US budget bill tax provisions’ effective dates, rates, thresholds

By Doug Connolly, MNE Tax

Following a November 2 off-year election that many pundits consider an initial bad omen for the Democrats, Biden and the party continue to finalize the details – and secure the votes – for the signature portion of the President’s agenda. That agenda, planned to be enacted through the Build Back Better budget bill, includes several notable corporate and international tax provisions.

Whether passing the landmark bill would tip the scales for next year’s mid-term elections is unclear. Nonetheless, assuming a bill passes broadly in line with its current draft, for which Biden remains optimistic – whose taxes are changing when?

Effective in 2022

Modifications to the base erosion and anti-abuse tax (BEAT) would generally apply for tax years beginning in 2022. This includes provisions amending the determination of modified taxable income for BEAT, provisions modifying applicable exceptions, and other BEAT modifications. The BEAT rate increases would take effect in 2023 (to 12.5% – three years earlier than planned), 2024 (to 15%), and 2025 (to 18%). The BEAT only applies to corporations with average annual gross receipts of at least USD 500 million over the preceding three-year period.

Also effective next year, the 1% excise tax on repurchases of corporate stock would apply to repurchases beginning in 2022.

A provision delaying the legislative change enacted in 2017 that would require amortizing research and experimental expenditures beginning in 2022 would also take effect next year, thereby temporarily holding back the change previously scheduled to take effect next year. The delay pushes the amortization requirement back four years, until 2026.

The individual income tax changes, including the new surcharge on high-income individuals, would also generally take effect in 2022. The high-earner surcharge would apply a 5% tax on modified adjusted gross income of more than USD 10 million and an additional 3% tax on modified adjusted gross income of more than USD 25 million.

Effective in 2023

The increase in the rate for global intangible low-taxed income (GILTI) – as well as for foreign-derived intangible income (FDII) – would apply for tax years beginning in 2023. GILTI would become subject to a 15% rate, with a 15.8% rate applicable for FDII. Amendments to the GILTI regime to require country-by-country calculation would also apply to tax years beginning in 2023. In addition, in 2023, the exclusion for qualified business asset income (QBAI) would be reduced from 10% to 5% (with an exception for US territories). These changes generally would align GILTI with the global minimum tax under the OECD agreement, which is also planned to be effective beginning in 2023.

Amendments to align foreign tax credit limitations to country-by-country calculation would also apply to tax years beginning in 2023. In addition, reductions to the foreign tax credit “haircut” would apply for tax years in 2023.

The alternative minimum corporate tax of 15% on large corporations’ adjusted financial statement income is planned to take effect for tax years beginning in 2023. The tax would generally apply to corporations with three-year average annual adjusted financial statement income of more than USD 1 billion. In the case of foreign-owned companies, the USD 1 billion threshold would apply to the global group, but the tax would apply only if the US member of the group has a three-year average annual adjusted financial statement income of USD 100 million or more.

A limitation on interest deductions of certain domestic corporations that are members in an international financial reporting group would also apply to tax years beginning in 2023. The provision would limit the deduction to an “allowable percentage” of 110% of net interest expense. The limitation would apply to domestic corporations whose average excess interest expense over interest includible over a three-year period exceeds USD 12 million.