President Biden’s Proposed International Tax Changes
The President has signaled his intentions to make changes to the international tax provisions, many of which would drastically change the positive impact the Tax Cuts and Jobs Act (TCJA) of 2017 has on the decision making of US multinationals. Before we look at the proposed changes, we must look at what the impact of the TCJA.
The impact of TCJA on US Multinationals. Based on a study by Duke University, The Effect of U.S. Tax Reform on the Tax Burdens of U.S. Domestic and Multinational Corporations (June 2020), the TCJA lowered the tax burden of multinational US firms. The study points out that the TCJA did not change the average rate of federal tax on foreign income, but it did increase the amount of foreign income subject to US tax, primarily due to GILTI. Because of the lower US corporate rate and the current GILTI tax rate, US multinationals benefitted from TCJA.
Despite TCJA’s 100% dividend-received-deduction for dividends received from a foreign subsidiary, the GILTI tax acts as a minimum tax on the offshore earning of the US multinational.
Proposed raising of the corporate tax rate from 21% to 28%. The US currently enjoys one of the lowest corporate tax rates in the OECD at 21%. The OECD average is 23.85%. Raising our corporate tax rate to 28% would make us one of the highest in the OECD before adding in state taxes.
Proposed reformation of the GILTI rules and rate. It is proposed to raise the GILTI rate
from 10.5% to 21% and to apply it at the first cent earned, not on earnings above 10% earnings as it is now. It is also proposed to have the GILTI high-tax exclusion be applied on a country-by-country basis which would increase the amount of taxpayers paying GILTI.
Unknown is how the FDII deduction would be impacted. GILTI and FDII are synchronized via effective tax rates so any change to GILTI will adversely affect FDII. It appears the benefit of the FDII deduction may disappear as a result of the GILTI changes.
The proposed “Made in America" Tax Credit. This would be a credit for US companies that would be earned through incremental increases in overall manufacturing wages up to USD$ 100,000. More details will be needed to assess this provision.
The proposed "10 percent offshoring penalty surtax". This would impose a 30.8 percent corporate tax rate on profits derived by American companies that operate call centers or offer services targeting American consumers from overseas, where the jobs could have been in the United States. More details will be needed to assess this provision.
Impact of the proposed changes. The biggest impact of TCJA was on the decision-making process of businesses on where to locate their operations. For the first time since the 1960s, the TCJA has allowed US multinationals to have a tax burden at or below the tax burden of its foreign competitors.
Combined with the FDII deduction, the current corporate and GILTI rates act as an incentive for multinationals to keep their operations in the US. The result is that US multinationals are retaining and even repatriating operations back into the US.
The proposed increase to the corporate tax rate and the GILTI reform will bring back the US corporate strategies of moving operations out of the US and deferring tax with complex strategies.