There has been quite a lot of media coverage recently on domestic and corporate tax proposals by the new Biden Administration in the United States – with reports of a much higher global minimum tax rate being proposed to the OECD Inclusive Framework by the US as part of the ongoing work on Pillar Two of BEPS 2.0. Tom Woods, Head of Tax and Legal, and our Tax team explain.
On 7 April 2021, the U.S. Department of the Treasury published its detailed ‘The Made in America Tax Plan’. The plan proposes reforms to the Base Erosion and Anti-Abuse Tax (BEAT), Global Intangible low-tax income (GILTI) and foreign-derived intangible income (FDII) regimes introduced by the Trump Administration in 2017 as well as several other measures, including an increase in the domestic corporate tax rate to 28%.
The stated aims of the proposals are to fund a $2tn infrastructure and clean energy plan and to stop the so-called “race to the bottom” on global corporate tax rates.
The Made in America Tax Plan proposals
For businesses operating internationally, the most significant proposals include the following:
- A 28% US corporate tax rate – the current rate is 21%.
- A complete repeal of FDII – which provides for a reduced rate of US corporation tax on foreign derived intangible profits. It is anticipated that direct incentives for R&D conducted in the US would be introduced to incentivise R&D and innovation in the US.
- Changes to GILTI - under the plan it is proposed to increase the GILTI minimum tax rate to 21% (currently 10.5%) It also proposed that the exemption for the first 10% return on foreign tangible assets provided for under the GILTI regime would be eliminated. It would also calculate the GILTI minimum tax on a per-country basis, preventing the ability of multinationals to pool tax paid in high tax countries with lower tax counties. This would bring GILTI into closer alignment with the Income Inclusion Rule (IIR) under Pillar Two of BEPS 2.0 as currently proposed.
- Changes to BEAT - for Irish and other non-US multinationals with US operations, the changes to BEAT are particularly important, although of relevance to US multinationals also. The tax plan intends to repeal and replace the BEAT with the intention of more effectively targeting profit shifting to low-taxed jurisdictions by multinational corporations. To replace the BEAT, the plan proposes the introduction of “SHIELD” (Stopping Harmful Inversions and Ending Low-tax Developments).
It is understood that SHIELD would essentially operate to deny US resident corporations US tax deductions by reference to payments made to related parties where the profits arising from those payments are subject to a low effective rate of tax – in a similar fashion to the Under Taxed Payment Rule (UTPR) under Pillar Two of BEPS 2.0 as currently proposed. In addition, current carve-outs for BEAT, such as payments for cost of goods sold, are unlikely to apply under SHIELD.
The minimum effective tax rate will be that agreed at OECD level. However, if an OECD agreement is not reached prior to the introduction of SHIELD, the default rate under the SHIELD proposal will be that applied to GILTI income (21% ).
- Anti-inversion provisions - the plan also includes a new anti-base erosion regime which will strengthen anti-inversion provisions so as to prevent US corporations from inverting. The proposal would strengthen the anti-inversion rules by generally treating a foreign acquiring corporation as a US company based on a reduced 50% continuing ownership threshold or if a foreign acquiring corporation is managed and controlled in the United States.
Interaction with OECD BEPS 2.0 proposals
As part of the proposals, it has been reported that on 7 April, the Biden administration submitted new proposals to the OECD Inclusive Framework on BEPS 2.0 calling for a global minimum corporate tax rate under Pillar Two. It is unclear what rate of tax was recommended, although the US are likely to prefer a rate as close as possible to the proposed new GILTI rate of 21%. Prior to this, the rate that has been rumoured to date has been in the region of 10% – 15%, which was understood to have widespread support across members of the Inclusive Framework.
Final agreement at OECD level on both pillars in BEPS 2.0 is aimed for mid-2021.
The Made in America tax plan proposes that where countries adopt Pillar Two, the US would “turn off” the BEAT regime (or the new SHIELD regime) for entities resident in that jurisdiction. It is still unclear whether the US GILTI regime would be fully brought into line with the IIR under Pillar Two though one would expect that if the US proposals are accepted at OECD level, the US would seek to fully implement it.
It has also been reported in recent days that the Biden administration has dropped the proposals of its predecessor on Pillar One of BEPS 2.0 for a ‘safe harbour’ approach for MNCs – which would have allowed MNC’s to elect out of Pillar One where they satisfied other agreed criteria.
What happens next?
The proposals by the Biden administration are clearly ambitious and if they come to fruition, it would see further significant reform of the US corporate tax system – in close succession to the Trump tax reforms.
Separate to the Biden proposals, a number of Senate Democrats, led by Senate Finance Committee Chairman Ron Wyden, also released a framework on Overhauling International Taxation [040121 Overhauling International Taxation.pdf (senate.gov)]. The Wyden framework differs from the Biden proposals in a number of respects, but both are moving in the same direction by proposing higher taxes on earnings outside the US along with closing the gap between domestic and foreign tax rates.
The US legislative process is a complicated one and while the Democratic party hold control of all 3 arms of the US legislative system, it does not mean that the Biden administration’s proposals are a done deal or that their final form will reflect what has been proposed. Within the Senate Democrats ranks opposition to a rate as high as 28% has already been expressed, highlighting the difficult negotiations which lie ahead for the US. One would expect and hope that the final proposals will reflect to a large extent what is agreed at OECD level.
To that end, it is clear that there is still some way to go before agreement on a final framework on BEPS 2.0 is reached. The OECD remains committed to reaching agreement in mid-2021 and the US appears to now be fully on board with the BEPS 2.0 project.
It remains to be seen what appetite there is within the 135 members of the Inclusive Framework (including Ireland) for a global minimum rate of corporation tax of double that which has until now been suggested and there will likely be much speculation and rumour over the coming months as the process takes its course.
Should an agreement on BEPS 2.0 be reached by mid-2021 and US tax reforms come to pass this year, it will take some time thereafter for the US and other jurisdictions to implement legislation and treaty changes to reflect any newly agreed rules.
Impact for Ireland and Irish businesses
The OECD proposals on BEPS 2.0 are expected to have some impact on Irish corporation tax receipts.
If the broader US tax reform proposals also come to pass, depending on how they operate in practice they may well also have an impact on businesses operating in Ireland - both those headquartered in the US and on this side of the Atlantic. It is, however, too early to speculate on what the impact would be as there will likely be changes to the US tax reform proposals and the BEPS 2 proposals as they make their way through their various approval channels. Those changes could be substantive.
That said, while tax is a very important component in any investment decision, it is also important to bear in mind that fundamentally US multinationals invest outside of the US in order to access European and other world markets and exploit their growth potential. Introducing significant increases in the US GILTI rate could significantly impact on US businesses competitiveness if it is not part of a broader OECD agreement and it is difficult to see how popular such a move might be. Ireland has for many years been an attractive location for US investment for a wide range of reasons, not least a highly educated English speaking workforce, common law legal system, EU membership and market access, etc. These attributes should not be impacted by global tax reform, but such changes will heighten the importance of Ireland remaining attractive and competitive across all areas, including ease of doing business, regulatory, skilled labour, etc.
While these measures are complex and depending on their final shape, are likely to have some impact on where large businesses pay their corporate tax, in our view, Ireland is likely to remain an attractive location to invest and do businesses in for the many reasons that have contributed to its success over the last number of decades, as noted above.
Get in touch
If you would like to discuss the potential impact of the above proposals on your business, please get in touch with any member of our Tax team, below. We'd be delighted to hear from you.