Senate Finance Committee Provides International Taxation Framework After President Biden Unveils the American Jobs Plan
Last week, President Biden outlined an infrastructure spending plan (the American Jobs Plan) and a tax reform plan (the Made in America Tax Plan), as described in our separate client alert published on April 1, 2021. On April 5, 2021, the Senate Finance Committee revealed its own framework to overhaul international taxation (the Framework) authored by Senate Finance Committee Chair Senator Ron Wyden (D-Oregon), Senator Sherrod Brown (D-Ohio), and Senator Mark Warner (D-Virginia). The proposals in the Framework echo many of the themes set forth in the Made in America Tax Plan with respect to international tax policy.
The Framework aims to change certain international tax provisions of the 2017 Tax Cuts and Jobs Act (the TCJA). More specifically, the Framework proposes the following changes:
- Revising the GILTI regime. The Framework echoes President Biden’s plans to reform the global intangible low-taxed income (GILTI) system and suggests that several aspects of the GILTI system encourage multinational corporations to offshore US operations by:
- Providing a tax exemption for “qualified business asset investment” (QBAI), which is equal to roughly the value of offshore tangible assets such as factories, machinery, and buildings, encouraging multinational corporations to invest in tangible assets abroad;
- Taxing GILTI at half of the US corporate tax rate;
- Allowing corporations to offset high-tax income from certain countries with low-tax income in tax havens in one calculation determined on a blended average global basis;
- Discouraging investment in research and development in the United States due to the operation of the foreign tax credit rules.
To address these issues, the Framework proposes to (i) repeal the exemption for QBAI; (ii) increase the GILTI rate (the Framework states that the rate will likely be between 60 and 100 percent of the US corporate rate); (iii) move to a country-by-country GILTI system (thereby eliminating the ability to offset high-taxed income against low-taxed income so as to avoid US tax liability under the current GILTI system); and (iv) adding an incentive to create and retain research and management jobs in the United States.
The Framework expands on President Biden’s Made in America Tax Plan by describing two methods for moving to a country-by-country GILTI system. The first method would require corporations to apply the GILTI rules separately for each country in which they operate. The Framework suggests that this would disallow aggregation between countries and potentially reduce profit shifting to tax havens. The second method would require corporations to apply the GILTI rules to two groups of global income—low-tax and high-tax. The Framework clarifies that the GILTI tax would apply only to income from low-tax jurisdictions. The Framework explains further that this two-basket system would be simpler than a country-by-country system and easier for the IRS to enforce.
- Revamping the FDII system. As described in more detail in our separate client alert published on April 1, 2021, the foreign-derived intangible income (FDII) system works with the GILTI regime. As with GILTI, the Framework suggests eliminating the benefit of QBAI in offshore assets as well as raising the FDII rate. Additionally, the Framework suggests replacing the concept of “deemed intangible income” under FDII with “deemed innovation income” to provide corporations with a tax benefit for income and expenses related to “innovation-spurring activities” in the United States. The Framework posits that the “intangible” concept in FDII has created an incentive to hold intangible assets offshore. By shifting focus from intangibles to innovation, the Senate Finance Committee hopes to increase research and development and worker training in the United States.
- Reforming the BEAT. The base erosion and anti-abuse tax (BEAT) is a minimum tax imposed on certain corporations (other than RICs, REITs, or S corporations) that make certain “base erosion payments” to foreign-related parties. Instead of repealing the BEAT as suggested by President Biden in the Made in America Tax Plan, the Framework would reform the BEAT in part by increasing the BEAT rate on base erosion payments. Apart from increasing the BEAT rate on base erosion payments, the Framework does not provide other details on reform other than noting that such reform should capture more revenue from companies eroding the US tax base.
The same day that the Senate Finance Committee released the Framework, Janet Yellen, the US Treasury Secretary, expressed support for President Biden’s international tax policy proposals and reported that she is working with other G-20 nations to agree to a global minimum corporate tax rate. As the conversation on tax reform continues, we expect to see additional commentary from multiple levels of the federal government. Former US Congressman and member of House Ways and Means Committee Phil English said the following about the Framework:
"In order to dramatically increase the corporate tax rate to finance its economic initiatives, it is inevitable that the Biden Treasury adopt an aggressive approach to base erosion. The Wyden-Brown-Warner framework represents a serious and nuanced opening bid to frame the thinking of Democratic tax writers as they build on the Administration's tax ideas and challenge core elements of the Tax Cut and Jobs Act. Revisions of GILTI and a rethinking of BEAT are very likely going forward, and every major company with international operations should be doing due diligence on their potential tax exposure."
– Phil English, Former US Congressman and member of House Ways and Means Committee
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