An examination of the Biden Administration’s proposed changes to the taxation of multinational corporations.
Biden Administration’s Proposed Changes to the Tax Code
On May 28, 2021, the Department of the Treasury released its General Explanations of the Biden Administration’s Fiscal Year 2022 Revenue Proposals, commonly referred to as the Green Book. The Green Book provides additional details on President Biden’s proposed changes to the tax code which are intended to fund his policy agenda; including the American Jobs Plan, the Made in America Tax Plan, and the American Families Plan. Many of the proposals date back to President Biden’s campaign, in which he made the case for policy changes involving infrastructure, manufacturing, and caregiving, and proposed paying for these changes by reversing some of the tax measures in the Tax Cuts and Jobs Act (“TCJA”) enacted under the previous administration.
Although there is debate over the U.S. international tax regime, there is an increased focus by the current administration on the issue in order to pay for President Biden’s Build Back Better (“BBB”) policy agenda. The following are some of the major changes to the international tax regime proposed by the Biden Administration in the BBB.
The GILTI Regime
The Biden Administration’s plan includes raising the minimum Global Intangible Low-Taxed Income (“GILTI”) tax rate from an effective 10.5% to 21% and calculating it on a jurisdiction-by-jurisdiction basis. The 21% effective tax rate will be achieved by increasing the corporate tax rate from 20% to 28% and reducing the GILTI deduction from 50% to 25%. By moving to a jurisdictional basis, a controlled foreign corporation (“CFC”) in a high-taxed jurisdiction would not be able to utilize its excess foreign tax credits against a CFC in a lower-taxed jurisdiction.
Additionally, the Biden Administration intends to eliminate the Qualified Business Asset Investment (“QBAI”) deduction from the GILTI calculation, as well as to repeal the Subpart F and GILTI high-tax exceptions. The net effect of these proposed changes results in the introduction of 21% global minimum tax. Currently, these proposed changes are stalled in Congress. However, the Biden Administration is confident it can enact a 15% international minimum tax under a scaled back version of BBB.
Repeal of the FDII Deduction
President Biden’s plan is considering repeal of the Foreign Derived Intangible Income (“FDII”) deduction to discourage domestic corporations generating profits from foreign revenue and from servicing foreign customers.
The Biden Administration’s proposed changes to the GILTI and FDII are meant to encourage domestic research and development investments and increase manufacturing operations (onshoring) and to deincentivize corporations from shifting manufacturing operations abroad (offshoring), thereby benefiting from both regimes and paying only a bare minimum tax in the U.S. The goals of these changes are to encourage R&D investments in the U.S. and to increase manufacturing operations.