Proposed US Tax Reform 2.0
Proposed US Tax Reform 2.0
CT proposals released by the US Biden administration with further reports of US support for the OECD’s proposed global minimum tax rate.
On 7 April 2021, the US Treasury published its detailed ‘The Made in America Tax Plan’. The stated aims of the proposals are to fund a $2 trillion infrastructure and clean energy plan and to stop the so-called ‘race to the bottom’ on global corporate tax rates. Separate to the Biden proposals, a number of Senate Democrats, led by Senate Finance Committee Chairman Ron Wyden, also released a proposed framework entitled ‘Overhauling International Taxation’. President Biden and Chairman Wyden are broadly proposing to move in the same direction - increasing the US corporate rate while simultaneously raising taxes on foreign earnings, although there are some notable differences in their proposals. Both sets of tax proposals are clearly ambitious and if they come to fruition, they would see further significant reform of the US corporate tax system – in close succession to the Trump tax reforms.
For businesses operating internationally, the most significant of Biden’s proposals include the following:
- A 28 percent US Federal corporate income tax rate – the current rate is 21 percent;
- A complete repeal of foreign-derived intangible income (FDII) – which currently provides for a reduced rate of US corporate income tax on foreign derived intangible profits;
- Changes to global intangible low-tax income (GILTI) - it is proposed to increase the GILTI minimum tax rate to 21 percent (currently 10.5 percent). It is also proposed that the first 10 percent 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 pooling of high taxed foreign income with lower taxed income from other countries;
- Changes to Base Erosion and Anti-Abuse Tax (BEAT) - for UK 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, aiming to more effectively target profit shifting by multinationals to low-taxed jurisdictions, with a new ‘Stopping Harmful Inversions and Ending Low-tax Developments’ (SHIELD) regime.
The SHIELD regime would essentially operate to deny US resident corporations US tax deductions by reference to payments made to related parties which are subject to a low effective rate of tax – in a similar fashion to the Under Taxed Payment Rule (UTPR) as proposed under Pillar Two of BEPS 2.0. 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 would be that applied to GILTI income (21 percent); and
- Anti-inversion provisions - the plan also includes a new anti-base erosion regime which will strengthen anti-inversion provisions.
The US legislative process is complicated and while the Democratic party has control, it does not mean that the Biden administration’s proposals are a done deal or that their final form will reflect the proposals.
It has been reported that on 7 April 2021, the Biden administration submitted new proposals to the OECD Inclusive Framework on BEPS 2.0 supporting a global minimum corporate tax rate under Pillar Two. Other key areas of alignment with the Pillar 2 proposals are noted above.
The OECD remains committed to reaching some form of agreement in mid-2021 on the BEPS 2.0 project and the US now appears to be on board with the project which increases the possibility of an agreement, at least on Pillar Two.
International groups should monitor the developments and speak to your local KPMG contact to discuss potential impacts on your group.
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