Biden’s Green Book Proposed Changes to US Foreign Income Tax Regime
The U.S. Treasury Department issued its green book, providing additional details of the Biden administration’s tax policy proposals outlined in the Made in America Tax Plan and the American Families Plan. A large portion of the proposals set forth in the green book are devoted to modifying the international provisions enacted under the Tax Cuts and Jobs Act (TCJA) that apply to U.S. taxpayers with international operations. In general, the international proposals seek to curtail some of the perceived benefits under the TCJA and further disincentivize U.S. taxpayers from moving business operations, investments and profits offshore. The proposals would also implement new information reporting requirements with respect to accounts with financial institutions and transactions involving cryptocurrency aimed at improving tax compliance.
The purpose of the green book is to provide a detailed explanation of the administration’s revenue proposals and the impact of those proposals on projected revenues for the federal government over the 10-year budget window, a Revenue Score. Each revenue proposal also includes an effective date, which is necessary to estimate a Revenue Score for the proposals. The revenue proposals set forth in the green book are merely a starting point for negotiations in Congress and are largely aspirational. However, they provide the greatest detail to date on many of the Biden administration’s tax proposals. As things move forward, Congress will utilize its own scorekeepers to estimate its own Revenue Scores for legislation and will likely consider different effective dates from those in the green book.
For a general discussion of both individual and business provisions in the green book, see our prior Tax Release.
International Tax Provisions
The green book provides the following details regarding the international tax proposals included in the Made in America Tax Plan:
Global Intangible Low-Taxed Income (GILTI) Reform – The administration has proposed a number of revisions to the existing GILTI regime, including:
- Reducing the GILTI deduction under Sec. 250 to 25% (resulting in an effective rate on GILTI of 21% (from current 10.5%) when combined with the proposed increase in corporate tax rate from 21% to 28%).
- Repealing the qualified business asset income (QBAI) exemption for 10% deemed tangible income return, so that the U.S. shareholder’s entire net controlled foreign corporation (CFC) tested income is subject to U.S. tax.
- Applying GILTI on a jurisdiction-by-jurisdiction basis, thereby eliminating the ability to reduce residual U.S. tax paid on income earned in lower-taxed foreign jurisdictions.
- Requiring a separate foreign tax credit (FTC) limitation for each foreign jurisdiction and applying a similar jurisdiction-by-jurisdiction apportionment with respect to a U.S. taxpayer’s foreign branch income, thereby eliminating the ability to use excess foreign tax credits from a high-tax jurisdiction to reduce U.S. tax on low-tax jurisdiction income.
- Repealing both the high-tax exemption for Subpart F income and the GILTI high-tax exclusion.
- Taking into account any foreign taxes paid by the foreign parent of foreign-parented controlled group, under an income inclusion rule that is consistent with an OECD/Inclusive Framework Pillar Two agreement on global minimum taxation (if such consensus is reached), with respect to the CFC income that would otherwise be part of the domestic corporation’s global minimum tax inclusion. The proposal’s jurisdiction-by-jurisdiction approach would also apply for this purpose.
Each of these proposals would be effective for taxable years beginning after December 31, 2021.
Foreign-Derived Intangible Income (FDII) Repeal – The administration has proposed to repeal the FDII regime effective for taxable years beginning after December 31, 2021.
Expanded Anti-Inversion Rules – The administration has proposed to expand and strengthen existing anti-inversion rules, including:
- Broadening the definition of an inversion transaction by replacing the 80% test with a greater-than-50% test and eliminating the 60% test.
- Expanding the number of inversion transactions by providing that, regardless of the level of shareholder continuity, an inversion transaction occurs if (1) immediately prior to the acquisition, the fair market value (FMV) of the domestic entity is greater than the FMV of the foreign-acquiring corporation, (2) after the acquisition the expanded affiliated group is primarily managed and controlled in the U.S., and (3) the expanded affiliated group does not conduct substantial business activities in the country in which the foreign-acquiring corporation is created or organized.
- Expanding the scope of an acquisition for purposes of Sec. 7874 to include a direct or indirect acquisition of substantially all the assets of a trade or business of a domestic corporation, substantially all the assets of a domestic partnership or substantially all of the U.S. trade or business assets of a foreign partnership. Furthermore, a distribution of stock of a foreign corporation by a domestic corporation or a partnership that represents either substantially all of the assets or substantially all of the assets constituting a trade or business of the distributing corporation or partnership would be treated as a direct or indirect acquisition of substantially all of the assets or trade or business assets, respectively, of the distributing corporation or partnership.
Each of these proposals would be effective for transactions completed after the date of enactment.
Base Erosion and Anti-Abuse Tax (BEAT) Repeal / Implementation of Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) Rule – The administration has proposed replacing the BEAT minimum tax regime with a new SHIELD rule. The SHIELD rule would provide the following:
- A deduction (whether related or unrelated party deductions) would be disallowed to a domestic corporation or branch, in whole or in part, by reference to all gross payments that are made (or deemed made) to low-taxed members, which is any financial reporting group member whose income is subject to (or deemed subject to) an effective tax rate that is below a designated minimum tax rate.
- The designated minimum tax rate will be determined by reference to the rate agreed to under Pillar Two. If SHIELD is in effect before a Pillar Two agreement has been reached, the designated minimum tax rate trigger will be the U.S. global minimum tax rate (which is 21% under the proposal to Revise the Global Minimum Tax Regime, Disallow Deductions Attributable to Exempt Income, and Limit Inversions).
- A financial reporting group is any group of business entities that prepares consolidated financial statements and that includes at least one domestic corporation, domestic partnership or foreign entity with a U.S. trade or business. Consolidated financial statements means those determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), or other method authorized by the Secretary under regulations.
- A financial reporting group member’s effective tax rate is determined based on the income earned (in the aggregate, taking into account both related and unrelated party income) and taxes paid or accrued with respect to the income earned in that jurisdiction by financial reporting group members, as determined based on the members’ separate financial statements or the financial reporting group’s consolidated financial statements, as disaggregated on a jurisdiction-by-jurisdiction basis. The proposal will include authority for the Secretary to provide special rules to address differences (both permanent and temporary) between the relevant income tax base and the base as determined under financial accounting, and to provide rules to account for net operating losses in a jurisdiction.
- Payments made by a domestic corporation or branch directly to low-tax members would be subject to the SHIELD rule in their entirety. In particular, payments that are otherwise deductible costs would be disallowed in their entirety, while in the case of payments for other types of costs (such as cost of goods sold), other deductions (including unrelated party deductions) would be disallowed up to the amount of the payment. In addition, payments made to financial reporting group members that are not low-tax members would be partially subject to the SHIELD rule to the extent that other financial reporting group members were subject to an effective tax rate of less than the designated minimum tax rate in any jurisdiction. In such cases, the domestic corporation or branch would effectively be treated as having paid a portion of its related party amounts to the low-taxed members, if any, of the financial reporting group based on the aggregate ratio of the financial reporting group’s low-taxed profits to its total profits, as reflected on the financial reporting group’s consolidated financial statements.
- The proposal provides authority for the Secretary to exempt from SHIELD payments in respect of financial reporting groups that meet, on a jurisdiction-by-jurisdiction basis, a minimum effective level of taxation as determined to the satisfaction of the Secretary. Finally, the proposal provides authority for the Secretary to exempt payments to domestic and foreign members that are investment funds, pension funds, international organizations, or non-profit entities, and to take into account payments by partnerships.
- The rule would apply to financial reporting groups with greater than $500 million in global annual revenues (as determined based on the group’s consolidated financial statement).
The proposal to repeal BEAT and replace with SHIELD would be effective for taxable years beginning after December 31, 2022.
Impose a 15% Minimum Tax on Book Earnings of Large Corporations – The administration has proposed adding a 15% minimum tax on worldwide book income for large corporations.
- The minimum tax would apply to corporations with worldwide book income in excess of $2 billion. Taxpayers would calculate book tentative minimum tax (BTMT) equal to 15% of worldwide pre-tax book income (calculated after subtracting book net operating loss deductions from book income), less General Business Credits (including research and development, clean energy and housing tax credits) and foreign tax credits. The book income tax equals the excess, if any, of tentative minimum tax over regular tax.
- Applicable taxpayers would be allowed to claim a book tax credit (generated by a positive book tax liability) against regular tax in future years, but this credit could not reduce tax liability below book tentative minimum tax in that year.
The proposal would be effective for taxable years beginning after December 31, 2021.
Limit Foreign Tax Credits from Sales of Hybrid Entities – The administration has proposed changes to the foreign tax credit (FTC) calculation rules for specified hybrid entities to limit the ability to claim FTCs when there are differences in the U.S. and foreign taxation of a transaction.
- The proposal would apply the principles of Sec. 338(h)(16) to determine the source and character of any item recognized in connection with a direct or indirect disposition of an interest in a specified hybrid entity and to a change in the classification of an entity that is not recognized for foreign tax purposes (for example, due to an election under the entity classification regulations).
- For purposes of applying the foreign tax credit rules, the source and character of any item resulting from the disposition of the interest in the specified hybrid entity, or change in entity classification, would be determined based on the source and character of an item of gain or loss the seller would have taken into account upon the sale or exchange of stock (determined without regard to Sec. 1248).
- The proposal does not affect the amount of gain or loss recognized as a result of the disposition or the change in entity classification as the proposal is limited to determining the source and character of such an item of gain or loss for purposes of applying the foreign tax credit rules.
- The Secretary would be granted authority to issue any regulations necessary or appropriate to carry out the purposes of the proposal, including those applying the proposal to other transactions that have a similar effect and exempting certain transactions among related parties from application of the proposal.
The proposal would be effective for transactions occurring after the date of enactment.
Interest Expense Deduction Limitations – The administration has proposed imposing additional limits for multinational groups for deducting business interest expense.
- The proposal generally would apply to an entity that is a member of a multinational group that prepares consolidated financial statements (financial reporting group) in accordance with U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS) or other method identified by the Secretary under regulations.
- Under the proposal, a financial reporting group member’s deduction for interest expense generally would be limited if the member has net interest expense for U.S. tax purposes and the member’s net interest expense for financial reporting purposes (computed on a separate company basis) exceeds the member’s proportionate share of the financial reporting group’s net interest expense reported on the group’s consolidated financial statements (excess financial statement net interest expense). A member’s proportionate share of the financial reporting group’s net interest expense would be determined based on the member’s proportionate share of the group’s earnings (computed by adding back net interest expense, tax expense, depreciation, depletion and amortization) reflected in the financial reporting group’s consolidated financial statements.
- When a financial reporting group member has excess financial statement net interest expense, a deduction will be disallowed for the member’s excess net interest expense for U.S. tax purposes. For this purpose, the member’s excess net interest expense equals the member’s net interest expense for U.S. tax purposes multiplied by the ratio of the member’s excess financial statement net interest expense to the member’s net interest expense for financial reporting purposes. Conversely, if a member’s net interest expense for financial reporting purposes is less than the member’s proportionate share of the net interest expense reported on the group’s consolidated financial statements, such excess limitation would be converted into a proportionate amount of excess limitation for U.S. tax purposes and carried forward as set forth below.
- Alternatively, if a financial reporting group member fails to substantiate its proportionate share of the group’s net interest expense for financial reporting purposes, or a member so elects, the member’s interest deduction would be limited to the member’s interest income plus 10% of the member’s adjusted taxable income (as defined under Sec. 163(j)). Regardless of whether a taxpayer computes the interest limitation under the proportionate share approach or using the 10% alternative, any disallowed interest expense could be carried forward indefinitely. A member of a financial reporting group that is subject to the proposal would continue to be subject to the application of Sec. 163(j). Thus, the amount of interest expense disallowed for a taxable year of a taxpayer that is subject to both interest expense disallowance provisions would be determined based on whichever of the two provisions imposes the lower limitation. A member of a financial reporting group may also be subject to the new SHIELD rule (see Replace the Base Erosion Anti-Abuse Tax with the Stopping Harmful Inversions and Ending Low-Tax Developments Rule).
- U.S. subgroups of a financial reporting group would be treated as a single member of the financial reporting group for purposes of applying the proposal. For this purpose, a U.S. subgroup is comprised of any U.S. entity that is not owned directly or indirectly by another U.S. entity and all members (domestic or foreign) that are owned directly or indirectly by such entity. If a member of a U.S. subgroup owns stock in one or more foreign corporations, this proposal would apply before the application of Sec. 265, which generally disallows a deduction for amounts allocable to tax-exempt income. Under the administration’s proposals, tax-exempt income would include dividends from a foreign corporation eligible for a Sec. 245A deduction and a GILTI inclusion eligible for a Sec. 250 deduction (see Revise the Global Minimum Tax Regime, Disallow Deductions Attributable to Exempt Income and Limit Inversions).
- The proposal would not apply to financial services entities and such entities would be excluded from the financial reporting group for purposes of applying the proposal to other members of the financial reporting group. The proposal also would not apply to financial reporting groups that would otherwise report less than $5 million of net interest expense, in the aggregate, on one or more U.S. income tax returns for a taxable year.
- The Secretary would be granted authority to promulgate any regulations necessary to carry out the purposes of the proposal, including (i) coordinating the application of the proposal with other interest deductibility rules, including the SHIELD, (ii) defining interest and financial services entities, (iii) permitting financial reporting groups to apply the proportionate share approach using the group’s net interest expense for U.S. tax purposes rather than net interest expense reported in the group’s financial statements, (iv) providing for the treatment of pass-through entities, (v) providing adjustments to the application of the proposal to address differences in functional currency of members, (vi) if a U.S. subgroup has multiple U.S. entities that are not all members of a single U.S. consolidated group for U.S. tax purposes, providing for the allocation of the U.S. subgroup’s excess net interest expense for U.S. tax purposes among the members of the U.S. subgroup, and (vii) providing rules to address structures with a principal purpose to limit application of the proposal. In addition, if a financial reporting group does not prepare financial statements under U.S. GAAP or IFRS, it is expected that regulations generally would allow the use of financial statements prepared under other jurisdictions’ generally accepted accounting principles in appropriate circumstances.
The proposal would be effective for taxable years beginning after December 31, 2021.
Tax Incentives for Increasing Jobs and Business Activity Within the U.S. and Remove Tax Deductions for Shipping Jobs Overseas – The administration has proposed providing tax incentives for locating jobs and business activity in the U.S. and removing tax deductions for shipping jobs overseas.
- The proposal would create a new general business tax credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. For this purpose, onshoring a U.S. trade or business means reducing or eliminating a trade or business (or line of business) currently conducted outside the U.S. and starting up, expanding or otherwise moving the same trade or business to a location within the U.S., to the extent that this action results in an increase in U.S. jobs. While the eligible expenses may be incurred by a foreign affiliate of the U.S. taxpayer, the tax credit would be claimed by the U.S. taxpayer. If a non-mirror code U.S. territory (the Commonwealth of Puerto Rico and American Samoa) implements a substantially similar proposal, the U.S. Treasury will reimburse the U.S. territory for the new general business credits provided to their taxpayers pursuant to a plan. Furthermore, the U.S. Treasury will reimburse a mirror code U.S. territory (Guam, the Commonwealth of the Northern Mariana Islands and the U.S. Virgin Islands) for the new general business credits provided to their taxpayers by reason of the enactment of the proposal.
- The proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. For this purpose, offshoring a U.S. trade or business means reducing or eliminating a trade or business or line of business currently conducted inside the U.S. and starting up, expanding or otherwise moving the same trade or business to a location outside the U.S., to the extent that this action results in a loss of U.S. jobs.
- In determining the income of a U.S. shareholder of a CFC on its global minimum tax inclusion or Subpart F income, no deduction would be allowed in determining such amounts for any expenses paid or incurred in connection with moving a U.S. trade or business outside the U.S.
- For purposes of the proposal, expenses paid or incurred in connection with onshoring or offshoring a U.S. trade or business are limited solely to expenses associated with the relocation of the trade or business and do not include capital expenditures or costs for severance pay and other assistance to displaced workers. The Secretary may prescribe rules to implement the provision, including rules to determine covered expenses and treatment of independent contractors.
The proposal would be effective for expenses paid or incurred after the date of enactment.
Other International Provisions
- Disallowance of Certain Deductions – The administration has proposed expanding the application of Sec. 265 to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction. The proposal would provide rules for determining the amount of disallowed deductions when only a partial deduction is allowed under Sec. 245A with respect to a dividend or a partial Sec. 250 deduction with respect to a global minimum tax inclusion. The proposal would also repeal Sec. 904(b)(4). The proposal would be effective for taxable years beginning after December 31, 2021.
- Reform Taxation of Foreign Fossil Fuel Income – The proposal would repeal the exemption from GILTI for foreign oil and gas extraction income (FOGEI). The definition of FOGEI and foreign oil related income (FORI) would also be amended to include income derived from shale oil and tar sands activity. In the case of a dual capacity taxpayer, the proposal would limit the amount of a levy that would qualify as a creditable foreign tax to the amount of tax that the dual capacity taxpayer would have paid to the foreign government if it were a non-dual capacity taxpayer, thereby codifying the safe harbor included in the current U.S. Treasury regulations for determining the portion of the levy that is paid in exchange for a specific economic benefit and making safe harbor the sole method for determining the creditable portion of the levy. The aspect of the proposal that would determine the amount of a foreign levy paid by a dual-capacity taxpayer that qualifies as a creditable tax would yield to U.S. treaty obligations that explicitly allow a credit for taxes paid or accrued on certain oil or gas income. Unless otherwise specified, the proposal provisions would be effective for taxable years beginning after December 31, 2021.
- Financial Account Reporting – The administration has proposed imposing a comprehensive financial account reporting regime to improve compliance. As part of the proposal, financial institutions would report data on business and personal financial accounts in an information return subject to a de minimis threshold. Similar reporting would apply to crypto asset exchanges. The annual return will report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account and transfers to and from another account with the same owner. The proposal would be effective for taxable years beginning after December 31, 2022.
- Crypto Asset Reporting – The proposal would expand the scope of information reporting by brokers who report on crypto assets to include reporting on certain beneficial owners of entities holding accounts with the broker. This would allow the U.S. to share such information on an automatic basis with appropriate partner jurisdictions, in order to reciprocally receive information on U.S. taxpayers that directly or through passive entities engage in crypto asset transactions outside the U.S. pursuant to a global automatic exchange of information framework. The proposal would require brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker. The proposal, if adopted, and combined with existing law, would require a broker to report gross proceeds and such other information as the Secretary may require with respect to sales of crypto assets with respect to customers, and in the case of certain passive entities, their substantial foreign owners. The proposal would be effective for returns required to be filed after December 31, 2022.
- Expand the Secretary’s authority to require electronic filing for forms and returns – The administration’s proposals include expanding the Secretary’s authority to require electronic filing for forms and returns. Electronic filing would be required for Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
A large portion of the Biden administration’s revenue proposals set forth in the green book seek to curtail the perceived benefits of the TCJA’s international tax provisions and further disincentivize businesses from undergoing corporate inversions and other offshoring activities. The details of the Biden administration’s tax proposals and effective dates included in the green book are merely a starting point for negotiations with Congress during the annual budget process. As a result, the details contained in the green book are likely to change, including the effective dates. In any case, it appears that the prospect of major tax changes is on the horizon for U.S. businesses engaged in international activities.
If the tax proposals included in the green book are enacted, the international landscape would change significantly for U.S. businesses and taxpayers should be prepared to model out the tax implications.
Contact an Andersen advisor to understand how the Biden administration’s tax proposals impact your business.