By Doug Connolly, Multinational Corporate Taxation
The U.S. Treasury Green Paper, released today alongside President Biden’s Fiscal Year 2022 Budget, outlines the specific tax provisions the administration seeks to enact this year, including important proposals for overhaul of the international tax rules applicable to companies.
Many of the corporate tax proposals were first announced in general terms in the president’s “Made in America tax plan” released in March.
The Green Paper, the colloquial name for “general explanations of the administration’s revenue proposals for fiscal year 2022”, includes detailed legislative explanations of these proposals.
The tax proposals of the Green Paper are divided into those of the “American Jobs Plan” and the “American Families Plan”. The US Jobs Plan includes corporate tax reform, housing and infrastructure tax support, and clean energy tax provisions. The American Families Plan includes provisions for personal income tax and provisions for tax compliance and administration.
Increase in corporate tax rate
As expected, the Administration proposes to increase the corporate tax rate from 21% to 28% – by dividing the difference between the rate set by the 2017 tax reform and the previous rate (35%). It is proposed that the new tax rate apply to tax years beginning after December 31, 2021. The new rate would be prorated for non-calendar tax years beginning in 2021.
Comprehensive Minimum Tax Improvements
The Administration is proposing several changes to the US “Global Minimum Tax” regime, officially known as the Global Low-Taxed Intangible Income (GILTI) provisions.
The proposal would remove the current exclusion from qualifying business asset income (QBAI). Under current law, U.S. shareholders can reduce their aggregate minimum tax by 10% of their return on the QBAI, which generally refers to foreign tangible property. The Administration argued that the QBAI exclusion prompts US companies to invest in more tangible assets abroad, as opposed to the United States, to increase their minimum tax exclusion.
The Administration would also increase the overall minimum tax rate by reducing the Internal Revenue Code Section 250 deduction from the overall minimum tax. U.S. shareholders currently benefit from a 50% deduction on a 21% corporate tax rate, resulting in an overall minimum effective tax rate of 10.5%. The Administration would reduce this deduction to 25%, which, combined with the increase in the corporate rate to 28%, would result in an overall effective minimum tax rate of 21%.
U.S. shareholders are also expected to calculate their overall minimum tax country by country under the proposals. Under current law, tax is calculated globally, which allows income from low tax jurisdictions to be combined with income from high tax jurisdictions to minimize the application of minimum tax.
Notably, by adopting the proposal for a country-by-country calculation, the Administration did not adopt the proposal of the Chairman of the Senate Finance Committee, Ron Wyden (D-Ore.) To require a separate calculation for each jurisdiction. .
It is proposed that the changes to the overall minimum tax come into effect for tax years beginning after December 31, 2021.
To avoid the erosion of the American tax base by expatriate companies, the Administration is also proposing accompanying changes to toughen the rules against reversal operations. These changes would apply to transactions entered into after the promulgation date.
Repeal of the FDII deduction
The Administration proposes to repeal the deduction for foreign intangible income (IEDI). Current law allows a 37.5% deduction for IDEI, which is calculated as a portion of a U.S. company’s intangible income from exports. Like the QBAI provisions under the global minimum tax, the administration believes that the FDII provision provides an incentive to move certain economic activities out of the United States.
The Green Paper indicates that the Administration will use the savings achieved through the repeal of the FDII deduction to strengthen the provisions encouraging research and development (R&D). However, the proposals do not contain details of the amended R&D provisions.
It is proposed that the repeal of the FDII deduction apply to taxation years beginning after December 31, 2021.
Replacing BEAT with SHIELD
The Administration proposes to repeal the Base Erosion Tax and the Anti-Abuse Tax (BEAT) and replace it with the “stop damaging reversals and end low-tax developments” (SHIELD) rule .
Under current legislation, BEAT is an additional tax applicable only to certain large corporate taxpayers. The Administration criticized the provision as ineffective for its intended purpose of preventing base erosion of the US tax base, as well as having unintended consequences.
SHIELD would attempt to combat base erosion by prohibiting deductions to domestic companies or branches in respect of payments made to a member of the same financial reporting group whose income is subject to a low rate. effective taxation.
A low effective tax rate, for this purpose, would be set by reference to the proposed overall minimum tax rate in the United States of 21%, unless or until an overall minimum tax rate is agreed. in the international negotiations underway under OECD Pillar 2, in this regard, the US Treasury recently suggested that the US would accept an overall minimum tax rate as low as 15%.
SHIELD is proposed to apply to financial information groups with global annual revenues greater than $ 500 million.
The Administration proposes that the provisions replacing BEAT with SHIELD come into effect for tax years beginning after December 31, 2022.
Large corporation minimum tax on accounting profits
The proposals also include a minimum tax of 15% on global accounting income for companies with global accounting income exceeding $ 2 billion. The provision is designed as a safety net against tax evasion by large corporations that report substantial profits to their shareholders while paying little or no corporate income tax.
It is proposed that the provision apply to taxation years beginning after December 31, 2021.
Tax incentive for relocation
The Administration is proposing to create a new business credit equal to 10% of qualifying expenses paid or incurred in the “relocation” of a business or business to the United States. To this end, relocating a US business would mean reducing or eliminating a business or business activity abroad while starting or expanding the same business or business in the US.
It is proposed that the provision apply to expenses paid or incurred after the date of promulgation.
Other provisions relating to corporation tax
The Green Paper includes some other corporate tax proposals.
The Administration proposes to reform the taxation of income from fossil fuels by repealing the GILTI exemption for foreign income from oil and gas extraction.
Another proposal would limit foreign tax credits on sales of hybrid entities.
Finally, the corporate tax proposals also include a provision to restrict excessive interest deductions by members of financial reporting groups for disproportionate borrowing in the United States.