Biden’s corporate tax plan would increase rates, upend international provisions

By Doug Connolly, MNE Tax

President Biden’s corporate tax plan released on March 31 would raise the US corporate tax rate to 28%, increase the global minimum tax and calculate it on a country-by-country basis, add a “book income” minimum tax for the largest corporations, and encourage international cooperation on global minimum taxes. The plan would also eliminate the deduction for foreign-derived intangible income (FDII) and reinvest the savings in expanded research and development (R&D) incentives.

The corporate tax plan, named the “Made in America Tax Plan,” would fully pay for the President’s accompanying infrastructure investment plan, the “American Jobs Plan,” over 15 years, the Biden Administration claimed.

The Administration says the tax plan aims to ensure that corporations “pay their fair share,” invest in jobs at home in the US, and stop shifting profits to tax havens. The plan cites a recent study finding that the corporate effective rate halved from 16 percent to 8 percent following the enactment of the 2017 Tax Cuts and Jobs Act (TCJA). The Biden Administration has also argued that the TCJA inadvertently incentivized US companies to invest more overseas, as discussed in a recent Senate Finance Committee hearing.

Corporate tax rate hike and “book income” minimum tax

The President’s plan would split the difference between the pre-TCJA corporate tax rate of 35 percent and the TCJA-enacted tax rate reduction to 21 percent by settling on a 28 percent corporate tax rate. This would return corporate tax revenue as a share of the economy to around its pre-TCJA 21^st-century average, the Administration says. A Treasury official speaking at the recent Senate hearing noted that corporate tax revenues shrunk from 2 percent to 1 percent of GDP post-enactment of the TCJA.

To prevent large corporations from using tax code “loopholes” to avoid paying US income taxes while the corporations report large profits to investors, the plan would create a new 15 percent minimum tax on the “book income” corporations report to their investors. The proposal would apply “only to the very largest corporations.”

Global minimum tax, GILTI

The TCJA enacted the global intangible low-taxed income (GILTI) provisions, which operate as a global minimum tax on foreign income. The provisions include an exemption from the tax for US corporations for the first 10 percent return on their foreign tangible assets. The remainder is taxed at about half the US corporate tax rate. The tax is calculated based on the corporation’s overall global income and foreign taxes, rather than on a country-by-country basis.

The Biden plan would keep the global minimum tax but increase the rate to 21 percent and make two additional changes aimed at discouraging profit shifting and eliminating perceived incentives to offshore investment.

The Biden plan would keep the global minimum tax but increase the rate to 21 percent and make two additional changes aimed at discouraging profit shifting and eliminating perceived incentives to offshore investment.

The plan would eliminate the 10 percent exemption based on foreign assets, which the Biden Administration has claimed encourages corporations to make additional foreign investments to boost their exemption.

The plan would also require companies to calculate their minimum tax on a country-by-country basis. This change is intended to discourage the use of tax havens, as companies under current law can combine their low-taxed income in tax havens with high-taxed income from other jurisdictions in calculating their global minimum tax.

R&D incentives, FDII

The Biden Administration considers the TCJA’s deduction for foreign-derived intangible income (FDII), like the GILTI provisions, to inadvertently encourage US corporations to place more assets overseas to be able to claim a larger deduction. Accordingly, the President proposes eliminating the FDII provisions.

The plan would use the revenue saved by repealing FDII “to expand more effective R&D investment incentives.” The plan does not include further details on its tax-based approach to encouraging R&D, although the infrastructure side of the President’s plan also includes several proposals for more direct investment in R&D by the federal government.

Multilateral cooperation on minimum taxes, BEAT

The Biden Administration has expressed concerns about a global “race to the bottom” on corporate tax rates. To that end, the President is seeking a multilateral agreement on a global minimum tax. The Administration believes that if it can convince other countries to adopt strong minimum corporate taxes along with the US, it could undermine corporate efforts to shift profits to tax havens.

The plan would include additional provisions to prevent profit stripping from the US. If a corporation is based in a country that does not adopt a strong minimum tax, the plan would deny deductions to the corporation “on payments that could allow them to strip profits out of the United States.”

The plan would include additional provisions to prevent profit stripping from the US. If a corporation is based in a country that does not adopt a strong minimum tax, the plan would deny deductions to the corporation “on payments that could allow them to strip profits out of the United States.”

Possibly in reference to the TCJA’s base erosion and ant-abuse tax (BEAT), although unnamed, the plan would also replace “an ineffective provision in the 2017 tax law that tried to stop foreign corporations from stripping profits out of the United States.”

Other provisions

The plan lists several other corporate tax overhaul proposals.

Without specifying details, the plan states that it would make it harder for US corporations to acquire or merge with foreign companies to avoid US taxes by claiming to be a foreign company despite US-based management and operations (commonly called “inverting”).

To encourage job creation in the US, the plan would ensure “companies can no longer write off expenses that come from offshoring jobs.” In addition, a new tax credit would support onshoring jobs.

The plan would also eliminate tax code “subsidies, loopholes, and special foreign tax credits for the fossil fuel industry” and require polluting industries to cover costs by restoring payments from polluters into the Superfund Trust Fund.

Finally, the President proposes to ramp up corporate tax enforcement. To this end, the Administration would aim to ensure that the IRS has the resources it needs to scrutinize corporate transactions and pursue corporate tax audits.

 The plan states that the Administration will also announce in the coming weeks “a broader enforcement initiative” aimed at addressing tax evasion by corporations and high-income individuals.