Biden Administration And OECD Moving Full Steam Ahead Modifying The U.S. And International Tax Systems

Biden Administration And OECD Moving Full Steam Ahead Modifying The U.S. And International Tax Systems

The Biden administration, the OECD, and the European Union are moving full steam ahead with proposals that will modify the U.S. and international tax systems, significantly impacting clients’ aftertax investment returns and business income. We dig into the administration’s domestic and global tax proposals, including that a U.S. corporation may be required to pay a minimum tax amount to each foreign country where it has clients or investments. Are your clients preparing to adjust their portfolio of investments to maintain their after-tax annual investment returns?

Biden’s Tax Proposals: Two Surprises for Clients Impacting Last Year and 2021

President Biden’s tax proposals contain two major tax surprises. First, Biden’s tax plans would make any capital gains tax hike retroactive to April 28, 2020. That means clients who have engaged in tax planning strategies to avoid higher rates might wind up subject to the higher rates regardless if this provision makes its way into the final proposal. Second, not only would the stepped-up basis rules be repealed, but taxpayers who inherit property would be required to recognize gain at the time of death—even if the individual doesn’t immediately sell the inherited property. In other words, the property could be immediately subject to both the estate tax and income or capital gains tax. Life insurance proceeds that will remain tax-free under the current proposals will be more valuable than ever in order to cover the tax payments.

Biden’s Tax Proposals: The Biden Administration released its 2021 ‘Green Book’ of legislative tax proposals for Congress to consider.[1] The proposals as published include the following most salient items for clients:

  • Raise the corporate income tax rate from 21 to 28 percent effective for 2022.
  • Impose a 15 percent minimum tax on book earnings of large corporations.
  • Determining global minimum tax inclusion and residual U.S. tax liability on a jurisdiction-by-jurisdiction basis would be a stronger deterrent to profit.
  • Disallow deductions attributable to exempt income, and limit inversions.
  • Repeal the deduction for foreign-derived intangible income (FDII).
  • Replace the base erosion anti-abuse tax (BEAT) with the stopping harmful inversions and ending low-tax developments (SHIELD) rule.
  • Limit foreign tax credits from sales of hybrid entities.
  • Restrict deductions of excessive interest of members of financial reporting groups for disproportionate borrowing in the United States.
  • Reform taxation of foreign fossil fuel income.
  • Eliminate fossil fuel tax preferences.
  • Extend and enhance renewable and alternative energy incentives.
  • Increase the top marginal income tax rate for high earners.
  • Reform the taxation of capital income.
  • Tax carried (profits) interests as ordinary income.
  • Repeal deferral of gain from like-kind exchanges.
  • Make permanent excess business loss limitation of noncorporate taxpayers.
  • Address taxpayer noncompliance with listed transactions (tax shelters).

Regarding the Biden administration’s proposed changes to the minimum tax applicable to U.S. shareholders of controlled foreign corproations (known as “GILTI”), the following three aspects are most impactful for clients:

  • The U.S. shareholder’s entire net CFC tested income will be subject to U.S. tax. The qualified business asset investment (QBAI) exemption that allows 10 percent of the adjusted basis of QBAI to be exempt from GILTI would be repealed.
  • The IRC section 250 deduction of 50 percent of the global minimum tax inclusion would be reduced to 25 percent, thereby generally increasing the U.S. effective tax rate under the global minimum tax to 21 percent under the proposed U.S. corporate income tax rate of 28 percent.
  • The “global averaging” method for calculating a U.S. shareholder’s global minimum tax would be replaced with a “jurisdiction-by-jurisdiction” calculation. Under the new standard, a U.S. shareholder’s global minimum tax inclusion and, by extension, residual U.S. tax on such inclusion, would be determined separately for each foreign jurisdiction in which its CFCs have operations. As a result, a separate foreign tax credit limitation would be required for each foreign jurisdiction. A similar jurisdiction-by-jurisdiction approach would also apply with respect to a U.S. taxpayer’s foreign branch income. These changes mean that foreign taxes paid to higher-taxed jurisdictions will no longer reduce the residual U.S. tax paid on income earned in lower-taxed foreign jurisdictions.

The Biden proposal would repeal the Base Erosion and Anti-Abuse Tax (BEAT), replacing it with a new rule disallowing 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). Specifically, under this new Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) tax regime, a deduction (whether related or unrelated party deductions) 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, which 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. The proposal to repeal BEAT and replace it with SHIELD would be effective from 2023.

Posted By William H. Byrnes 

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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

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