By Doug Connolly, MNE Tax
A US Treasury Department report released on April 7 expands on the corporate tax plan announced by the Biden Administration last week and describes new details on the Administration’s plan for repealing and replacing the base erosion and anti-abuse tax (BEAT).
Meanwhile, an international tax overhaul plan released by Senate Finance Committee Chairman Ron Wyden (D-Ore.) and Senators Sherrod Brown (D-Ohio) and Mark Warner (D-Va.) on April 5 mirrors the plan outlined by the Biden Administration but differs in several respects.
Apart from introducing the President’s BEAT replacement plan, known as the SHIELD, the new Treasury report reiterates and strengthens the case for the key elements of Biden’s plan set forth last week. Among other changes, the plan would increase the corporate tax rate to 28%, pursue international agreement on corporate minimum taxation, and impose a “book income” minimum tax on large corporations.
The Senate plan focuses exclusively on changes to three key international tax provisions enacted by the 2017 Tax Cuts and Jobs Act (TCJA) that the plan would nominally retain but significantly rework: global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the BEAT.
The goals of both the Biden and Senate plans are the same: boost corporate tax revenues, undo perceived incentives for companies to invest more overseas, and discourage the use of tax havens and profit stripping.
BEAT replacement
The BEAT was intended to discourage large multinational corporations from shifting profits out of the US, as well as to raise revenue to offset the TCJA’s corporate tax rate cut. Critics have contended that it has been ineffective in discouraging profit stripping, has undercut other tax incentives, and has been disappointing as a revenue raiser.
The Treasury report provides the first details on Biden’s plan to repeal and replace the BEAT. The plan names its successor the SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments). The goal of the new provision is to both more effectively target profit shifting to low-tax jurisdictions and to incentivize other countries to join the US in adopting corporate minimum taxes.
The SHIELD would deny multinational enterprises US tax deductions with respect to payments made to related parties that are subject to a low effective rate of tax. The threshold for the low effective rate of tax would be set at the GILTI rate unless and until an agreed upon rate is set forth in a multilateral agreement. The SHIELD would not apply with respect to entities resident in countries that have adopted the globally agreed minimum corporate tax sought by the Biden Administration.
An accompanying anti-inversion component of the SHIELD would treat an acquiring foreign corporation as a US company if either it meets a reduced 50 percent continuing ownership threshold or it is managed and controlled in the US.
The Senate plan stops short of calling for a repeal of the BEAT. Instead, it mentions that that “[t]here are multiple ways to adjust the BEAT,” and it specifically calls for increasing the tax on income tied to base erosion payments.
The Senate plan, like the Biden plan, would also seek to restore the value of domestic tax incentives that were undercut by the BEAT, such as those for renewable energy and low-income housing.
GILTI global minimum tax provisions
GILTI operates like a global minimum tax on US corporations and is often referred to as such. The TCJA set the GILTI rate at 10.5% – half the US corporate rate, which it lowered to 21%. President Biden proposed increasing the corporate tax rate to 28% and increasing the global minimum tax rate to 21% (i.e.., 75 percent of the proposed US corporate rate).
The Senate plan considers the Biden proposal for a GILTI rate at 75 percent of the corporate rate to be within range. It also contemplates a GILTI rate as high as the US corporate rate, suggesting the rate should be somewhere between 60 and 100 percent of the US corporate rate, depending on how other international tax provisions are finalized.
Like the Biden plan, the Senate plan would also move GILTI to a country-by-country calculation. Currently, the tax is calculated globally. Democrats have argued this enables corporations to offset profits stashed in tax havens with profits in high-tax foreign jurisdictions. The remedy, they contend, would be to calculate the tax on a country-by-country basis.
Like the Biden plan, the Senate plan would also move GILTI to a country-by-country calculation. Currently, the tax is calculated globally. Democrats have argued this enables corporations to offset profits stashed in tax havens with profits in high-tax foreign jurisdictions. The remedy, they contend, would be to calculate the tax on a country-by-country basis.
The Senate plan proposes a simplified country-by-country GILTI calculation that would group countries into two baskets: high and low tax. Thus, companies would not have to calculate the tax separately for each country in which they operate. Instead, the tax would apply to the company’s collective income in low-tax jurisdictions. Income in high-tax jurisdictions would be exempt.
Democrats have also criticized the GILTI provisions as incentivizing overseas investments. They argue that GILTI has this effect because it exempts from the tax a percentage of foreign income based on the company’s qualified business asset investment (QBAI) – essentially the company’s investment in foreign tangible assets like buildings and machinery.
Under the QBAI provision, the more a company invests in foreign tangible assets, the bigger its GILTI exemption. Hence, Democrats contend, the provision incentivizes companies to invest more abroad rather than at home. The Senate plan, like the Biden plan, would eliminate the exemption that is perceived as problematic.
FDII and R&D incentives
Democrats argue that FDII, closely linked with GILTI, similarly incentivizes offshoring.
Biden’s plan proposes eliminating FDII entirely and using the tax savings to invest in expanded R&D incentives.
The Senate plan would seek to retain the FDII in a broadly reimagined form while removing the perceived incentive for offshoring, but they use a new name, “deemed innovation income” or DII. The plan paints in broad strokes but imagines a redubbed deemed innovation income (rather than “deemed intangible income”) benefit. The DII would be “an amount of income equal to a share of expenses for innovation-spurring activities that occur in the U.S.” This would include expenses like R&D and worker training. The benefit would apply for current year spending for such activities in the US.
The Senate plan also states that the FDII rate, if the provision remains, should equal the GILTI rate, whatever rate it is finalized at.
Doug Connolly
Doug Connolly is Editor-in-Chief of MNE Tax. He has more than 10 years of experience covering tax legal developments, previously working with both a Big Four firm and a leading legal publisher. He holds a law degree from American University Washington College of Law.
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