Aggressive tax increases targeting large corporations and high-income individuals are now officially on the proposal table with the U.S. Treasury’s release of its Green Book and President Biden’s FY 2022 Budget.

By Davinia Lyon

The Biden Administration has proposed retooling key areas of the tax code to eliminate 2017 tax reform provisions most beneficial to large corporations and wealthy individuals. The details of the proposal are outlined in President Biden’s FY 2022 Budget, and in greater detail, the U.S. Treasury Green Book.

Together, these documents highlight Administration priorities, including a sizable corporate tax rate increase and an overhaul of international tax rules. While we do not normally focus on “proposed” tax changes, the aggressive nature of these changes is worth tracking closely.

Corporate tax rate increase

The Administration is going forward with a proposal to increase the corporate tax rate from 21% to 28%, still below the pre-2017 tax reform rate of 35%. The proposal aims for an effective date beginning after December 31, 2021, prorated for non-calendar tax years that begin during 2021.

Global minimum tax enhancements (formerly GILTI)

In international tax, numerous U.S. “global minimum tax” adjustments are proposed, including the elimination of current exclusions for qualified business asset income (QBAI or more generally, foreign tangible property) to motivate U.S. corporations to invest in tangible assets on U.S. soil. Current law permits U.S. shareholders to reduce their global minimum tax by 10% of their return on QBAI.  

The Administration would almost double the global minimum tax rate by cutting the IRS §250 deduction in half. U.S. shareholders now receive a 50% deduction against a 21% corporate tax rate for a 10.5% effective global minimum tax rate. The Administration would decrease the deduction to 25%, which when combined with the corporate rate increase to 28%, would result in an effective global minimum tax rate of 21%, double today’s tax rate of 10.5%.

The proposals also have U.S. shareholders calculating their global minimum tax on a country-by-country basis, as opposed to in the aggregate. If enacted, corporations will no longer be able to blend income from low- and high-tax jurisdictions to reduce the minimum tax. The global minimum tax changes would be effective for tax years beginning after December 31, 2021.

The Green Book further outlines a series of proposals to counter inversion transactions, including:

  • Repealing a federal-derived intangible income (FDII) deduction
  • Add a 15% minimum tax on worldwide book income for corporations that have worldwide book income more than $2 billion, for tax years after 2021
  • Replacing the base erosion and anti-abuse tax (BEAT) with the “stopping harmful inversions and ending low-tax developments” (SHIELD) rule for tax years after 2022
  • Institute a new business credit equal to 10% of eligible expenses paid or incurred in connection with “onshoring” a U.S. trade or business

The Takeaway

The Biden Administration is proposing aggressive tax increases and changes that will impact all companies with domestic and global operations and sales. It is important to keep in mind these are proposals and will go through a battery of scrutiny as the related bills move through the House and Senate before becoming law. We will keep you updated as the bills are proposed and revised over the course of the next several months.

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