Proposed tax changes under Biden administration for corporate taxpayers
By Toria Lessman, SVP, Underwriting Leader, Transactional Liability, Danielle Nieh, VP, Underwriting Leader and Hannah Tucker, Senior Underwriter
On May 28, 2021, the Biden administration released the “General explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” referred to as the Green Book1, providing details and guidance for taxpayers regarding proposed tax changes. This article briefly highlights some of the key proposals that may have an impact on corporate taxpayers.
Corporate tax rate
Currently, the income tax rate for C corporations is 21%. The Biden administration has proposed increasing the income tax rate for C corporations to 28% for taxable years beginning after December 31, 2021.
The Biden administration has indicated previously, it may agree to a compromised increase of up to 25% instead of the proposed 28%.
15% minimum tax
The government has proposed imposing a 15% minimum tax on worldwide pre-tax book income of corporations with annual book income more than $2 billion, effective for taxable years beginning after December 31, 2021.
The Biden administration believes that this tax would help to reduce the disparity in the income of large corporations as reported on financial statements and their tax returns by targeting large corporations that report high profits but have little taxable income.
Global minimum tax regime
Currently, under the Global Intangible Low-Taxed Income (GILTI) tax regime, a U.S. shareholder of a controlled foreign corporation (CFC) is taxed annually in the United States. The U.S. shareholder’s minimum tax allows a reduction for a 10% return on specified tangible foreign property held by the CFC called “qualified business asset income” (QBAI). The U.S. shareholder’s GILTI inclusion currently allows for a 50% deduction for an effective tax rate of 10.5%. The GILTI inclusion is determined on an overall global average basis from high-tax foreign jurisdictions combined with low-tax foreign jurisdictions, and currently allows for the exclusion of “high-tax” income from GILTI altogether.
The Biden administration has proposed several changes to the GILTI regime. These proposals include: (i) eliminating the 10% QBAI exemption from GILTI; (ii) doubling the effective GILTI tax rate from 10.5% to 21%; (iii) imposing a country-by-country method for calculating GILTI (effectively eliminating blended high-tax GILTI jurisdictions against low-tax GILTI jurisdictions; and (iv) excluding the high-tax exception from GILTI (and subpart F income). These changes would be effective for taxable years beginning after December 31, 2021.
They believe this change would encourage them to retain jobs and profits within the US. Moreover, we would fully move to a true global tax system, as opposed to a territorial approach.
Currently, under Section 7874 of the Code, a foreign corporation is treated as a domestic corporation if pursuant to a plan (or series of related transactions): (i) substantially all of the assets of the domestic corporation are acquired directly or indirectly by the foreign acquiring corporation, (ii) the former shareholders of the domestic corporation hold at least an 80% ownership interest (by vote or value) in the foreign acquiring corporation by reason of having held stock in the domestic corporation, and (iii) the foreign acquiring corporation does not conduct substantial business activities in the country in which the foreign acquiring corporation is organized.
Alternatively, if the former shareholders own less than 80%, but greater than 60%, of the stock (by vote or value), the foreign entity is not treated as a U.S. taxpayer, but may be subject to increased U.S. taxation.
The Biden administration has proposed expanding the circumstances under which a foreign corporation can be deemed to be a domestic corporation by replacing the 80% ownership test with a greater than 50% ownership test and eliminating the 60% to 80% ownership test in its entirety.
The government has also suggested that, regardless of the former shareholder level, an inversion transaction would be deemed to occur if: (i) immediately prior to the acquisition, the fair market value of the domestic entity is greater than the fair market value of the foreign entity, (ii) after the acquisition, the foreign entity's “expanded affiliated group” is managed and controlled in the United States, and (iii) the expanded affiliated group does not conduct substantial business activity in the country in which the foreign acquiring corporation is organized.
This proposal would be effective for transactions completed after the date of enactment, with no exceptions for transactions started before the effective date. The Biden administration believes this will disincentivize inversion transactions.
Repeal the FDII deduction
A U.S. corporation’s Foreign Derived Intangible Income (FDII) is equal to the portion of its intangible income derived from export transactions. Currently, a U.S. corporation can deduct 37.5% for taxable years after December 31, 2017 and 21.875% for taxable years after December 31, 2025.
The Biden administration has recommended to repeal the deduction for FDII taxable income for taxable years beginning after December 31, 2021. They believe that the FDII deduction is not effective in promoting domestic research and development activities.
Replace BEAT with SHIELD
Presently, U.S. corporate taxpayers with average gross receipts more than $500 million that make “base eroding” payments to non-U.S. related persons are subject to a minimum tax on “modified taxable income,” commonly known as “BEAT.”
The government has proposed repealing BEAT and replacing it with a new rule referred to as the “Stopping Harmful Inversions and Ending Low-Tax Developments” (SHIELD) rule. The SHIELD rule would apply to financial reporting groups with greater than $500 million in global annual revenues. Under SHIELD, a deduction would be disallowed to a domestic corporation with respect to payment made to a “low-tax member,” which is any financial group member whose income is subject to (or deemed subject to) an effective tax rate that is below a designated minimum tax rate.
The SHIELD rule is proposed to be effective for taxable years beginning after December 31, 2022. The Biden administration believes that this change will reduce the incentive for corporations to continue shifting profits to low-tax jurisdictions.