By: Rupali Mundada
President Biden’s proposed American Jobs Plan would increase income taxes on corporate profits. The increased taxes would help fund the plan’s infrastructure improvement goals, estimated to cost $2.3 trillion.
The significant tax changes include a higher corporate tax, new minimum taxes on book income, and taxes on the profits of multinational corporations.
Higher income taxes for corporations
Under the American Jobs Plan, the corporate income tax rate would increase from 21% to 28%. A 28% tax rate would be significantly lower than the top corporate effective tax rate of 35% that applied between 1994 and 2017. Nonetheless, the increase has drawn opposition and prompted suggestions for a compromise rate..
Minimum tax on book income
A 15% minimum tax would apply to corporate book income to prevent profitable companies from avoiding US taxation. Book income is the amount of income that a company reports to its investors, but it may vary from the income that is taxed.
The minimum book tax would apply to corporations with a net income or pre-tax book income of $2 billion or more, and it would be effective for tax years beginning after 2021. About 180 firms would meet the income threshold, and 45 would owe minimum tax liability.
- A corporation to which minimum tax applies would pay a tax equal to the greater of following:
- 15% of its worldwide pre-tax book income. This is calculated after subtracting book net operating losses from prior years, general business credits (including research and development, clean energy, and housing credits), and foreign tax credits. Or,
- Its regular tax liability without regard to the minimum tax.
- Corporations that pay additional tax because of the minimum tax would receive a credit that could reduce regular tax liability in future tax years.
Current taxation for global intangible low taxed income (GILTI)
GILTI is a form of income earned by US-controlled foreign corporations (CFCs) that receives special tax treatment in the United States. Taxes on GILTI discourage CFCs from shifting their profits to foreign countries where taxes are lower.
Under the current GILTI law, US shareholders of CFCs are taxable on net CFC tested income, minus 10% of the CFC’s return on foreign tangible property, also known as a Qualified Business Asset Investment (QBAI). Net CFC tested income is the excess of a corporation’s gross income over its allocable deductions.
In simple terms, GILTI = Net CFC tested income – 10% of QBAI.
Under current Tax Cuts and Jobs Act (TCJA) regulations, GILTI is taxed at 10.5%. While the corporate tax rate is 21%, TCJA allows CFCs to take a 50% special deduction on GILTI tax, making the effective tax rate 10.5%.
proposed changes to gilti
President Biden has proposed changing how GILTI is taxed for the 2022 tax year and beyond. Biden’s policy would:
- Increase the effective tax rate on GILTI to 21%. The US corporate income tax rate would increase to 28%, and Biden’s policy would reduce the GILTI special deduction to 25% instead of 50%.
- Eliminate the QBAI income reduction from CFC income, therefore increasing the amount of GILTI that can be taxed.
- Calculate this global minimum tax by jurisdiction to prevent companies from “cross-crediting” their taxes from high-tax jurisdictions against income from low-tax jurisdictions.
new regulations for foreign dividends
Under TCJA, the base erosion and anti-abuse tax (BEAT) was introduced to deter US corporations from shifting their profits from the US by making deductible payments, such as interest, royalties, and certain service payments, to their affiliates in low-tax countries.
BEAT is a minimum tax add-on. To determine whether BEAT applies, first a corporation must calculate its regular corporate tax amount, at a 21% rate. Then the corporation recalculates its tax at the 10% BEAT rate after adding back deductible payments. If the regular tax is lower than BEAT, then the corporation must pay the regular tax plus the amount of the difference between BEAT and the regular tax.
BEAT only applies to corporations that make:
- More than $500 million in annual gross receipts, averaged over the three prior years.
- More than three percent of total deductible payments to foreign affiliates, excluding payments related to cost of goods sold.
Proposed changes under sheild
Biden’s proposed legislation Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) aims to more effectively counter profit shifting to low-taxed countries than its predecessor, BEAT.
Effective for tax years beginning after 2022, SHIELD would apply to financial reporting groups with greater than $500 million in global annual revenues. The proposal would enact the following changes:
- Deductions would not be allowed for payments by US group members to foreign affiliates that are taxed at a low rate, unless the income is subject to an acceptable minimum tax regime.
- The designated minimum tax rate would be determined by the Organization for Economic Cooperation and Development’s (OECD) ongoing “Pillar Two” negotiations. In the absence of such an agreement, the minimum tax rate would be the proposed GILTI rate of 21%.
repeal tax breaks on foreign derived intangible income (fdii)
Foreign derived intangible income (FDII) is earned from exporting US-held intangible assets, like patents, copyrights, and trademarks.
Under current law, corporations are taxed at a rate of 13.125 percent on foreign sales and services, rather than the full 21% corporate tax rate. The law is designed to encourage US corporations to base their intangible assets in the US and export more goods and services.
Effective for tax years 2022 and beyond, Biden’s proposal would repeal FDII tax breaks.
impose additional limitation on interest deductions by mulitnationals
Under current law, businesses can deduct interest expenses up to a maximum of the sum of annual business interest income, 30% of adjusted annual taxable income, and floor plan financing interest expenses.
Biden’s proposed policy change would limit interest expense deductions for multinational groups preparing consolidated financial statements, based on the following equation:
- Member’s net interest expense for financial accounting purposes, multiplied by Member’s proportionate share of the multinational group’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
The disallowed deduction would be equal to net interest expenses for US federal income tax purposes minus the allowed interest expense deduction.
Any interest expense that could not be deducted in the current year could be carried over to future years indefinitely until claimed as deduction.
The proposal would not apply to financial services entities or financial reporting groups that would otherwise report less than $5 million of net interest expenses in the aggregate on one or more US corporate income tax returns for a tax year.
incentivize onshoring and discourage offshoring
The American Jobs Plan includes a new general business credit equal to 10% of the expenses paid or incurred in connection with onshoring a US trade or business that results in an increase in US jobs. Onshoring means reducing or eliminating a business conducted outside the United States and starting up, expanding, or moving the same business to the United States.
The policy would also disallow a deduction for expenses paid or incurred to offshore a trade or business to the extent that offshoring results in a loss of US jobs.
The American Jobs Plan is not yet law. If it is approved by Congress, it may change from its current form before being finalized into law. Our accounting experts will closely monitor the proposal as it evolves, and provide updates as they become available. For case-specific tax questions, please contact your Chugh CPAs, LLP accounting professional.