On May 28, 2021, the U.S. Treasury released its Fiscal Year 2022 explanation of the various proposals included in President Biden’s “Made in America” tax plan, known as the Green Book. While far from being finalized, here is an outline of proposed changes within the proposal impacting international businesses the most.
International
- GILTI tax rate – The proposal increases the tax rate on GILTI from the current 10.5% to 21% and eliminates the exemption from GILTI of a net deemed tangible income return, currently equal to 10% of a US shareholder’s share of controlled foreign corporation adjusted basis in qualified business assets. The proposal also repeals the high tax exception for both GILTI and Subpart F. This would be effective for tax years beginning after December 31, 2021.
- Foreign tax credits – The plan requires determination of a US shareholder’s GILTI inclusion and foreign tax credit limitation on a country-by-country basis, thus preventing excess foreign tax credits from high-tax jurisdiction from being credited against GILTI inclusions from low tax jurisdictions. Like the above, this would be effective for tax years beginning after December 31, 2021.
- FDII – There’s also a proposed repeal of the Foreign-Derived Intangible Income “FDII” deduction, replaced with tax-based incentives for research and development in the United States. The proposal would be effective for taxable years beginning after December 31, 2021.
- BEAT — The plan repeals the Base Erosion Anti-Abuse Tax “BEAT” and replaces it with the Stopping Harmful Inversions and Ending Low-Tax Development “SHIELD” Rule. SHIELD would deny deductions “by reference to all gross payments that are made (or deemed made)” to related entities with global annual revenue greater than $500 million whose income is subject to a low effective tax rate. Such a low effective tax rate would be the GILTI rate of 21% until the adoption of a multilateral agreement on global minimum tax rates under the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiative. The proposal indicates this change would be effective for taxable years beginning after December 31, 2022.
- Expense deduction – The plan limits a member of a multinational group’s interest expense deduction if the member has net interest expense for financial reporting purposes exceeds the member’s proportionate share of the group’s net interest expense reported on the group’s consolidated financial statements. This would apply to groups that report more than $5 million of net interest expense on U.S. tax returns for a taxable year. The proposal would be effective for taxable years beginning after December 31, 2021.
- Stock sale – There are changes to the source and character of any item resulting from the disposition of an interest in a specified hybrid entity as if the seller had sold or exchanged stock; therefore, limiting foreign tax credits available on such a sale. A hybrid entity is one that is treated as a corporation under foreign tax laws but as a partnership or disregarded entity for US tax purposes. The proposal would be effective for transactions occurring after the date of enactment.
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We will keep you informed of updates that impact you and your business both internationally and domestically. In case you missed it, check out our summary of proposed corporate and individual impacts. We are dedicated to finding the best solution for every client as President Biden’s plans unfold and are formalized. Follow us on LinkedIn or subscribe to our newsletter for the latest information.
