In late March 2021, President Biden unveiled the American Jobs Plan (Plan), the next spending proposal following the American Rescue Plan Act of 2021 which was enacted into law in early March 2021. The Plan contains several provisions to create new jobs through upgrading physical and digital infrastructure. It also involves reigniting manufacturing through increased renewable energy investments, modernizing schools, building more than 2 million houses to resolve the affordable housing crisis, and upgrading power, water, and transportation infrastructure. As currently proposed, the Plan would cost in excess of $2T and be concentrated over the next 8 years.
The high price tag of the American Jobs Plan has left many wondering how the government will fund these changes. The answer is through significant tax increases targeting U.S. multinational companies, also known as Controlled Foreign Corporations (CFC) for U.S. tax purposes. However, several proposed changes may also impact any U.S. corporation including U.S. subsidiaries of foreign corporations. The details are outlined in the Made in America Tax Plan (Tax Plan) proposed alongside the American Jobs Plan, which includes targeted tax increases, repeal of exemptions and increased enforcement. Here is a summary of key details.
All U.S. Corporations including Foreign-Owned Subsidiaries:
- Increased Corporate Tax Rate – The Tax Plan proposes an increase in the corporate income tax rate to 28%, up from the 21% rate enacted with the Tax Cuts and Jobs Act in 2017. Even with the increase, this tax rate would remain below the rates in place from the late 1980’s until the 2017 tax reform. Reforms to reward productive domestic investments will be paired with the rate increase.
- Minimum Book Tax – A 15% minimum tax on book income is proposed to reduce the exploitation of tax loopholes by large corporations reporting substantial profits but little or no tax liability. Companies would pay up to the minimum tax in excess of their regular tax liability.
- Clean Energy Incentives – The Tax Plan discusses a number of tax and non-tax initiatives for companies to advance clean electricity production in the U.S. Additionally, the fossil fuel subsidies would be eliminated with no impact expected on the price or security of energy for U.S. consumers.
- Increased IRS Enforcement – Finally, the Tax Plan also calls for significantly strengthening enforcement against large corporations through increased funding and expanding the number of resources available to the IRS. The goal would be to increase the number of audit rates on international companies.
U.S. Multinational Corporations:
- GILTI Update – The Tax Plan calls for significant changes to the Global Intangible Low Taxed Income (GILTI) that increase taxes paid by U.S. multinationals while concurrently making offshore investments far less attractive. The proposed changes include increasing the tax rate from 10.5% to 21%, requiring tax to be assessed on a country-by-country basis and removing the 10% exclusion of Qualified Business Asset Investments (QBAI).
- FDII Repeal – The Foreign Derived Intangible Income (FDII) tax was designed to determine income from the sale of goods and services internationally attributable to intangible assets such as patents, trademarks, and copyrights. The purpose is to encourage U.S. multinational groups to keep intellectual property in the U.S. by using a lower 13.5% effective tax rate for certain foreign sales. However, FDII did not incentivize domestic R&D investment. The Tax Plan calls for a complete repeal of FDII and asserts the revenue from the change would be used to expand domestic R&D incentive programs.
- Global Minimum Tax Agreement – There is also discussion about the implementation of a strong multi-national global minimum tax agreement. There would also be a repeal of the ineffective Base Erosion and Anti-Abuse Tax (BEAT). It would be replaced by a tax regime that denies deductions to U.S. multinationals making payments in countries which have not adopted the new global minimum tax agreement.
- Preventing Inversions – The Tax Plan also discusses implementing changes to prevent U.S. corporations from merging with foreign businesses to reduce U.S. federal income tax while retaining management and operations domestically (known as an inversion). Since there were very few details provided it is unclear how the Administration intends to impose a tax or if those who previously inverted will be affected.
- Elimination of Offshoring Expense Deductions – There is also discussion on the elimination of certain deductions for expenses when moving operations to another country. Concurrently, there are also discussions about creating new tax incentives for bringing jobs back to the U.S. Unfortunately, no specific details have yet to be provided.
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While it is almost certain the Plan as proposed by President Biden will be changed before it gets to Congressional approval, it does provide insight into the international tax changes which are likely to occur this year. If you have questions about the information outlined above or need assistance with a global business, tax, or structuring issue, we can help. For additional information call us at 248.208.8860 or reach out today. We look forward to speaking with you soon.
