The Biden Administration’s “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” also known as the Green Book, was released by the Treasury Department on May 28, 2021. The Green Book provides greater detail and highlights the administration’s priorities with respect to tax reform proposals and revenue generation.
Background
On March 31, 2021, the White House released The American Jobs Plan, a blueprint of the administration’s intent to invest in rebuilding the country’s infrastructure and target job creation. The Made in America Tax Plan was released simultaneously as a general proposal of primarily corporate tax reforms aimed at financing the intended infrastructure investment.
On April 28, 2021, the White House released The American Families Plan, the next iteration of additional tax reform proposals directed at individual level taxation.
The Green Book is the next step in the Biden Administration’s plans; a formal outline with additional detail into the proposals introduced in The American Jobs Plan and The American Families Plan.
The Green Book
The following is a summary of significant tax reform proposals contained with the Treasury’s document. Unless otherwise noted, the proposed effected date of each reform would be for taxable years beginning after December 31, 2021.
Corporate Tax
- 28% corporate income tax rate (currently 21%).
- GILTI (Global Intangible Low-Taxed Income) – Established by the Tax Cut and Jobs Act (TCJA) in 2017, GILTI operates as a global minimum tax upon income generated by a U.S. shareholder’s controlled foreign corporations (CFCs).
- Eliminate the Qualified Business Asset Investment (QBAI) reduction to a CFC’s tested income (currently 10%).
- Repeal the high-tax exception to GILTI (currently, GILTI does not apply where the CFC’s income is subject to an effective rate of more than 18.9% in the foreign jurisdiction).[1]
- Reduce the Section 250 deduction to 25% of the CFC’s tested income (currently 50%; scheduled to be reduced to 37.5% in 2026).
- Eliminate the foreign oil and gas income exception to GILTI.
- The combined changes to GILTI would result in a CFC global minimum tax of generally 21% (currently 10.5%).
- FDII (Foreign-Derived Intangible Income) Deduction
- Repeal entirely (currently provides a 37.5% deduction to U.S. C corporations on certain income derived from exported goods or services; deduction scheduled to be reduced to 21.875% in 2026).
- Inversions – Section 7874
- Reduce the ownership test to 50% (currently, if the continuing former shareholders of the U.S. corporation hold at least 80% of the foreign acquiring corporation, then the foreign acquiring corporation is treated as a domestic corporation for all U.S. tax purposes).
- Eliminate the 60% ownership test.
- Establish a new fair market value (FMV) test: Where the FMV of the domestic corporation is greater than the FMV of the foreign acquiring corporation immediately before the acquisition, the foreign acquiring corporation will be treated as a domestic corporation for all U.S. tax purposes.
- The proposed reforms to Section 7874 will result in further limitations on U.S. corporations’ ability to expatriate.
- BEAT (Base Erosion Anti-Abuse Tax) – The BEAT, established by the TCJA in 2017, is a form of tax liability applicable only to a taxpayer with (1) average gross receipts in excess of $500 million over a three-year average and that (2) makes deductible payments to a foreign related party.
- Repeal and replace with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) Rule.
- Payments made to a related entity in a low-tax jurisdiction would be subject to SHIELD, which could mean losing a deduction for such a payment where that payment is otherwise deductible.
- SHIELD would apply to taxpayer groups with greater than $500 million in global annual revenues.
- The SHIELD minimum tax rate would be determined by the rate agreed upon under Pillar Two of the OECD/G20 Base Erosion and Profit Shifting project. The objective of the OECD Project is to curb profit shifting across international borders and tax structures; it aims to accomplish its goal by establishing a global minimum tax aimed at revenue currently excluded from a country’s taxing structure by reason of the multinational business not having a physical presence in the jurisdiction.[2]
- Foreign Tax Credits (FTCs)
- Establish a new limitation on FTCs from the sale of hybrid entities.
- Limitation on Business Interest Deduction – Section 163(j)
- Establish a new limitation based upon a consolidated group member’s proportionate share of the group’s net interest expense reported on the consolidated financials. The member’s deduction would be limited where its net interest expense exceeds its proportionate share, which would be based upon the member’s proportionate share of the group’s earnings.
- If a member fails to substantiate its proportionate share of the group’s interest expense, then the member’s interest deduction would be limited to its interest income plus 10% of its adjusted group income (AGI).
- Taxpayers would be permitted to elect this approach.
- Minimum Tax
- 15% minimum tax on book earnings.
- Would apply only to corporations with book income in excess of $2 billion (the tentative tax is reduced by general business credits and FTCs).
- Inbounding Jobs Tax Incentive
- 10% credit for eligible expenses paid or incurred in connection with onshoring a U.S. trade or business.
- Must result in an increase in jobs within the U.S.
- Interestingly, the expenses to onshore would be permitted to be incurred by a foreign affiliate, but the credit would apply to the U.S. taxpayer.
- Offshoring U.S. Jobs
- Disallowance of deductions for expenses in connection with offshoring a U.S. trade or business.
Individual / Non-Corporate Tax
- 39.6% top marginal individual income tax rate
- For 2022, would apply to those reporting taxable income of more than $509,300 (married filing jointly).
- Capital Gains Taxation
- Ordinary tax rates for taxpayers with AGI of more than $1 million
- Effective retroactively to date of announcement (unclear whether date of The American Families Plan (April 28, 2021) or The Green Book release (May 28, 2021)).
- Gift or death transfers of appreciated property would be taxable (exclusions apply).
- Carried Interest
- Would be ordinary income (currently treated as capital gain).
- Excess Business Losses – Section 461(l)
- Make permanent (currently due to expire in 2027).
- Like-Kind Exchanges
- Repeal, but would establish an exclusion of $500,000 ($1 million for married filing jointly) each year for real property exchanges.
Ongoing Negotiations
All the above items remain mere proposals as negotiations between Democrats and Republicans continue. In fact, in discussions at the White House on June 2nd, only days following the Treasury’s Green Book release, President Biden presented an offer eliminating all of the corporate reforms described above—including the 28% corporate income tax rate—except the 15% minimum tax on corporate book income. No deal was reached and much of The Green Book’s provisions may, and likely will, see a vote in Congress, either with bipartisan support or through a process called reconciliation, a Senate budgetary device providing an easier path to passing a law even with the Democrats’ thin majority.
We Can Help
If you would like to discuss anything contained in this alert or generally whether your business could benefit from planning to position itself for likely tax reform, please contact us and we’ll connect you with one of our advisors.
[1] The high-tax exception for Subpart F income is also proposed to be eliminated.
[2] On June 5, 2021, the Group of Seven (G7) wealthy democracies agreed in principle in pursuit of a 15% global minimum tax.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
