At the midpoint of 2021, the US has made tremendous progress at slowing the spread of COVID-19, primarily through vaccinations. Thus, the second half of 2021 may bring some return to normalcy as many workers return to offices and local restrictions put in place to slow the spread of the virus are relaxed. However, as the United States recovers from COVID-19 many businesses are struggling from the secondary effects of the pandemic, dealing with labor shortages and inflation. Adding to the uncertainty surrounding the post-pandemic new normal is a season of serious debate over legislation in Washington, DC that makes planning more difficult for companies wondering how they might be impacted by proposed tax law changes.
In an effort to recover from increased government outlays during the global pandemic, countries around the world are looking for ways to generate revenue while balancing a delicate economic recovery. Companies should prepare for significant tax law changes that may alter the global tax landscape with some legislation possibly beginning later this year. In response to economic concerns brought into focus during the pandemic, the G7 Finance Ministers and Central Bank announced their intent to establish a 15% global minimum tax, which representatives have suggested would affect only large multinational enterprises that have a profit margin of at least 10%. While such a globally coordinated tax policy may be far off, many jurisdictions at all levels have enacted or proposed plans to adjust income tax rates, paired with other changes to business income tax, in the near term. While proposed tax changes are not reflected in tax provisions, companies should carefully monitor proposed legislation and evaluate how the proposals may impact their current a future tax liabilities.
The Made in America Tax Plan
On April 7, 2021, the U.S. Department of the Treasury released The Made in America Tax Plan Report, which includes several U.S. tax law amendments that may have implications for taxpayers. The Made in America tax plan (also referred to as the Biden tax plan) implements a series of corporate tax reforms to address profit shifting and offshoring incentives in an attempt to level the playing field between domestic and foreign corporations. While this is not enacted legislation, it is strongly recommended that taxpayers begin to carefully consider how these possible changes will affect them.
The Biden tax plan contains a series of international tax proposals that substantially modify key provisions of the Tax Cuts and Jobs Act of 2017 (the TCJA), including several key changes to the calculation of the GILTI inclusion, eliminating the FDII tax incentives, amending the BEAT tax, and imposing a corporate minimum tax on the book income of ‘large corporations.’ It is likely that one or more of these provisions will result in higher effective tax rates for companies with foreign income. For a full summary of the international tax implications of the Biden tax plan, please read the alert: Biden tax plan: International tax Implications.
Among the other items mentioned in the Biden tax plan is a proposed increase to the corporate tax rate from 21% to 28%, and a restriction of interest deductions for certain disproportionate U.S. borrowings, both of which would be effective for tax years beginning on or after Dec. 31, 2021. Taxpayers should be mindful of the potential impact of these proposals to chart an appropriate course of action. For more information on the proposal, please read the alert: White House releases President's budget, Treasury Greenbook.
Meals and entertainment deductions
On April 8, 2021, the IRS issued guidance in Notice 2021-25 to further explain how to apply the temporary exception that allows companies to fully deduct certain business meals paid or incurred during the 2021 and 2022 calendar years, provided that the amounts would otherwise be deductible under section 274(n)(2). The notice brings clarity to taxpayers by defining the term ‘restaurant’ as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises. Under this guidance, meal expense that is incurred at grocery stores, convenience stores, and the like will continue to be subject to the 50% limitation under section 274. In addition, the notice addresses that on-premises cafeterias operating under section 119 or section 132(e)(2) may not be treated as restaurants subject to the temporary exception. While there is still some ambiguity surrounding what ‘present’ means in the context of a taxpayer having to be present when the food or beverages are provided, the notice certainly brings more transparency to taxpayers.
Companies should consider how this additional guidance related to the increased deductibility of certain business meals might impact estimated AETRs for the calendar years 2021 and 2022. You can find a summary of the guidance in RSM’s alert: IRS provides guidance on deductions for food or beverages.
Updates from the Financial Accounting Standards Board
FASB issued two additional accounting standards updates during the second quarter of 2021, however, neither of these relate directly to ASC 740. FASB is still deliberating over the much anticipated accounting standards update regarding enhanced income tax provision disclosure requirements.
State and Local update
The second quarter of 2021 has certainly brought about many changes to the state and local tax landscape, with several states including New York, Oklahoma and Nebraska passing legislation to adjust corporate income tax rates.
Effective for tax years beginning on or after Jan. 1, 2021 and before Jan. 1, 2024, New York will increase the corporate income tax rate to 7.25% for taxpayers with business income over $5 million. Companies will need to evaluate whether the new rate will apply in the current year or is expected to apply in any given future year. Any deferred tax effects due to the rate change should be recorded as a discrete item in the period of enactment. As part of the legislation, New York also reinstated the 0.1875% capital base tax for years beginning on or after Jan. 1, 2021. The capital base tax was previously effectively repealed with a rate of 0% for years beginning on or after Jan. 1, 2021, but will now apply for years beginning on or after Jan. 1, 2024.
In addition, Oklahoma and Nebraska have passed legislation to lower corporate income tax rates. For tax years beginning Jan. 1, 2022, the Oklahoma corporate income tax rate for corporate taxpayers will be reduced from 6% to 4%. Nebraska will also reduce corporate income tax rates on income over $100,000 from 7.81% to 7.5% for tax years beginning on or after Jan. 1, 2022. The rate will be further reduced to 7.25% for tax years beginning on or after Jan. 1, 2023. Any deferred tax effects due to the rate change should be recorded as a discrete item in the period of enactment.
These are just some of the changes in state tax laws in the last quarter. A roundup of other notable state and local tax law changes made during the second quarter can be found in the alert: State tax law changes for the second quarter of 2021.
As part of Australia’s 2021-22 Federal Budget, the Temporary Full Expensing measure for depreciating assets has been extended by one year. As a result, entities with less than AUD 5 billion in aggregated turnover, or companies with less than AUD 5 billion in Australian turnover plus at least AUD 100 million invested in fixed assets in financial years 2017, 2018 and 2019 can write-off the cost of certain assets acquired between Oct. 6, 2020 and June 30, 2023.
The Australian Government has extended the loss carry back measure announced last year for a further year to the 2022-23 income year. As a result, companies with aggregated turnover of less than AUD 5 billion will be able to carry back losses incurred in the 2020, 2021, 2022 or 2023 income years to the 2019 or later income years.
Brazil – UAE tax treaty
On May 6, 2021, the Federal Government of Brazil enacted Decree n. 10,705/2021 establishing the agreement signed between Brazil and the United Arab Emirates to eliminate double taxation in relation to income taxes and prevent tax evasion.
Income Tax Reform
The Federal Government of Brazil submitted to National Congress a tax reform bill including the following main propositions: (i) taxation of profits and dividends at a rate of 20%; (ii) a gradual reduction of the Corporate Income Tax (IRPJ) rate from 25% to 22.5% in 2022 and to 20% from 2023 onwards; (iii) interest on shareholder’s equity will no longer be considered as a deductible expense for IRPJ purposes; (iv) changes to the tax losses offsetting rules; (v) discontinuation of tax advantages for goodwill amortization in merger transactions; (vi) changes in taxation of financial investments such as fixed income securities and stock exchange transactions. The Tax Reform bill has not yet been enacted and is still subject to further changes until voted by National Congress.
The 2021 federal budget bill in Canada, Bill C-30, limits preferential treatment on employee stock options to CAD 200,000. The new law, which is effective July 1, 2021, received Royal Assent on June 29, 2021. Employers can claim a deduction for amounts included in the employee’s income in the tax year that includes the exercise date. The new limitation applies to corporations that are not Canadian controlled private corporations and have consolidated annual gross revenue in their financial statements that exceeds CAD 500 million. Under prior law, corporations were generally not able to deduct stock option expense except under certain scenarios and employees were granted a stock option deduction for half of the amount included in the employee’s income. Companies will need to evaluate the tax consequences of options granted after July 1, 2021 and whether these options will result in future deductions.
The Central Board of Direct Taxes amended rules regarding County-by-Country Reporting (CbCR), effective from April 1, 2021. CbCR related filings by Indian constituent entities are now only required if consolidated group revenue exceeds INR 6400 crore (formerly INR 5500 crore) in the immediately preceding accounting year of parent entity. The changes in the CbCR threshold align with the current threshold of 750 million Euro provided by Organization for Economic Operation and Development (OECD).
The Central Board of Direct Taxes also issued guidance regarding the threshold for Significant Economic Presence, which expands the scope of income tax for non-residents. Multi-national companies with customers in India will need to consider these new rules. The income tax considerations of these new rules is outlined in the alert: Significant Economic Presence (SEP) rules in India and its tax impact
On June 9, 2021, the German parliament law on the modernization of relief from withholding tax came into legal effect. The main changes of the new tax rules relate to new procedural rules to obtain relief from German withholding tax, a new specific anti-treaty shopping rule and new transfer pricing rules.
The new rules regarding withholding tax will come into effect on Jan. 1, 2022. Under the new provision, exemption certificates for royalties will be issued even if it unclear whether a tax liability exists. In addition, unlike under current provisions, the payer will still have to make quarterly declarations of zero withholding tax even where an exemption certificate has been granted. The new rules are particularly relevant for companies effected by guidance earlier this year on withholding tax arising from IP transactions. It is important to note that the certificate of exemption must be issued at the time any dividends or royalties are paid, otherwise the payer is still required to withhold and remit taxes and the payee may claim a tax refund under the applicable double tax treaty or EU provision.
Dividends and royalties paid by a German company to a foreign payee are subject to German withholding tax of up to 15%-25% plus solidarity surcharge. According to the new specific anti-treaty shopping rule, the payee of dividends/royalties is only entitled to relief from German withholding tax if certain conditions are met.
The new law also makes changes to the German transfer pricing rules. The new rules are largely aimed at bringing the transfer pricing framework into line with international standards.
Germany has also introduced a draft bill to implement the EU Anti-Tax Avoidance Directives, an overview of the proposed legislation can be found in the alert, Germany moves forward with Anti-Tax Avoidance Rules
JAPAN CORPORATE TAX REFORM
Japan enacted several changes to corporate income tax on March 26, 2021, with most of the following provisions effective as of April 1, 2021:
Introduction of a digital transformation investment promotion tax incentive which establishes a measure to allow a tax credit of 3% to 5% or accelerated depreciation of 30% for companies which transform their business by developing a ‘connectable’ digital environment (e.g. cloud computing).
Revisions to the general R&D tax incentive, including raising the upper limit of tax credits for companies which increase R&D investment even under an adverse business environment. The tax credit rate will be reformed to increase incentives for R&D, and the lower limit of the tax credit rate will be lowered
A special measure concerning the deduction limit of net operating losses. For companies which make investments in the area of carbon neutral, digital transformation, business restructuring/reorganization, etc. even under an adverse business environment, the new law allows a tax deduction for loss carryforwards, up to the amount of such investments, or a maximum of 100% of their income, for up to five years.
Revision of the tax incentives to encourage wage increases and investments. In response to the deteriorated employment environment during the pandemic, tax incentive for wage hikes and investment will be replaced in consideration of facilitating expansion of employment and education/training supports.
Introduction of a tax incentive to help specified investment management companies with the consolidation of their managerial resources by allowing a deduction under certain conditions for performance-based compensation paid to executives of unlisted non-family companies, etc., whose main business is investment management.
On April 23, 2021, the Ministry of Labor and Social Security published in the Federal Official Gazette a decree regarding labor laws for subcontracting, also known as insourcing and outsourcing.
This labor reform modifies provisions of interest to workers, companies and unions in Mexico in terms of outsourcing and the subcontracting of specialized work.
As a general rule, the sub-contracting of personnel is prohibited. Only the sub-contracting of specialized services or the execution of specialized works, provided that it complies with the following requirements:
a) The contracted services or work need to be different to the ones stated on the corporate purpose or the predominant economic activity of the beneficiary of the service.
b) The contractor must be registered in the public registry of the Ministry of Labor and Social Security.
Payments made for any personnel sub-contracting services prohibited by the new law will be not deductible for income tax and non-creditable for value added tax purposes.
For more information, read the alert: Mexico passes rules banning subcontracting arrangements
During the first quarter of 2021, the Netherlands enacted a job-related investment allowance as part of the coronavirus relief measures to encourage investments and employment. This measure was determined to potentially be unlawful state aid based on EU regulations and was repealed with retroactive effect during the second quarter of 2021.
On June 10, 2021, the United Kingdom Finance Act 2021 received Royal Assent, the final step in enacting the corporate tax rate increase from 19% to 25% for large businesses with profits in excess of £250,000. Businesses with profits less the £250,000 will be granted relief so they are able to pay less than the headline rate of 25%, while those under £50,000 in profits will remain at the 19% tax rate. To give businesses an opportunity to bounce back from the pandemic, the tax rate increase will not be effective until tax years beginning on or after April 1, 2023. In the U.K., tax rates take effect based on the fiscal year, so a U.S. calendar year taxpayer would have a blended tax rate in calendar 2023, with three months at 19% and nine months at 25% resulting in a 23.5% rate for the year
Although the rate change is effective April 1, 2023, calendar year companies should include the effects of the rate change on deferred U.K. deferred tax liabilities as part of the second quarter provisions for 2021 as the law was enacted on June 10, 2021. Under ASC 740, companies are required to include the effects of changes in tax laws in the period in which they are enacted.
To encourage investment in the near team, the new law includes a 130% ‘super deduction’ for qualified capital spending from April 1, 2021 to March 31, 2023. The bill also includes an incentive to deter corporations from diverting profits out of the U.K. by increasing the U.K. diverted profits tax from 25% to 31% beginning April 1, 2023.
The Finance Act 2021 also includes several other tax changes. For a summary of these changes, refer to the U.K. government’s release: Finance Bill 2021 Published.
While preparing second quarter provisions, companies may need to give additional consideration to the impact of the new meals and entertainment guidance, state and local income tax rate changes and global changes in tax laws and regulations. With the hope of leaving many of the challenges of the global pandemic behind, companies will need to continue to monitor potential tax law changes in the US.