The international tax landscape is shifting based on recent developments from the following recently released frameworks and reports:
- The Made in America Tax Plan fact sheet released by the White House March 31, 2021
- Overhauling International Tax framework released by Senators Warner, Wyden and Brown via the Senate Finance Committee on April 5, 2021
- The Made in America Tax Plan Report released by the U.S. Department of the Treasury on April 7, 2021
- U.S. International Tax Policy: Overview and Analysis report by the Joint Committee on Taxation, released on March 25, 2021
The common focus of the White House, the Treasury Department and the tax writing committees of congress on changing the international tax rules strongly suggest that amendments to key aspects of U.S. international tax law is likely. For example, taxpayers should be prepared to see significant changes, possibly this year, that will affect the rules governing Global Intangible Low-Taxed Income (GILTI), Foreign Derived Intangible Income (FDII) and the Base Erosion and Anti-Abuse Tax (BEAT). We strongly recommend that taxpayers begin to carefully consider how these potential changes will affect them. The following summarizes key proposals in each of the above-mentioned reports and provides suggested action items.
The Made in America Tax Plan released by the White House
The Made in America Tax Plan (also herein referred to as the Biden tax plan) contains a series of international tax proposals that would have a significant impact on multinational businesses and substantially modify key provisions of the Tax Cuts and Jobs Act of 2017 (the TCJA). In 2017, the TCJA imposed a 21% tax on so-called global intangible low-taxed income which the TCJA generally defined as income earned overseas by controlled foreign corporations of U.S. taxpayers (other than Subpart F income) that exceeds a threshold amount. However, the TCJA also allowed corporate taxpayers to deduct 50% of their GILTI income, resulting in an effective tax rate on GILTI of only 10.5%. The Biden administration believes that these provisions encourage offshoring of jobs and profit shifting. To discourage these practices, the Biden tax plan will eliminate the 50% deduction for corporations under GILTI, ensuring that corporations pay a higher global minimum tax rate of 21% instead of 10.5%. In addition, the new global minimum tax rate will be calculated on a country-by-country basis, which could limit the ability for corporations to offset losses incurred in one country against income earned in another. The proposals would also eliminate the current law exemption from GILTI for income equal to 10% of the foreign corporation’s business assets. This could significantly increase the effective tax rate on foreign income and could result in U.S. tax even where the taxpayer has no net foreign income.
The Biden tax plan also proposes to make corporate inversions (where companies would change jurisdictional headquartering or acquiring a foreign entity in order to reduce U.S. taxes) more difficult and less appealing for companies. In addition to this, the Biden tax plan will deny any deductions for offshoring jobs. To incentivize investment in U.S. jobs, the Biden tax plan will provide a credit to support onshoring of jobs.
In addition, the Biden tax plan would eliminate entirely FDII tax incentives created under the TCJA, which provides a deduction to businesses that sell domestic goods and services to foreign consumers. The revenue generated from the repeal of FDII would be used to expand research and development incentives, but the plan description released by the White House does not list any specific incentives it would expand. Some possibilities may include:
- Repeal of the TCJA provisions requiring capitalization and amortization of section 174 research and experimentation expenditures beginning in 2022
- Increasing the section 41 research credit rate under the regular and Alternative Simplified Credit (ASC) methods
The Biden administration also plans to work together with other countries to build consensus and supports a global minimum tax in order to end the global “race to the bottom” regarding corporate tax. In this regard, we expect the Biden administration to support the efforts by the Organization for Economic Development and Cooperation (OECD) to develop a framework for a global minimum tax that other countries can use as a basis for internal legislation designed to prevent corporate tax evasion on a global basis.
The White House description of the tax plan also includes a discussion of a proposed corporate minimum tax on the book income of “large corporations.” This provision, as described, would impose a 15% minimum tax on the income corporations use to report their profits to investors. This description appears to be similar to the Biden campaign’s proposal but many ambiguities remain. The campaign proposal called for the imposition of a 15% minimum tax on global book income in excess of $100 million. The Biden tax plan will likely also revise/amend the BEAT as well. We expect further details to emerge as we move further in the policy debate.
Overhauling International Taxation framework (the Framework)
On April 5, 2021, the Senate Finance Committee Chair Ron Wyden, Senator Sherrod Brown, and Senator Mark Warner, released their Framework to overhaul international taxation and make sure that corporations are being taxed appropriately.
The Framework echoes much of what the Biden tax plan states, but provides a more comprehensive understanding of how the plan will work. It focuses on three main international taxes from the TCJA legislation in 2017, including GILTI, FDII and BEAT.
The Framework proposes the repeal of the qualified business asset (QBAI) provision under GILTI as it claims this incentivizes offshoring. The Framework argues that the QBAI provision allows multinational enterprises the ability to earn tax-free income by putting tangible assets (such as factories, machinery and buildings) overseas. This incentive allows companies to move factories and American jobs overseas, and Congress should therefore repeal the QBAI rules.
Under the Framework, the GILTI tax rate would rise in order to reduce the gap between U.S. and foreign profits and minimize incentives to shift profits (and presumably jobs) overseas. The Framework states that it is undecided as to whether the GILTI rate should equal the U.S. corporate tax rate (currently at 21%, but proposed to increase to 28% under the Biden tax plan), or if it should be reduced to 75% of the U.S. corporate tax rate (per the Biden tax plan).
In addition, the Framework advocates that GILTI should apply on a country-by-country basis, as set forth in the Biden tax plan. The Framework argues that the current system allows companies to shelter low-taxed income in tax havens with high-taxed income from other countries in order to eliminate a GILTI tax on the low-taxed income. A country-by country approach would likely result in GILTI tax on haven income. The Framework puts out two different methods to achieve a country-by country approach. One method would be to create “country baskets” although this method could be too complicated to implement administratively. The other simpler approach would separate taxes into high-tax and low-tax jurisdictions, where high-tax jurisdictions would be exempt from GILTI via a high-tax exemption and GILTI would only apply to low-tax jurisdictions. As the high-tax exclusion is already in place from the TCJA, little would need to be done in order to change the system to suit the second approach.
Finally, the Framework suggests that the GILTI provisions should add an incentive to increase onshoring of research and development (R&D) jobs. Expenses for research and management that occur in the United States should be treated as domestic expenses. This would eliminate any foreign tax credit penalties under GILTI, which would help to keep these jobs and activities in the United States.
Regarding FDII, the Framework does not necessarily take the same hard line approach as the Biden tax plan, which advocates for total elimination of the provision. The Framework states FDII currently has an offshoring incentive and if it continues to retain that incentive, that it should be eliminated. However, if it could instead be used to create innovation and drive investment in the United States, then FDII could potentially remain in the tax code. In order to retain FDII, the Framework would require removal of QBAI from the FDII calculation (as in GILTI above) in order to remove the incentive for offshoring. Additionally, the Framework proposes to create a new FDII benefit that would reward companies that invest in innovation in the United States. Finally, the Framework posits that the rates of tax on FDII and GILTI should be the same.
The Framework suggests that the BEAT should be revised in order to generate revenue from companies eroding the U.S. tax base, and that this revenue should support companies that invest in the United States. In order to do this, tax credits that support opportunity and investment in the United States should be restored to full value under BEAT and that the BEAT rate should be increased on base erosion payments.
The Made in America Tax Plan report released by the U.S. Department of the Treasury provides additional policy support for the Biden tax plan and argues that corporate tax benefits under the TCJA have been detrimental to the U.S. economy. The report argues that the Biden tax plan will make America more competitive by removing incentives to offshore and reduce profit shifting. It will stimulate investment in U.S. infrastructure, research and manufacturing.
The Joint Committee on Taxation Report on U.S. International Taxation provides a general overview of international taxation in light of the TCJA and describes international tax impact on U.S. workers. It also addresses hot topics in international taxation such as the digital services tax proposed in several other countries.
While the above-mentioned international tax revisions to provisions such as GILTI, FDII and BEAT are currently only in draft form, taxpayers with operations overseas should be prepared for changes that may come as early as this year. Taxpayers that are currently or will be subject to GILTI, FDII and BEAT should discuss how these far-reaching proposals could affect their business activities. It is likely that one or more of these provisions will result in higher effective rates of taxation on foreign income so taxpayers should consider modeling the potential impact of these proposals to chart an appropriate course of action.