Wed, Apr 21, 2021
On March 31, 2021, the White House released The American Jobs Plan, which in addition to calling for $2.25 trillion in infrastructure-focused spending, introduced several proposed changes to U.S. corporate tax regulations titled the Made in America Tax Plan (“MATP”). On the heels of President Biden’s policy proposals, his administration’s Secretary of the Treasury, Janet Yellen, echoed his sentiments during remarks made to The Chicago Council of Global Affairs on April 5. Separately, Senate Finance Committee Chair: Senator Ron Wyden, Senator Sherrod Brown and Senator Mark Warner–all Democrats–introduced their own tax plan on April 5, titled, “Overhauling International Taxation” (“the Wyden Proposal”). The Wyden Proposal differs from the MATP in execution but shares many overarching themes.
The MATP and the Wyden Proposal (and Secretary Yellen’s comments) both explicitly state in their respective texts that they are reversals from the Trump administration and the Tax Cuts and Jobs Act of 2017 (“TCJA”) in terms of specific policy and overarching philosophy. Both proposals include language that is directly critical of TCJA, citing purported unfairness of the policies and a failure to successfully disincentivize corporations from investing abroad.
These comments and proposals come as the global community, led by the Organisation for Economic Cooperation and Development (“OECD”), is in a transitional period on international tax matters. Most notably, the OECD released its Pillar One and Pillar Two Blueprints on October 12, 2020, which are non-consensus documents that propose a framework for taxing an increasingly digitalized economy and creating a global minimum tax rate. Certain unilateral international tax policies implemented by the Trump administration were at odds with proposed and existing OECD guidance, so it is notable that language from the Biden administration suggests more openness to regulating international taxation multilaterally and better aligns with the OECD on certain specific policies.
The MATP purports that it will curtail competing countries’ abilities to attract companies through low tax rates, and it will limit the means by which corporations can avoid taxation by offshoring jobs or profits while raising $2 trillion over the next two years. Specific policy proposals include the following:
In addition to the policies listed above, the MATP would also deny certain write-offs associated with offshoring jobs, eliminate tax breaks and subsidies for producers of fossil fuels, and further prevent corporations from inverting or claiming tax havens as their residence. Finally, the MATP plans to ramp up enforcement against corporations by increasing resources to the Internal Revenue Service, noting that audit rates have fallen over the last decade.
It is important to note that the MATP is a policy proposal from the Biden administration and, as such, does not constitute formal proposed legislation, let alone actual regulations. It remains to be seen what, if any, version of tax reform will be introduced by Congress. With that, the Wyden Proposal, written by U.S. Senators, could more closely indicate what changes to tax policies will be introduced in the U.S. Legislature. The key policy measures introduced therein include:
Not mentioned in the Wyden Proposal were changes to the corporate tax rate, any sort of multilateral global minimum tax or a minimum tax on book income.
At this stage, it is still unclear what form of tax reform, if any, will be proposed and passed in Congress. Assuming the Biden administration, the Wyden Proposal writers, and other Congressional Democrats can reconcile any policy differences and arrive at a single proposal, the Democrats will then have to try to pass the legislation with thin majorities in the House and Senate, as early indications suggest Congressional Republicans will not support many measures being discussed.
Compounding this uncertainty are ongoing efforts by the OECD to achieve global agreement on a minimum tax and a new tax framework for the digital economy. It remains to be seen how much, if at all, any U.S. corporate tax reforms will align with those of the international community. The messaging of the Biden administration thus far has suggested a willingness to seek alignment with other tax administrations; for example, Secretary Yellen, in her remarks on April 5, called for greater collaboration between the U.S. and the global communities, stating, “Over the last four years we have seen firsthand what happens when America steps back from the global stage. America first must never mean America alone.” On the matter of tax specifically, she reiterated Biden’s calls for a global minimum corporate tax rate and advocated for renewed international engagement.
While her comments were well-received by many tax authorities abroad, there is still reason to doubt that the U.S. will fully align with the OECD and international communities. For example, although calls for a global minimum tax seemingly align with the OECD’s Pillar Two Blueprint, the suggested minimum 21% rate under the MATP likely exceeds what many were expecting under Pillar Two, which sets the stage for future debate on this issue.
Additionally, it is unclear how any changes to the U.S. tax code will address taxation of the digital economy, a key issue for the OECD. Though the U.S. seems open to negotiations on a digital tax solution, reaching consensus may be challenging, as these measures could have the broadest impact on U.S.-based tech companies. In the near term, the U.S. has levied retaliatory tariffs that could total $1 bn annually on six countries that have implemented unilateral measures to tax multinational tech firms. This notable move could perhaps signal a continuation of the U.S.’s protectionist attitude towards its international tax base–particularly as it pertains to the digital economy.
Looking forward to the remainder of 2021 and beyond, some movement on tax rate and/or policy seems almost assured. Conventional wisdom seems to indicate that a rate increase, at a minimum, will be enacted.
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