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The Made In America Tax Plan

The president’s proposed tax plan represents a major overhaul of key domestic and international tax provisions that were enacted as part of the 2017 tax law changes (TCJA). The current plan will significantly increase the U.S. tax on earnings of U.S. companies. The announced proposed changes will have a significant impact on international tax planning and will certainly create new uncertainty for U.S. multinationals. The new proposals do not contain details and it is unclear as to what ultimately may become law or when it will be effective. To illustrate the expected legislative “back and forth,” top Democratic senators floated their alternative to President Biden’s proposal on April 5, 2022. Modeling will again become crucial and commonplace for long-term planning and the “what if” thought process will need to be sharper than ever under the new proposed rules. Continued knowledge is imperative in terms of proper tax planning. Planned and possible effective dates for any changes are also crucial to allow proper tax planning. We will continue to keep you abreast of the developments as they arise in the next several months. The key proposed corporate provisions of The Made in America Tax Plan (MATP) are summarized here.

Increase in the corporate tax rate from 21% to 28%

The TCJA reduced the corporate tax rate from 35% to 21%.

As a result, the U.S. had become a more attractive selection for a holding company structure as a result of TCJA. Coupled with the increase in tax rates and other proposed changes, its increased popularity as an ideal holding company location will be diminished.

Coupled with average state rates, certain reports claim that the effective overall U.S. tax rate could exceed 32%. In comparison, certain other countries’ corporate income tax rates are still lower. For example, the U.K. just recently announced a plan to increase the rate from 19% to 25% in 2023 and the rates in Canada (including provincial tax rates), France, Germany, Italy, and Japan (including local tax surcharges) are all above 25% but still below a potential U.S. combined federal and state rate of 32%. 

Repeal of the deductions in computing GILTI

Currently, a U.S. shareholder of a controlled foreign corporation (CFC) is required to include in gross income its Global Intangible Low Taxed Income (GILTI), a new concept designed as a minimum tax on income derived from CFCs.

A 50% deduction is allowed in computing GILTI, in addition to a deduction equal to 10% of the value of the CFC’s qualified business investment assets (QBAI). GILTI is also computed on an aggregate basis, which allows loss CFCs to offset income from other CFCs.

Under the proposed tax plan, both deductions would be eliminated in order to increase the effective tax rate on income earned through foreign corporations. Additionally, the aggregate method in calculating GILTI would be replaced by a country-by-country approach. At least, as currently proposed, it would appear that MATP provides for a 21% minimum tax on all foreign profits, as compared to the proposed 28% domestic tax rate.  

End the race to the bottom around the world

Along with a minimum tax on U.S. corporations, the plan aims to level the playing field by no longer allowing countries to gain an advantage by lowering corporate tax rates and serving as tax havens. Further guidance will need to be provided but the plan laid out the following to achieve this objective:  

  • Encourage other countries to adopt a strong minimum tax in line with proposed U.S. tax rate and
  • Deny deductions for payments made to foreign corporations if they are based in a company that does not adopt a strong minimum tax.

The plan would repeal the base erosion anti-avoidance tax (BEAT) provisions that apply to certain corporations that make more than 3% of their total deductible payments, such as interest and royalties, to foreign affiliates, viewed as eroding the U.S. tax base. The Biden proposal called the BEAT provision “ineffective” and plans to support OECD’s current effort to implement a global minimum tax regime. 

Reinforce anti-inversion rules

As part of the effort to prevent U.S. companies from evading U.S. taxation, the proposed tax plan will reinforce the existing anti-inversion rules designed to deter U.S. companies from reincorporating in a foreign country.

Under current U.S. tax law, U.S. corporations can acquire or merge with a foreign company to avoid paying U.S. taxes, notwithstanding the reality that their place of management and operations continue to reside in the U.S. MATP would make it harder for companies to invert. The intent is also to prevent U.S. corporations from claiming tax havens as their residence. 

Onshoring & offshoring jobs

As announced during the presidential campaign, the proposed tax plan introduced a new tax credit intended to incentivize businesses to create and bring jobs back to the U.S. This will provide a 10% tax credit for companies making investments that will create jobs for American workers in manufacturing sectors.

The plan also introduced a 10% offshoring penalty surtax on profits of any production by a U.S company overseas for sales back to the U.S. This penalty will also apply to services by a U.S. company such as call centers located overseas but serving the U.S. 

Elimination of the FDII export incentive provided by TCJA

The Foreign Derived Intangible Income (FDIII) deduction generally resulted in a reduced federal tax rate of 13.125%. The lower tax rate applied to income derived from tangible and intangible products and services in foreign markets. It applied to licensing of intellectual property offshore, as well. MATP would completely eliminate the FDII deduction. 

Establishment of a 15% minimum tax on "book income" of large corporations 

Further details need to be provided but the stated intent is to impose a minimum tax on the income that corporations use to report their profits to investors. The 15% minimum tax would be levied on corporate book income. Therefore, a firm’s financial statement income would replace taxable income for this purpose. It is intended that this tax will only apply to the very largest corporations. Analysis will need to be made regarding what financial statements are to be targeted; U.S. GAAP or another accounting standard.

Planning over the coming months will be crucial as the world begins to open back up. We will continue to provide updates and thoughts as the U.S. tax landscape continues to change. 

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