U.S. Department of the Treasury – The Made in America Tax Plan (4/7/2021)
The Treasury Department has issued The Made in America Tax Plan Report (the Report) which describes President Biden’s Made in America tax plan (the Plan). The plan has the goal of making American companies and workers more competitive by eliminating incentives to offshore investment, substantially reducing profit shifting, countering tax competition on corporate rates, and providing tax preferences for clean energy production.
Here are some of the key elements of the Plan:
Raising the corporate income tax rate to 28%. The Plan will increase the corporate tax rate from 21% to 28%.
The Report notes that the United States raises less corporate tax revenue (as a share of GDP) than almost all of the advanced economies in the Organisation for Economic Co-operation and Development (OECD). “Raising the corporate income tax rate would modestly increase corporate revenues relative to GDP, still leaving them below those of our trading partners,” said the report.
Reversing tax-based incentives for moving production overseas. The Report says that the Plan makes fundamental changes to the global intangible low-tax income (GILTI) regime introduced by the Tax Cuts and Jobs Act (TCJA). The Plan “would eliminate the incentive to offshore tangible assets” by ending the tax exemption for the first 10% return on foreign assets. It would also calculate the GILTI minimum tax on a per-country basis, “ending the ability of multinationals to shield income in tax havens from U.S. taxes with taxes paid to higher tax countries.”
The Plan would also increase the GILTI minimum tax to 21% (up to three-quarters of the proposed new 28% corporate tax rate, as opposed to the current one-half ratio). In addition to these reforms to GILTI, the plan would disallow deductions for the offshoring of production and “put in place strong guardrails against corporate inversions.”
The Plan also proposes to repeal and replace the Base Erosion and Anti-Abuse Tax (BEAT). For additional information about the BEAT replacement, see “Ending the ‘Race to the Bottom’ around the world,” below.
The Report says that these proposals would bring well over $2 trillion in profits over the next decade back into the U.S. corporate tax base.
Ending the “Race to the Bottom” around the world.
The Report states that a race to the bottom among countries has driven down corporate tax rates substantially over the last two decades. The average statutory corporate rate among OECD countries was 32.2% in 2000; by 2020 this had fallen to 23.3%.
Under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, the United States and the international community are pursuing a comprehensive agreement on corporate minimum taxation, providing for minimum tax rules worldwide. Under the agreement, home countries of multinational corporations would apply a minimum tax when offshore affiliates are taxed below an agreed upon minimum tax rate.
The Plan would replace the BEAT with the SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments), which denies multinational corporations U.S. tax deductions by reference to payments made to related parties that are subject to a low effective rate of tax. The low effective rate of tax would be defined by reference to the rate agreed upon in the multilateral agreement. However, if the SHIELD is in effect before such an agreement has been reached, the default rate trigger would be the tax rate on the GILTI income, as modified by the Plan.
“As a backstop to this new anti-base erosion regime,” the Plan would strengthen the anti-inversion rules by generally treating a foreign acquiring corporation as a U.S. company based on a reduced 50% continuing ownership threshold or if a foreign acquiring corporation is managed and controlled in the United States.
Repealing the FDII.
Subject to a limitation based on taxable income (Code Sec. 250(a)(2)), a domestic corporation may deduct an amount equal to 37.5% of the foreign-derived intangible income (FDII) of the domestic corporation for the tax year (Code Sec. 250(b))
Noting that FDII creates incentives to locate economic activity abroad, the Plan repeals FDII.
Instituting a “minimum book tax.”
Under this proposal, there would be a minimum tax of 15% on book income, i.e., on the profit firms generally report to their investors. Firms would make an additional payment to the IRS for the excess of up to 15% on their book income over their regular tax liability. For example, a firm with zero federal income tax liability computed based on its taxable income would still face a minimum tax of 15% on book income. Firms would be given credit for taxes paid above the minimum book tax threshold in prior years, for general business tax credits (including R&D, clean energy and housing tax credits), and for foreign tax credits.
Replacing subsidies for fossil fuels with incentives for “Clean Energy” production. The Plan would:
- remove subsidies for fossil fuel companies;
- provide a ten-year extension of the production tax credit and investment tax credit for clean energy generation and storage, and make those credits direct pay;
- create a new tax incentive for long-distance transmission lines;
- expand the tax incentives available for electricity storage projects;
- provide tax incentives for state-of-the-art carbon capture and sequestration projects;
- provide specific supports for clean energy manufacturing, including an extension of the Code Sec. 48C tax credit program;
- include a blender’s tax credit for sustainable aviation fuel;
- provide incentives to encourage people to switch to electric vehicles and efficient electric appliances;
- provide tax incentives for investments to increase the resilience of households and small businesses to droughts, wildfires, and floods; and
- penalize polluters through tax disincentives, restoring a tax on polluters to pay for EPA clean-up costs associated with Superfund sites.
Increasing IRS’s enforcement budget. The Plan would increase the IRS’s enforcement budget. It envisions a well-resourced team of revenue agents that can be hired and trained to identify when corporations—and the wealthy individuals who own them—underpay taxes. This proposal is part of a broader overhaul of tax administration that would give the IRS the resources it needs to collect the taxes that are owed by wealthy individuals and large corporations.
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