Proposed Made in America Tax Plan Will Impact How Profits and Revenue Are Reported
President Biden’s Made in America Tax Plan, part of his wider American Jobs Plan, seeks to build a resilient, competitive economy and a fairer tax system. Changes to how multinational corporations are taxed on both their domestic and foreign business activities are a major focus of this plan.
The proposed plan is intended to accomplish two main things:
- Make it more attractive to do business in the U.S.
- Ensure that corporations doing business in the U.S. pay their fair share of U.S. taxes
If enacted as proposed, the changes are projected to bring in over $1.25 trillion in new tax revenue over 15 years.
Biden Looks to Raise Corporate Taxes
The 2017 Tax Cuts and Jobs Act (TCJA) made a significant change to how U.S. multinational corporations are taxed on their overseas profits. The law moved the U.S. tax code’s previous residence-based system toward a hybrid system that combines aspects of a territorial tax system with anti-base erosion provisions aimed at income from intangibles and inbound profit shifting.
However, the result was a drop in corporate tax revenues from two percent of GDP in the years before the TCJA to 1 percent in the years since its enactment. Biden’s plan is designed to reverse that trend.
To make the U.S. more competitive on the international stage, the plan proposes to:
- Reduce profit shifting by eliminating incentives to offshore investment through the enactment of a country-by-country minimum tax. Currently, countries try to attract multinationals by having the lowest corporate tax rates. The plan aims to level the playing field between multinational companies headquartered in the U.S. and foreign countries through the denial of U.S. deductions on related-party payments to foreign corporations residing in countries that have not implemented a strong minimum tax.
- Modify or eliminate the tax laws embedded in the TCJA that incentivized the offshoring of assets. For example, as a result of the TCJA, a multinational that located more tangible assets abroad might be able to reduce its global intangible low-tax income (GILTI). That same corporation might also be able to increase the amount of it U.S income that can be deducted as foreign-derived intangible income (FDII).
International Tax Provisions of the Made in America Plan
Changes to the plan before, and if, it becomes law are possible. With what we know today, the following tax provisions will impact multinational businesses.
Proposed GILTI Changes Lead to a Higher Effective Tax Rate
The TCJA imposed the GILTI tax, which it generally defined as income earned overseas by controlled foreign corporations (CFCs) of U.S. taxpayers (other than Subpart F income) that exceeds a threshold amount. The GILTI tax rate was set at 21 percent, but the TCJA also allowed corporate taxpayers to deduct 50 percent of their GILTI income, which brought the effective tax rate down to 10.5 percent.
The plan would keep the GILTI tax rate at 21 percent, and also make these changes:
- Eliminate the 50 percent deduction, ensuring that multinational corporations will pay a higher minimum tax rate. The rate will be determined on a country-by-country basis, which would limit the ability for corporations to offset losses incurred in one country against income earned in another.
- Eliminate the exemption for income equal to 10 percent of the foreign corporation’s business assets.
If these changes are implemented, the result will be a higher effective tax rate on foreign income.
FDII Tax Incentives Eliminated
The FDII tax incentives created by the TCJA, which provide a deduction to businesses that sell domestic goods and services to foreign consumers, would be eliminated under Biden’s plan. The revenue generated from the repeal of FDII would be used to expand as yet unspecified research and development incentives.
Base Erosion and Anti-Abuse Tax (BEAT) Replaced with Stopping Harmful Inversions and Ending Low-tax Developments Tax (SHIELD)
The BEAT is an additional minimum tax imposed on base erosion payments, including amounts a taxpayer pays or accrues to a related foreign person that the taxpayer may deduct. The plan would repeal the BEAT, which has failed to collect the promised revenue, in favor of a new tax called the SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments).
This tax is intended to discourage companies from moving their headquarters abroad for tax purposes through inversions, where a new parent company is formed in a low-tax country and the current parent becomes a subsidiary of the newly formed country. Consequently, it will treat foreign corporations as U.S. corporations for federal income tax purposes if more than 50 percent of its value is owned by the former owners of the acquired U.S. company or the foreign corporation is “managed and controlled” in the U.S.
The SHIELD would not allow the deduction for federal income tax purposes if the foreign payee’s effective tax rate was below a specified level. The SHIELD tax rate would be 21 percent initially, but it would eventually be set in a multilateral agreement.
Other Provisions Affecting Multinational Corporations
The plan also proposes a 15 percent minimum tax on the “book income” of corporations with annual income of $2 billion or more. Book income is the profit that firms report to investors on their financial statements but is not used to calculate tax liability. Such income can make a company appear profitable while allowing it to pay little or no tax.
Companies will be able to apply a credit for taxes paid above the 15 percent threshold in prior years and can also use general business tax credits and foreign tax credits.
International Cooperation a Hallmark of Biden’s Plan
The Biden administration plans to work together with 139 other countries to support a 21 percent global minimum tax that is designed to end the “race to the bottom” and level the playing field between foreign and U.S. companies. The new global tax would apply to companies that meet certain revenue and profit-margin thresholds regardless of their industry and whether they are consumer-facing.
The Organization for Economic Development and Cooperation (OECD) will oversee the effort to develop a framework for the new global minimum tax. Individual countries could then rely on this framework as they formulate their internal legislation designed to prevent corporate profit-shifting.
Some Issues Not Addressed in the Proposed Plan
There are some issues relating to the taxation of multinational corporations that are not addressed in the proposed plan, including taxation of internet and remote services, transfer pricing or a uniform corporate income tax. It remains to be seen how these issues will evolve.
There’s a Lot at Stake
According to the Bureau of Economic Analysis, multinationals represent major sources of economic activity and tax revenue in the U.S. In 2018, U.S. multinationals invested $721.6 billion in tangible capital, conducted $323.1 billion of research and development and paid $2.3 trillion of labor compensation to 28.6 million Americans.
While we do not yet know whether there will be modifications to Biden’s Made in America Plan before it is enacted, or even when it will be enacted, multinational corporations operating in the U.S. should be prepared to respond to changes in how their profits and revenue are reported and taxed.
