Corporate tax increases focus on TCJA international tax revisions

| 4/15/2021
Corporate tax increases focus on TCJA international tax revisions

Since the No Tax Breaks for Outsourcing Act and the Stop Tax Haven Abuse Act of 2021 were  introduced into the Senate and the House on March 11, there has been significant activity around international taxes. President Joe Biden released his American Jobs Plan (AJP) on March 31. On April 5, Democratic Sens. Ron Wyden, Sherrod Brown, and Mark Warner released a framework to revamp international tax provisions (Wyden-Brown-Warner framework). And on April 7, the U.S. Department of the Treasury provided more detail on the tax portions of the AJP in its report on the Made in America tax plan (Treasury report).

The recent activity primarily focuses on increasing taxes on U.S. multinationals by implementing changes to the tax on global intangible low-taxed income (GILTI), the deduction for foreign-derived intangible income (FDII), and the base erosion anti-abuse tax (BEAT), which were enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA). The international features of each overlap in many ways, but each includes unique provisions. The coming months are likely to bring many more iterations.

The two most recent proposals set forth in the Wyden-Brown-Warner framework and the Treasury report are indicative of the issues under debate. Although the two proposals are similar, some differences are worth noting.

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Treasury report

The AJP, as outlined in the Treasury report, proposes to address perceived abuses by multinationals as follows:

GILTI

  • Apply GILTI to all controlled foreign corporation income, tangible and intangible.
  • Increase the GILTI effective tax rate to 21%, which is 75% of the proposed increased corporate tax rate.
  • Determine GILTI on a country-by-country basis rather than globally.
  • Cease allocating U.S.-based research and development and management expenses to GILTI income inclusion.

FDII

  • Repeal FDII.

BEAT

  • Remove BEAT and replace it with a new base erosion prevention provision entitled Stop Harmful Inversions and Ending Low-Tax Developments (SHIELD), which would:
  • Deny multinationals U.S. tax deductions for payments to related parties that are subject to low effective tax rates, which are rates below the minimum tax rate established by mutual agreement, or – if such an agreement is not in place – below 21% (the GILTI tax rate).
  • Strengthen the existing anti-inversion rules. Under the proposal, a U.S. company will not be treated as foreign if it has 50% or more of continuing ownership or if the foreign acquiring corporation is managed and controlled in the U.S.

Wyden-Brown-Warner framework

The Wyden-Brown-Warner framework generally parallels much of the AJP approach, but it proposes several unique features.

GILTI

  • Increase the GILTI tax rate, but defer specifying the increase until changes to the corporate tax rate and the modifications to other base erosion provisions have been determined.
  • Include the following options to achieve the objectives inherent in a country-by-country GILTI regime: 1) allocate foreign income and related taxes to baskets by country, potentially necessitating numerous foreign tax credit calculations (AJP approach), or 2) split the GILTI foreign tax credit calculation into two separate calculations – one for a low-tax (abusive) pool and one for a high-tax pool. This approach would make the high-tax exclusion mandatory, which would allow a more aggregate approach while achieving the objectives of a country-by-country regime.

FDII

  • Retain FDII but eliminate the deduction for qualified business asset investment in FDII (similar to the proposal for GILTI).
  • Change FDII to provide a benefit for companies that innovate rather than those that simply invest in intangible property, fundamentally changing the function of the deduction to reward innovation.
  • Equalize the tax rate for FDII and GILTI.

BEAT

  • Allow for certain tax credits to offset BEAT, which would allow for activities that support certain investment opportunities (low-income housing, clean energy, job creation) to reduce BEAT liability.
  • Increase the tax rate on BEAT payments from its current rate of 10%. This proposal would create a separate (and likely higher) rate of tax on base erosion payments.

Looking ahead

These proposals are a reversal of the previous administration’s policies and are intended to move the U.S. to align more closely with the Organisation for Economic Co-operation and Development (OECD). The OECD missed its original deadline for an agreement on global tax rules. However, the changes currently proposed and the United States’ support for global adoption of a minimum tax rate might smooth the OECD’s path toward reaching agreement by the revised summer deadline.

In general, multinationals headquartered both in the U.S. and abroad should expect a bigger tax bite in the 2022 tax year. In order to understand how the proposals will affect them specifically, businesses should begin their modeling now and remain nimble to adjust to changes that are certain to occur. The razor-thin majority in Congress will require compromise, even among Democrats, to enact any kind of legislation that raises taxes, and no certainty exists as to which proposals will win the day and in what form. Stay tuned for updates as Congress and the administration coalesce around international tax policy.

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