Treasury ‘Green Book’ sheds additional light on Biden’s tax proposals has been saved
Treasury ‘Green Book’ sheds additional light on Biden’s tax proposals
The White House released a fiscal year 2022 budget blueprint on May 28 that, as expected, calls for significant tax increases targeting large corporations and high-income individuals to pay for lower- and middle-class tax relief and bankroll trillions of dollars in new spending initiatives proposed by the administration in its American Jobs Plan and American Families Plan. President Biden up to now has addressed these proposals only in a very general way, but his budget blueprint includes a “Green Book,” which provides more granular details from the Treasury Department on how they would operate – including their effective dates and their projected impact on federal revenues. All told, the administration projects that its tax proposals would generate a net increase in federal tax receipts of nearly $2.4 trillion between 2022 and 2031.
The following are among the more notable provisions:
- Increasing the headline rate of federal corporate tax from 21% to 28%, effective for taxable years beginning after 31st December 2020.
- Confirming plans to bring in a 15% tax on the book profits of companies that pay no federal income tax. However, this would only kick in for companies with book income above a threshold of $2bn. In addition, there would be a mechanism to take account of prior years' taxes paid that exceeded the minimum tax, as well as the potential utilisation of certain credits.
- Replacement of the Base Erosion and Anti-Abuse Tax (BEAT), which was introduced in the 2017 tax reform, and replacing it with a new system called Stopping Harmful Inversions and Ending Low-tax Developments (or SHIELD). SHIELD would deny deductions for cross-border related party payments if they were subject to a low effective tax rate in the destination jurisdiction. The report suggests that what defines a low effective tax rate could come out of the OECD's discussions on Pillar 2 (which is currently considering a 15% minimum tax rate as proposed by the US), but if not then it would be equal to the proposed rate on GILTI income (currently proposed at a rate of 21%). The rule would apply to financial reporting groups with an annual turnover exceeding $500m and be effective for taxable years beginning after 31st December 2022.
- The changes around Global Intangible Low-Taxed Income (GILTI) conform to those previously proposed, being:
- An increase in the effective rate from 10.5% to 21%
- Removal of the 10% allowance for a return on foreign tangible assets (called QBAI)
- Requiring GILTI to be calculated on a country-by-country basis
- Repealing the Foreign Derived Intangible Income (FDII) regime.
- A proposal for an additional interest limitation rule which would operate to disallow interest expense deductions of the US subgroup in proportion to the portion of the subgroup’s net interest expense (calculated for financial reporting purposes on a separate company basis) that exceeds the subgroup’s proportionate share of the overall group’s net interest expense reported on the group’s consolidated financial statements.
- Tightening existing rules to prevent inversions of US companies.
From an Irish perspective
Overall 2021 will be a critical year for international tax including US elements as global agreement is sought at OECD level on addressing the challenges of digitalisation and minimum tax rates. From a business perspective continuing uncertainty is likely to impact on investment decisions with a consequent negative impact on economic growth. Therefore, reaching an agreement this year that works for all stakeholders is important.
It is our view that if the (likely modified) Biden proposals are passed by Congress an agreement at OECD becomes very likely. Ireland has a strong track record of embracing changes and being agile and through continued engagement between Government and Business a positive outcome is achievable. However, between the US Treasury publishing its report on April 7 and the publication of this Green Book, Minister for Finance Paschal Donohoe held a Virtual Seminar on International Taxation with the Department of Finance on April 21. There he explained that his view was that the right agreement at the OECD can bring stability to the international tax framework. He outlined his stall for such an agreement being one that, inter alia, continues to support innovation and growth and one that “facilitates healthy but appropriate and acceptable tax competition aligned to key principles, such as substance and creation of real value, and accommodates Ireland’s 12.5% rate”.
It is interesting to note that in the OECD’s view with regard to the impact of taxes on economic growth they view high corporate tax rates as being the most harmful with property taxes being the least harmful. The debate at OECD on what should be the minimum tax rate should take this into account coupled with ensuring that fairness is achieved between large, medium and small and developing economies.
It is noteworthy that the proposed introduction of Shield would not be until 1 January 2023 when combined with the recent US pronouncements that a floor for the minimum rate should be 15%.
These indicate a willingness to avoid a “ cliff edge “ for many MNCs that would otherwise be liable to Shield if detailed consensus is not reached within the OECD this year and the US implemented key elements of their tax package . A key consideration with regard to possible outcomes is the timing of political pronouncements/agreements and the drafting of the legislation and final Pillar 2 architecture which would then have to be finally approved in Congress and at OECD level respectively.
There is no doubt that non-tax factors with regard to choosing Ireland as a location will assume greater importance than heretofore. Our strong track record, talent pool and position as a gateway into the EU are all positive aspects, albeit that varies by industry.
Overview of the detail
28 percent corporate tax rate
The administration’s budget proposal would increase the corporate tax rate from 21 percent to 28 percent, citing that change as “an administratively simple way to raise revenue in order to pay for the [its] infrastructure proposals and other long-run drivers of spending growth.” This proposal was a centrepiece of then-candidate Biden’s tax platform during the presidential campaign and was featured prominently in the American Jobs Plan released at the end March, so its inclusion in the Green Book was widely expected. The only new light that the Green Book shed on this proposal was a statement that the administration wants to see the rate increase take effect for tax years beginning after December 31, 2021. For non-calendar year taxpayers, for tax years beginning after January 1, 2021, and before January 1, 2022, the tax rate would be equal to 21 percent plus 7 percent multiplied by the portion of the year that falls within 2022.
15 percent minimum tax on book income
The administration also proposes a 15 percent minimum tax on corporations based on worldwide book income, if a corporation has more than $2 billion of worldwide book income. More specifically, the new minimum tax would equal the excess of (1) book tentative minimum tax over (2) regular tax. The book tentative minimum tax would be equal to 15 percent of worldwide pre-tax book income (calculated after reducing book income by book net operating loss deductions), less general business credits (including R&D, clean energy, and housing tax credits) and foreign tax credits. Under the proposal, taxpayers would be allowed a book tax credit (for a positive book tax liability) against regular tax in a subsequent year, but the credit may not reduce regular tax liability below the book tentative minimum tax for that year. This proposal would be effective for tax years beginning after December 31, 2021.
Revisions to the GILTI regime: The administration proposes three changes to the current global intangible low-taxed income (GILTI) regime.
First, the QBAI exemption which reduces the GILTI inclusion by 10 percent of the Qualified Business Asset Investment would be eliminated. This would result in a US shareholder’s entire net controlled foreign corporation (CFC) tested income being subject to US tax.
Second, the deduction, which reduces US federal income tax on GILTI inclusion amounts would be reduced to 25 percent. As a result, the US effective tax rate on GILTI would generally be increased to 21 percent, assuming the US corporate income tax rate is increased to 28 percent as the White House has proposed.
Finally, the current approach for calculating GILTI, which combines the tested income and tested losses of all of a US shareholder’s CFCs would be replaced with a “jurisdiction-by-jurisdiction” calculation, as opposed to blending the results globally. Under the proposed approach, a US shareholder’s GILTI inclusion and, by extension, residual US tax on such inclusion, would be determined separately for each foreign jurisdiction in which its CFCs have operations. In addition, a separate foreign tax credit limitation would be required for each foreign jurisdiction, with a similar jurisdiction-by-jurisdiction approach applying with respect to a US taxpayer’s foreign branch income. Finally, the budget proposes to repeal the high-tax exception for both subpart F income and for GILTI.
As part of this proposal, the administration would allow a domestic corporation that is a member of a foreign-parented controlled group to take into account any foreign taxes paid by the foreign parent, under an approach that would be consistent with an OECD/Inclusive Framework Pillar Two agreement on global minimum taxation (if such consensus is reached), with respect to the CFC income that would otherwise be part of the domestic corporation’s global minimum tax inclusion. The proposal’s jurisdiction-by-jurisdiction approach would also apply for this purpose.
The proposal would be effective for taxable years beginning after December 31, 2021.
Deduction disallowance for exempt or tax-preferred foreign gross income: The proposal would expand the application of existing law to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction. The proposal would be effective for taxable years beginning after December 31, 2021.
Inversions: The proposal would broaden the definition of an “inversion” transaction by replacing the 80-percent test with a greater-than-50-percent test and eliminating the 60-percent test. The proposal would also provide that, regardless of the level of shareholder continuity, an inversion transaction occurs if (1) immediately prior to the acquisition, the fair market value of the domestic entity is greater than the fair market value of the foreign acquiring corporation, (2) after the acquisition the expanded affiliated group is primarily managed and controlled in the United States, and (3) the expanded affiliated group does not conduct substantial business activities in the country in which the foreign acquiring corporation is created or organized.
The proposal would also expand the scope of an acquisition subject to the existing law by including a direct or indirect acquisition of substantially all of the assets constituting a trade or business of a domestic corporation, substantially all of the assets of a domestic partnership, or substantially all of the US trade or business assets of a foreign partnership. Furthermore, a distribution of stock of a foreign corporation by a domestic corporation or a partnership that represents either substantially all of the assets or substantially all of the assets constituting a trade or business of the distributing corporation or partnership would be treated as a direct or indirect acquisition of substantially all of the assets or trade or business assets, respectively, of the distributing corporation or partnership.
The proposal would be effective for transactions that are completed after the date of enactment.
Changes to FDII rules: The proposal would repeal the deduction allowed for foreign-derived intangible income (FDII). The resulting revenue would be used to encourage R&D. The proposal would be effective for taxable years beginning after December 31, 2021.
Replace BEAT with SHIELD: The proposal would repeal the current-law base erosion anti-abuse tax (BEAT) enacted in the Tax Cuts and Jobs Act and replace it with a new rule – known as the Stopping Harmful Inversions and Ending Low-Taxed Developments (SHIELD) – that would disallow deductions to domestic corporations or branches by reference to low-taxed income of entities that are members of the same financial reporting group (including a member that is the common foreign parent, in the case of a foreign-parented controlled group). Under this proposal, a deduction would be disallowed to a domestic corporation or branch, in whole or in part, by reference to all gross payments that are made (or deemed made) to “low-taxed members.” A low-taxed member is any financial reporting group member whose income is subject to (or deemed subject to) an effective tax rate that is below a designated minimum tax rate.
If SHIELD is in effect before a Pillar Two agreement has been reached, the designated minimum tax rate trigger will be the US global minimum tax rate for GILTI (which is 21 percent under this proposal). If a Pillar Two agreement has been reached, such agreed-upon rate will apply for purposes of SHIELD. A financial reporting group is any group of business entities that prepares consolidated financial statements and that includes at least one domestic corporation, domestic partnership, or foreign entity with a US trade or business. Consolidated financial statements means those determined in accordance with US Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), or other method authorized by the Secretary under regulations. The proposal to repeal BEAT and replace with SHIELD would be effective for taxable years beginning after December 31, 2022.
Limit foreign tax credits from sales of hybrid entities: This proposal would apply the principles of existing law to determine the source and character of any item recognised in connection with a direct or indirect disposition of an interest in a specified hybrid entity and to a change in the classification of an entity that is not recognized for foreign tax purposes (for example, due to an election under the entity classification regulations). Thus, for purposes of applying the foreign tax credit rules, the source and character of any item resulting from the disposition of the interest in the specified hybrid entity, or change in entity classification, would be determined based on the source and character of an item of gain or loss the seller would have taken into account upon the sale or exchange of stock (determined without regard to section 1248). The proposal would not affect the amount of gain or loss recognized as a result of the disposition or the change in entity classification. The proposal would be effective for transactions occurring after the date of enactment.
New incentives for ‘onshoring’; denial of deductions for ‘offshoring’: In order to incentivize taxpayers to bring offshore jobs and investments to the United States, the proposal would create a new general business credit equal to 10 percent of the eligible expenses paid or incurred in connection with onshoring a US trade or business. Under the proposal, onshoring a US trade or business means reducing or eliminating a trade or business (or line of business) currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business to a location within the United States, to the extent that this action results in an increase in US jobs. The administration also proposes to disallow deductions for expenses paid or incurred in connection with offshoring a US trade or business. Offshoring a US trade or business means reducing or eliminating a trade or business or line of business currently conducted inside the United States and starting up, expanding, or otherwise moving the same trade or business to a location outside the United States, to the extent that this action results in a loss of US jobs.
For purposes of both proposals, expenses paid or incurred in connection with onshoring or offshoring a US trade or business are limited solely to expenses associated with the relocation of the trade or business and do not include capital expenditures or costs for severance pay and other assistance to displaced workers. The Secretary may prescribe rules to implement the provision, including rules to determine covered expenses and treatment of independent contractors. The proposal would be effective for expenses paid or incurred after the date of enactment.
Additional interest deduction limitation for multinational group members: This proposal would add a new interest expense limitation applicable to multinational groups. Taxpayers subject to both this limitation and existing limitation would apply whichever limitation is lower each taxable year. The new limitation would apply to any US subgroup (or stand-alone US entity) that is included in the consolidated financial statements of a multinational group and that reports $5 million or more of net interest expense on US tax returns annually, except that it would not apply to financial services entities. Interest expense deductions of the US subgroup would be disallowed in proportion to the portion of the subgroup’s net interest expense (calculated for financial reporting purposes on a separate company basis) that exceeds the subgroup’s proportionate share of the overall group’s net interest expense reported on the group’s consolidated financial statements. The US subgroup’s proportionate share of the group’s net interest expense would be based on the subgroup’s proportionate share of the group’s earnings before interest, taxes, depreciation, and amortization.
Interest expense disallowed under the limitation would be carried forward to subsequent years, and the US subgroup would also carry forward any excess limitation. A US subgroup would be comprised of any US entity that is not directly or indirectly owned by another US entity as well as all direct or indirect subsidiaries (domestic and foreign) of such US entity that are included in the group’s consolidated financial statements.
The Treasury Department would be directed to issue regulations providing for the allocation of interest expense disallowance among the members of the US subgroup to the extent they are not all members of a US consolidated group. The US subgroup would also be permitted to elect to limit its interest deductions to its interest income plus 10 percent of its adjusted taxable income as an alternative to applying the new limitation.
In addition to the above there are certain proposals regarding the Repeal of credits and incentives for the oil and gas industry as well as Incentives for renewable energy production and investment, low-emission vehicles.
Although the budget gives the President the opportunity to formally lay out his tax policy agenda, these proposals are not binding and the authority for drafting actual legislation lies with members of Congress. But Congress does not speak with one voice and, based on comments from lawmakers in the weeks since President Biden released his American Jobs Plan and American Families Plan, his proposals are likely to be modified to some degree regardless of whether he is able to reach a bipartisan deal on an infrastructure package with congressional Republicans (which would mean winning over at least 10 GOP lawmakers in the Senate to avert a filibuster) followed by a smaller Democrats-only bill under fast-track budget reconciliation protections or decides instead to abandon negotiations with Senate Republicans and enact as much of the American Families Plan and American Jobs Plan as possible using budget reconciliation.
President Biden had initially set Memorial Day as an informal deadline for deciding which legislative path he intends to pursue. In the wake of the GOP’s latest counteroffer, however, White House Press Secretary Jen Psaki appeared to back off of that marker, telling reporters on May 27 that the administration “look[s] forward to making progress before Congress resumes on June 7.” For her part, House Speaker Nancy Pelosi, D-Calif., continues to state that she hopes to move legislation through her chamber by the July 4 recess. Senate Majority Leader Charles Schumer, D-N.Y., likewise indicated this week that he expects his chamber to take up a bill in July.
Global investment and innovation incentives (Gi³)
Anna Holohan, Tax Senior Manager discusses Finance Act 2020 amendments in a recent Irish Tax Review article