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 Made in America Tax Plan
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:
- Increase the corporate tax rate to 28%: The MATP would effectively split the difference between the TCJA rate of 21% and the pre-TCJA rate of 35%.
- Reform the GILTI tax: The TCJA introduced a 10.5% minimum tax rate on global intangible low-taxed income (“GILTI”), which was roughly defined as all income made by a controlled foreign corporation (“CFC”) in excess of 10% of the CFC’s investment in depreciable tangible business assets. The MATP would increase the 10.5% minimum rate to 21% and apply it to all CFC income, rather than just the amount in excess of the 10% return. Further, the GILTI tax under the TCJA was calculated based on total foreign income, which in effect allowed companies to continue avoiding taxes in tax havens by “netting out” high-tax and low-tax profits; the MATP would instead assess the minimum tax on a country-by-country basis, thus ensuring the minimum tax is applied to income in each individual low-tax jurisdiction.
- Implement a multilateral, globally agreed upon minimum tax: The MATP stressed the need to “end the race to the bottom on corporate tax rates” by which countries compete with one another for corporate investment by undercutting one another’s corporate tax rates. The plan also denies deductions to foreign corporations on payments that allow them to strip profits out of the U.S. if they are based in a country that does not adopt a strong minimum tax. This would effectively replace the base erosion anti-abuse tax (“BEAT”) implemented under the TCJA, which has been criticized for being ineffective and inconsistent with tax treaties.
- Completely eliminate tax incentives for FDII: Under the TCJA, U.S. taxpayers were allowed a tax break on foreign derived intangible income (“FDII”), which is income earned on sales of goods and services abroad related to intellectual property held in the U.S. The MATP calls for wholesale elimination of these tax incentives.
- Enact a minimum tax on corporations’ book income: The MATP would prevent corporations from exploiting what it refers to as “loopholes in the tax code” by implementing a 15% minimum tax on “book income,” which is income that is reported to investors (as opposed to taxable income). Later clarification from the Treasury Department noted that this tax would only apply to companies with income exceeding $2 billion.
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.
Overhauling International Taxation
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:
- Change GILTI to avoid reducing taxes and incentivizing offshoring jobs: Similar to the MATP, the Wyden Proposal aims at addressing perceived shortcomings in the GILTI tax. As with the MATP, the Wyden Proposal seeks to remove the stipulation of the GILTI tax, whereby only income in excess of a return on tangible assets is subject to tax. That clause, the Wyden Proposal claims, incentivizes multinational corporations to invest in tangible assets (e.g., factories) abroad, as doing so would increase the amount of income that is not subject to the GILTI tax. The Wyden Proposal also suggests an increase to the GILTI tax rate (though unlike the MATP it does not make a specific rate proposal) and suggests enforcing GILTI on a country-by-country basis rather than a consolidated system (though it suggests other approaches capable of achieving a similar effect while being simpler to implement).
- Change the GILTI system to further incentivize onshore research and management jobs: The Wyden Proposal notes that the interaction of the GILTI tax and foreign tax credit rules could create undesirable incentives (from a U.S. perspective) for corporations. As an example, it notes, “… taxes owed under GILTI increase when a corporation invests in research and development in the U.S. or expands a U.S. headquarters office,” which discourages corporations from investing in such jobs in the U.S. As such, the Wyden Proposal suggests that expenses for both research and management in the U.S. should be treated as domestic expenses, eliminating the foreign tax credit penalties under GILTI.
- Revise the FDII system: Though similar to the MATP, the Wyden Proposal claims shortcomings in the FDII system under the TCJA, it suggests revisions rather than a wholesale repeal. First, as with GILTI, the Wyden Proposal posits that tethering the impact of FDII to tangible assets abroad incentivizes companies to offshore factories or other fixed assets and calls for a repeal of this component of the rule. Second, it proposes revising the FDII calculation to reward companies for “innovation-spurring” activities that occur in the U.S., such as research and development. Finally, it recommends that whatever the ultimate GILTI rate is, the FDII rate should be the same.
- Reform BEAT to capture more revenue and incentivize favorable behavior: The Wyden Proposal notes that the BEAT under the TCJA cuts the value of certain important tax incentives while doing little to prevent erosion of the U.S. tax base. It proposes providing full value to domestic business tax credits and increasing the BEAT rate on income tied to base erosion payments to account for the corresponding reduction in tax revenue.
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.
Uncertain Horizon Ahead
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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