On March 31, the Biden administration released a fact sheet with details on a proposed $2 trillion in spending for infrastructure, along with offsetting revenue raisers from tax increases on corporations. The administration says that the proposed tax increases will more than pay for the mostly one-time investments in the American Jobs Plan and then reduce deficits on a permanent basis.
Statutory Corporate Rate
The administration proposes to increase the corporate tax rate to 28%, which is halfway between the current 21% rate and the pre-TCJA 35%. When combined with state corporate income taxes, this would put the United States among the high end of OECD countries in terms of corporate tax rates.
Taxation of Earnings of Controlled Foreign Corporations
The TCJA introduced a new mechanism to tax the earnings of U.S. persons’ controlled foreign corporations (CFCs) on a current basis, referred to as global intangible low-taxed income (GILTI). The current rate on those earnings is determined by a deduction in section 250, now at 50% of the corporate statutory rate, resulting in a rate of tax on GILTI inclusions of 10.5%. That rate is scheduled to increase, because the 2017 law built in a reduction of the section 250 deduction to 37.5% for tax years starting in 2026. The Biden proposal would increase the rate on GILTI inclusions to 21%.
The administration also proposes to change the way the GILTI inclusion is calculated. Currently, the calculation allows for blending of loss-making foreign subsidiaries against profitable ones, and of high-taxed CFCs with low-taxed ones. The Biden proposal would require the inclusion amount to be calculated on a per-jurisdiction basis, reducing the possibility that losses could be used to offset profits and eliminating the potential for blending the foreign tax rate across jurisdictions.
The TCJA, as part of its nominal move to a territorial system, introduced a100% dividends received deduction for dividends from specified foreign corporations paid to U.S. corporate shareholders. Because of the GILTI inclusion, the exemption for foreign earnings mostly only applies to the portion of those earnings that qualifies as QBAI, or qualified business asset investment, equal to a 10% return on the tax basis in tangible assets owned by the CFC. The proposal would eliminate that exemption, thereby essentially rendering all of the CFC earnings subject to immediate tax in the United States.
The TCJA introduced a new tax on outbound (otherwise deductible) payments from U.S. corporate taxpayers to related parties, known as the BEAT. The BEAT works as an alternative minimum tax that is owed if a taxpayer meets a specified threshold of outbound deductible payments as a percentage of gross revenue. The administration says it will replace what it refers to as an “ineffective provision” and proposes to deny deductions to foreign corporations on payments that could allow them to strip profits out of the United States if they are based in a country that does not adopt a strong minimum tax.
The proposal includes measures to prevent inversions, perhaps by imposing a new managed and controlled test for corporate residency.
In order to prevent offshoring, the administration would deny companies deductions for expenses related to offshoring jobs and provide a credit for expenses related to onshoring.
Elimination of FDII
The 2017 tax law enacted a measure that provides a deduction (currently at 37.5%) on the portion of a U.S. corporation’s net income attributable to foreign sales or the provision of services to foreign persons, known as foreign derived intangible income, or FDII. The provision was intended to achieve parity between the U.S. tax rate on earnings of a CFC (taxable as GILTI) and the rate that would apply if overseas profits were generated from U.S. activities. The administration proposes to repeal that benefit entirely.
Alternative Minimum Tax on Book Income
The proposal includes a 15% minimum tax on book income.. This was both a Biden campaign promise and similar to a proposal Senator Warren made during her run for president.
Corporate Tax Enforcement
The plan includes a proposal for investment in enforcement to make sure corporations pay their fair share.
Taxation of Fossil Fuels
The plan proposes to eliminate all tax preferences for profits from fossil fuels.
The proposals released on March 31 all relate to corporate taxation and do not propose any changes to the taxation of pass-through income. In a separate, upcoming proposal, the administration is supposed to announce plans for tax increases on the individual side, including increases in the capital gains rate, the top individual rate, and estate (or inheritance) and gift taxes.
Regardless, the administration’s ambitious plans face a tough road to passage. A number of Democrats have already announced that they will not sign on to any tax law changes unless the 2017 cap on the state and local tax deduction is eliminated. Moreover, a week after the administration released its corporate tax proposals, Senator Ron Wyden, Chair of the Senate Finance Committee, released a separate proposal for modifications to the TCJA’s international tax changes, some of which are consistent with the Biden administration proposals and other of which are less so.
Please contact your Mazars tax professional for additional information.
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.