As the dust settles on an unpleasant political season, the inauguration of Joe Biden as the new US president set in motion what many believe will be changes to tax law that could impact multinational corporations doing business in the US. With Mr Biden’s Democratic party maintaining its majority in the House of Representatives, and the opposing Republican party losing its majority in the Senate, there is a likelihood many of Mr Biden’s tax plans will become law. When that might happen, if it does, is another question.
What can we expect? The Biden tax plan created during the political campaign was short on detail, but let’s look at some possible changes.
Income tax rates
Businesses enjoyed a significant tax-rate reduction in 2018 when the Trump administration reduced the highest federal rate from 35% to 21%. Mr Biden has proposed to increase the rate to 28%.
For businesses with book profits of more than $100 million, the Biden plan would also impose a minimum tax where businesses would pay the greater of their regular corporate income tax or 15% of book income. Nicknamed the Amazon Tax, it is meant to tax large businesses that reduce or eliminate the tax they pay by taking advantage of favourable tax provisions that differ from financial statement rules.
The Trump administration introduced a new and complicated regime called the Global Intangible Low Tax Income (GILTI) tax. While attempting to shift US taxation to more of a territorial system, lawmakers implemented a 10.5% effective tax rate on the taxable income of certain foreign subsidiaries of US corporations because they feared a mass exodus of US businesses to foreign jurisdictions.
President Biden has proposed to double this effective tax rate to 21%. The Biden plan would calculate GILTI on a country-by-country basis designed to prevent corporations from offsetting high-tax jurisdictions against low-tax jurisdictions. Further, the Biden plan would remove the provision that exempts from GILTI an amount equal to a 10% deemed return on the average adjusted basis of foreign tangible property.
Making America great again
The Biden plan would establish a clawback provision to penalize companies that cut jobs in the US and sent them overseas. Further, Mr Biden has called for a 10% surtax, on top of the corporate tax rate, on income earned by foreign affiliates of US corporations where the customers are in the US.
President Biden may also introduce an advanceable 10% tax credit for certain expenses incurred to retool and revitalize manufacturing plants, and increase manufacturing wages.
There may also be some make-America-green initiatives. Mr Biden favors repealing certain tax incentives enjoyed by the fossil fuel industry. His plan would also restore tax credits for electric cars, home-energy efficiency, and solar investments, while encouraging the development of a low-carbon manufacturing sector.
Other Trump-era tax laws likely to change
The Tax Cuts and Jobs Act passed at the end of 2017 was former President Trump’s signature tax initiative. President Biden wants to eliminate many of these provisions, especially those relating to individuals earning more than $400,000. Foreign businesses that send executives to work in the US need to be aware of the many income and social security tax provisions that apply. Also, under the Biden plan, US-sourced capital gains may not benefit from the favorably low capital gains rates if such taxpayers have income of more than $1 million. Prior immigration planning may become more important.
We can expect a continual unwinding of Trump policies where they serve to reduce corporate operating regulations and promote his agenda. Among the areas to watch are climate-change initiatives, immigration issues, limits on rental for real estate landlords, travel restrictions, and foreign government relations.
In the meantime
While we wait and try to plan for the upcoming tax changes, we continue to address the many tax provisions associated with the economic stimulus legislation passed in 2020 because of the Covid-19 pandemic. For businesses, these include utilizing and carrying back net operating losses, deducting more interest expense that otherwise may have been limited, writing off certain capital improvements under the bonus depreciation rules, obtaining government assistance including potentially forgivable loans, and applying credits for retaining employees.
About the author
Steve is a tax partner-in-charge of the Tax Planning and Compliance department and leads the International Practice at Williams Benator & Libby, LLP, Russell Bedford’s Atlanta member firm, while also serving on the board of directors of Russell Bedford International.
Raveh Ravid & Co. is the Israeli member of Russell Bedford International, an international network of certified public accounting firms with member firms in more than 100 countries worldwide.