US Treasury ‘Green Book’ details Biden’s international tax plans

By Doug Connolly, MNE Tax

The US Treasury’s Green Book, released today alongside President Biden’s FY 2022 Budget, outlines the specific tax provisions that the Administration seeks to enact this year, including significant proposals for overhauling the international tax rules applicable to corporations.

Many of the corporate tax proposals were first announced in broad terms in the President’s “Made in America Tax Plan” released in March.

The Green Book, the colloquial name for the formally titled “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” includes the detailed legislative explanations for these proposals.

The tax proposals in the Green Book are divided into those under the “American Jobs Plan” and the “American Families Plan.” The American Jobs Plan includes corporate tax reform, housing and infrastructure tax support, and clean energy tax provisions. The American Families Plan includes individual income tax provisions and provisions aimed at tax compliance and administration.

Corporate tax rate increase

As anticipated, the Administration proposes to increase the corporate tax rate from 21% to 28% – splitting the difference between the rate set by the 2017 tax reform and the rate before that (35%). The new tax rate is proposed to be effective for tax years beginning after December 31, 2021. The new rate would be prorated for non-calendar tax years that begin during 2021.

Global minimum tax enhancements

The Administration proposes several changes to the US “global minimum tax” regime, formally known as the global intangible low-taxed income (GILTI) provisions.

The proposal would eliminate the current qualified business asset income (QBAI) exclusion. Under current law, US shareholders can reduce their global minimum tax by 10% of their return on QBAI, which generally refers to foreign tangible property. The Administration has argued that the QBAI exclusion incentivizes US corporations to invest in more tangible assets abroad, as opposed to the US, to increase their minimum tax exclusion.

The Administration would also increase the global minimum tax rate by reducing the Internal Revenue Code Section 250 deduction against the global minimum tax. US shareholders currently get a 50% deduction against a 21% corporate tax rate, resulting in a 10.5% effective global minimum tax rate. The Administration would decrease this deduction to 25%, which, combined with the corporate rate increase to 28%, would result in an effective global minimum tax rate of 21%.

US shareholders would also have to calculate their global minimum tax on a country-by-country basis under the proposals. Under current law, the tax is calculated in the aggregate, which allows blending of income from low-tax jurisdictions with income from high-tax jurisdictions to minimize application of the minimum tax.

Notably, in adopting the country-by-country calculation proposal, the Administration did not adopt the proposal by Senate Finance Committee Chairman Ron Wyden (D-Ore.) to simplify the calculation by using two “baskets” (high and low tax) rather than requiring separate calculation for each jurisdiction.

The global minimum tax changes are proposed to be effective for tax years beginning after December 31, 2021.

To prevent erosion of the US tax base by companies expatriating, the Administration also proposes accompanying changes to stiffen the rules against inversion transactions. These changes would be effective for transactions completed after the date of enactment.

FDII deduction repeal

The Administration proposes to repeal the deduction for foreign-derived intangible income (FDII). Current law allows a 37.5% deduction for FDII, which is calculated as a portion of a US corporation’s intangible income derived from exports. Like the QBAI provisions under the global minimum tax, the Administration believes the FDII provision incentivizes moving certain economic activity out of the US.

The Green Book states that the Administration will use the savings from repealing the FDII deduction to enhance provisions incentivizing research and development (R&D). However, the proposals do not include details on any amended R&D provisions.

The FDII deduction repeal is proposed to apply to tax years beginning after December 31, 2021.

BEAT replacement with SHIELD

The Administration proposes repealing the base erosion and anti-abuse tax (BEAT) and replacing it with the “stopping harmful inversions and ending low-tax developments” (SHIELD) rule.

Under current law, BEAT is an additional tax applicable only to certain large corporate taxpayers. The Administration has criticized the provision as being ineffective at its intended purpose of preventing US tax base erosion, as well having unintended consequences.

The SHIELD would attempt to tackle base erosion by disallowing deductions to domestic corporations or branches with respect to payments made to a member in the same financial reporting group whose income is subject to low effective tax rate.

A low effective tax rate, for this purpose, would be set by reference to the proposed US global minimum tax rate of 21%, unless or until a global minimum tax rate is agreed to in international negotiations taking place under the OECD’s Pillar 2. Notably, in this respect, the US Treasury has recently suggested the US would agree to a global minimum tax rate as low as 15%.

The SHIELD is proposed to apply to financial reporting groups with global annual revenues greater than USD 500 million.

The Administration proposes for the provisions replacing BEAT with SHIELD to be effective for tax years beginning after December 31, 2022.

Large corporation minimum tax on book earnings

The proposals also include a 15% minimum tax on worldwide book income for corporations that have worldwide book income in excess of USD 2 billion. The provision is intended as a backstop against tax avoidance by large corporations that report substantial profits to shareholders while paying little or no corporate income tax.

The provision is proposed to be effective for tax years beginning after December 31, 2021.

Onshoring tax incentive

The Administration proposes to create a new business credit equal to 10% of eligible expenses paid or incurred in connection with “onshoring” a US trade or business. For this purpose, onshoring for a US business would mean reducing or eliminating a business or trade conducted abroad while starting up or expanding the same trade or business within the US.

The provision is proposed to be effective for expenses paid or incurred after the date of enactment.

Other corporate tax provisions

The Green Book includes a few other corporate tax proposals.

The Administration proposes to reform the taxation of fossil fuel income by repealing the exemption from GILTI for foreign oil and gas extraction income.

Another proposal would limit foreign tax credits from sales of hybrid entities.

Finally, the corporate tax proposals also include a provision to restrict deductions for excessive interest of members of financial reporting groups for disproportionate borrowing in the US.