by Sanjay Agarwal, Tax Practice Leader and Patrick Roach, International Tax Senior Manager
After much speculation about whether the Biden Administration would prioritize the tax code changes proposed during the 2020 election campaign, President Biden released additional detail of his tax reform plan, dubbed The Made in America Tax Plan, on Wednesday, March 31st, less than 100 days after taking office. This tax plan arrives hand-in-hand with The American Jobs Plan
, a massive infrastructure project that aims to “reimagine and rebuild a new economy,” fueled largely by increased tax revenue.
To generate the revenue needed to fully fund the American Jobs Plan, the Made in America Tax Plan proposes reversing the corporate tax decrease that was the centerpiece of the Trump Administration’s Tax Cuts and Jobs Act of 2017. President Biden’s tax plan also proposes a number of other changes, mostly concerning international taxation, with the stated goal of incentivizing job creation and investment in the U.S.
In the following, we discuss practical tax considerations and potential planning points that corporations should consider to prepare for the proposed changes and provide the key provisions of the Made in America Tax Plan.
With the announcement of the Made in America Tax Plan, major tax changes could be in the forecast. However, it is difficult to predict the ultimate changes or how seismic they will be. The fact sheet released by the White House is in many respects light on detail, and a comprehensive explanation of each proposal will not be available until the Treasury Department releases its “Green Book” this spring. Moreover, each proposal will likely face considerable pushback from Congressional Republicans, and the enactment of any proposal will minimally require the unanimous support of Senate Democrats and the support of the overwhelming majority of House Democrats.
Accordingly, the President’s more ambitious proposals could very well face Congressional gridlock, and may require considerable revision to amass the support necessary for enactment. Compounding this conundrum, several cabinet members, including Treasury Secretary Janet Yellen, have repeatedly indicated that proposed changes will be introduced iteratively, in separate legislation. That, combined with the lengthy congressional reconciliation process, makes it difficult to predict when any one proposal might be enacted, let alone become effective.
The difficulty forecasting the tax plan’s ultimate impact and the likelihood of a prolonged legislative process make interim tax planning exceptionally difficult, as tax professionals cannot reliably predict what is coming, or when. The Biden Administration has not provided any concrete details about timing, but in the fastest possible timeline, legislation could be introduced within the next six weeks, and voted into law within the next six months, with some changes potentially becoming effective for the 2022 tax year. However, the timetable could be considerably longer.
That said, there are financial, operational, and other remedial measures that companies can implement in 2021 to mitigate the eventual impact of Biden’s tax plan. First and foremost, companies should work with their tax advisors to model the potential impact of each of the proposals and, to the extent possible, include milder variants of each proposal (e.g., if the corporate income tax rate were raised to 25% rather than 28%). Using the results of these modeling efforts, companies should devise a strategic plan that accounts for the likeliest changes and identifies both interim and post-enactment measures that to mitigate the impact of potential changes.
Taxpayers and their advisors should also communicate with lawmakers about how each proposal would impact their bottom line, profitability, hiring practices, or other aspects of their business that could be negatively affected by these proposals.
Businesses should consider ceasing international expansion to the extent the tax plan’s proposals would undermine or negate the benefits. However, in some instances, it may well be advantageous to accelerate international expansion or the offshoring of certain operations. Modeling results can inform whether such measures would be beneficial or to a company’s detriment.
Despite the uncertainty, some tax planning measures may well be advisable in 2021. For example, the likelihood that the corporate income tax rate will be increasing could make it advisable to accelerate income recognition in 2021 under a preferable tax rate. Other timing measures could also prove beneficial, such as deferring losses and deductions to a later tax year, refraining from accelerating the deduction of prepaid expenses, capitalizing R&D expenses, or electing out of bonus depreciation. Businesses should work with their tax advisors to identify those measures which should be implemented in the interim period, before any tax law changes are implemented.
Key Elements of the Made in America Tax Plan
Set the corporate tax rate at 28 percent
“The President’s tax plan will ensure that corporations pay their fair share of taxes by increasing the corporate tax rate to 28 percent. His plan will return corporate tax revenue as a share of the economy to around its 21st century average from before the 2017 tax law and well below where it stood before the 1980s. This will help fund critical investments in infrastructure, clean energy, R&D, and more to maintain the competitiveness of the United States and grow the economy.”
Discourage Offshoring by Strengthening the Global Minimum Tax for U.S. Multinational Corporations
“Right now, the tax code rewards U.S. multinational corporations that shift profits and jobs overseas with a tax exemption for the first ten percent return on foreign assets, and the rest is taxed at half the domestic tax rate. Moreover, the 2017 tax law allows companies to use the taxes they pay in high-tax countries to shield profits in tax havens, encouraging offshoring of jobs. The President’s tax reform proposal will increase the minimum tax on U.S. corporations to 21 percent and calculate it on a country-by-country basis so it hits profits in tax havens. It will also eliminate the rule that allows U.S. companies to pay zero taxes on the first 10 percent of return when they locate investments in foreign countries. By creating incentives for investment here in the United States, we can reward companies that help to grow the U.S. economy and create a more level playing field between domestic companies and multinationals.”
End the Race to the Bottom Around the World
“The United States can lead the world to end the race to the bottom on corporate tax rates. A minimum tax on U.S. corporations alone is insufficient. That can still allow foreign corporations to strip profits out of the United States, and U.S. corporations can potentially escape U.S. tax by inverting and switching their headquarters to foreign countries. This practice must end. President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This plan also denies deductions to foreign corporations on payments that could allow them to strip profits out of the United States if they are based in a country that does not adopt a strong minimum tax. It further replaces an ineffective provision in the 2017 tax law that tried to stop foreign corporations from stripping profits out of the United States. The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. The time has come to level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates.”
Prevent U.S. Corporations from inverting or claiming tax havens as their residence
“Under current law, U.S. corporations can acquire or merge with a foreign company to avoid U.S. taxes by claiming to be a foreign company, even though their place of management and operations are in the United States. President Biden is proposing to make it harder for U.S. corporations to invert. This will backstop the other reforms which should address the incentive to do so in the first place.”
Deny Companies Expense Deductions for Offshoring Jobs and Credit Expenses for Onshoring
“President Biden’s reform proposal will also make sure that companies can no longer write off expenses that come from offshoring jobs. This is a matter of fairness. U.S. taxpayers shouldn’t subsidize companies shipping jobs abroad. Instead, President Biden is also proposing to provide a tax credit to support onshoring jobs.”
Eliminate a Loophole for Intellectual Property that Encourages Offshoring Jobs and Invest in Effective R&D Incentives
“The President’s ambitious reform of the tax code also includes reforming the way it promotes research and development. This starts with a complete elimination of the tax incentives in the Trump tax law for ‘Foreign Derived Intangible Income’ (FDII), which gave corporations a tax break for shifting assets abroad and is ineffective at encouraging corporations to invest in R&D. All of the revenue from repealing the FDII deduction will be used to expand more effective R&D investment incentives.”
Enact A Minimum Tax on Large Corporations’ Book Income
“The President’s tax reform will also ensure that large, profitable corporations cannot exploit loopholes in the tax code to get by without paying U.S. corporate taxes. A 15 percent minimum tax on the income corporations use to report their profits to investors—known as ‘book income’—will backstop the tax plan’s other ambitious reforms and apply only to the very largest corporations.”
Eliminate Tax Preferences for Fossil Fuels and Make Sure Polluting Industries Pay for Environmental Clean Up
“The current tax code includes billions of dollars in subsidies, loopholes, and special foreign tax credits for the fossil fuel industry. As part of the President’s commitment to put the country on a path to net-zero emissions by 2050, his tax reform proposal will eliminate all these special preferences. The President is also proposing to restore payments from polluters into the Superfund Trust Fund so that polluting industries help fairly cover the cost of cleanups.”
Ramping Up Enforcement Against Corporations
“All of these measures will make it much harder for the largest corporations to avoid or evade taxes by eliminating parts of the tax code that are too easily abused. This will be paired with an investment in enforcement to make sure corporations pay their fair share. Typical workers’ wages are reported to the IRS and their employer withholds, so they pay all the taxes they owe. By contrast, large corporations have at their disposal loopholes they exploit to avoid or evade tax liabilities, and an army of high-paid tax advisors and accountants who help them get away with this. At the same time, an under-funded IRS lacks the capacity to scrutinize these suspect tax maneuvers: A decade ago, essentially all large corporations were audited annually by the IRS; today, audit rates are less than 50 percent. This plan will reverse these trends, and make sure that the Internal Revenue Service has the resources it needs to effectively enforce the tax laws against corporations. This will be paired with a broader enforcement initiative to be announced in the coming weeks that will address tax evasion among corporations and high-income Americans.”
The stated goals of Biden’s Made in America Tax Plan is to “raise over $2 trillion over the next 15 years and more than pay for the mostly one-time investments in the American Jobs Plan and then reduce deficits on a permanent basis.” Whether these changes will ultimately be implemented or have the desired effect remains to be seen. In the meantime, US-based corporations, especially those with international operations, must prepare for significant changes to their tax reporting and obligations, despite the difficulty they will face in accurately predicting what those change will be.