How Biden Tax Plan, Foreign Tax Law Changes May Impact Business Operating Models

As a result of Democrats taking control of the House, Senate and presidency, the likelihood of more U.S. tax reform has increased. Various think tanks project President Biden’s plan will raise between $2.4 trillion and $3.3 trillion in tax revenue over the next decade. This projected revenue increase will come from significant changes to taxation of individuals and corporations.

For individuals, proposed tax law changes include increases in the top marginal tax rate from 37% to 39.6% for anyone earning above $400,000, capital gains and qualified dividends to be taxed at the ordinary income tax rate of 39.6% and the elimination of step-up in basis rules for capital gain tax.

For corporations, proposed tax law changes include:

• An increase in the U.S. corporate tax rate from 21% to 28%.
• A 15% minimum tax on companies’ “book income” of $100 million or higher but pay no U.S. income tax.
• An increase in the tax rate for global intangible low tax income (GILTI) earned by foreign subsidiaries of U.S. firms from 10.5% to 21% and elimination of GILTI’s exemption for deemed returns under 10% of qualified business asset investment (QBAI).
• A 10% surtax on corporations that undertake offshore manufacturing (including call centers and services) and sell goods or provide services back to the United States. This would effectively increase the corporate tax rate to 30.8%.
• An advanceable “Made in America” credit of 10% for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.

Along with the proposed tax law changes, U.S. multinational companies should also consider upcoming changes to select U.S. corporate income tax provisions enacted under the Tax Cut and Jobs Act (TCJA), which include:

• R&D cost to be expensed over the period of five years (10 years if R&D is performed outside the United States) for tax years beginning after December 31, 2021.
• Business interest expense deductions will be limited to 30% of EBIT (currently it is limited to 30% of EBITDA), for tax years beginning after December 31, 2021.
• Phase out 100% expensing for short-life business investments for tax years beginning after December 31, 2022.
• International tax provisions will become restrictive for tax years beginning after December 31, 2025.
  • The effective rate on foreign derived intangible income (FDII) is to increase from 13.125% to 16.406%. However, repeal of FDII cannot be overlooked considering that President Biden has indicated an intention to work with the WTO, which had challenged FDII as a prohibited export subsidy.
  • BEAT is scheduled to go up from 10% to 12.5%.
  • The effective rate on GILTI, if changes are not enacted earlier under the Biden proposal, will rise from 10.5% to 13.125%.

Finally, the OECD/G20 Inclusive Framework project (BEPS Project), which recommended 15 actions in 2015, continues to result in substantive corporate tax law changes as countries continue to implement those recommendations. For example, countries in the European Union have already adopted anti-tax-avoidance measures targeting hybrid mismatches (BEPS Action 2), interest deductions (BEPS Action 4), controlled foreign companies (BEPS Action 3), and also rules on exit taxes and general anti-abuse. Non-EU countries are also implementing these recommendations as part of their tax law reform.

Currently, OECD is working on finalizing its recommendation on tax challenges of the digitalized economy, which in summary has two pillars:

• Pillar One focuses on nexus and profit allocation.
• Pillar Two focuses on a global minimum tax intended to address remaining BEPS issues.

A company must continuously monitor how these changes affect its global tax cost. It must also evaluate how these tax changes impact the company’s current operating models.

With these anticipated changes to U.S. tax and foreign tax rules, U.S. companies should undertake tax modeling to compute and assess their global tax cost under their current operating model and do scenario modeling for their operating models.

Who Does This Apply To?

U.S. companies with international operations that are projected to grow should prepare for these changes. Forecasts of income and expenses, key inputs and assumptions are critical for tax modeling now, so in the event of significant tax law changes, companies can effectively plan to adjust their operating models.

CFOs, VPs of tax, in-house tax directors and tax advisors advising U.S. companies should plan for tax changes.

When Is the Expected Date of Change?

Based on the legislative process of implementing tax bills, many of President Biden’s tax proposals would be effective no earlier than the end of 2021. However, there is a possibility that tax law changes could be retroactively effective from January 1, 2021.

Plan Now

Planning ahead of time to understand the impact of anticipated U.S. tax and foreign tax law changes will allow companies to gain a thorough understanding of what these changes mean to their businesses and what operating model changes they need to make to effectively manage their global tax cost. If no action is taken now, it may result in less than optimal operating model planning.

For questions or assistance, contact our experts.

January 22, 2021