Doing business in the US? How Biden’s proposed tax changes might impact you.
Tax Law - 21 Jul 2021
The Made in America Tax Plan represents a series of corporate tax reforms to address profit shifting and offshoring incentives and to level the playing field between domestic and foreign corporations. Critically, one of the main pillars of the plan has received overwhelming support from the OECD and 130 separate countries – the global minimum tax and redistribution of income.
How does this impact you?
- While at this stage, the plan is just a plan and is not legislation yet, companies doing business in the US should expect a higher corporate tax rate under the Biden administration.
- Australia is a keen supporter of the global minimum tax, and multinationals can expect the Australian Government to introduce legislation implementing the global minimum tax. See our comments on the global minimum tax here.
The main issues the plan intends to address include:
- Collecting sufficient revenue to fund critical investments that promote competitiveness and address flaws in the current system.
- Building a fairer tax system that rewards labour by reversing the trend where the national income derived from labour continues to decrease relative to income derived from capital.
- The share of federal revenue raised by the corporate tax is now under 10% while the share raised by taxing labor now exceeds 80%.
- Reducing profit shifting and eliminating incentives to offshore investment by enacting a country-by-country minimum tax.
- U.S. multinational corporation’s effective tax rate, what they pay in federal taxes, is just 8%.
- Ending the race to the bottom around the world by creating a global agreement that implements minimum tax rules worldwide through the denial of US deductions.
- Requiring all corporations to pay their fair share by imposing a minimum tax on firms with large discrepancies between income reported to shareholders and that reported to the IRS.
- 7 of the top 10 locations for U.S. multinational profits in 2018 were tax-havens. Estimates suggest profit-shifting costs the U.S. $100 billion annually.
- Building a resilient economy to compete by ending long-entrenched subsidies to fossil fuels and promoting nascent green technologies.
- Moving toward a cleaner energy sector to adhere to climate-related commitments.
The main solutions put forth include:
- Raising the corporate income tax rate from 21% to 28%.
- Enacting a 15% minimum tax on large corporations on their book income. This aims to target large companies that report high profits but have little taxable income.
- Generally, this book income would be the profits and income report that is given to the company’s shareholders.
- Where a company reports its book income to its shareholders in an amount that exceeds the company’s taxable income, the company would be liable for tax at a minimum rate of 15% based on their book income. For example, where a company has zero federal income tax liability based on its taxable income, the company would still have a minimum tax of 15% on its book income.
- This would close significant gaps in current tax law. The average company facing this tax would see an increase in the minimum tax liability of approximately $300 million each year.
- Strengthening the global minimum tax for U.S. multinational corporations, potentially reclaiming over $2 trillion in profit over the next 10 years to the U.S. corporate tax base.
- Reducing incentives for foreign jurisdictions to maintain ultra-low corporate tax rates by encouraging global adoption of robust minimum taxes and imposing penalties on foreign corporations that strip profits into tax havens. Potentially reallocating profits of approximately $700 billion over the next 10 years that would be paid by both U.S. and foreign multinational corporations.
- Replacing flawed incentives that reward excess profits from intangible assets with more generous incentives for new research and development.
- Replacing fossil fuel subsidies with incentives for clean energy production, increasing government tax receipts by over $35 billion in the coming decade. Polluters would be penalized through tax disincentives.
- Ramping up enforcement to address corporate tax avoidance. Expanding IRS resources, creating the ability to sustain multi-year litigation involving complex tax matters against corporations.
- On 12 July 2021, the OECD announced that 130 countries have joined a two-pillar plan based on the Made in America Tax Plan.
- Under Pillar One, profits and taxing rights over multinational entities will be distributed to those countries where the multinational conducts business and earns profit, irrespective of the location of their tax residency or physical presence.
- Pillar Two seeks to put a floor on competition between jurisdictions in a ‘race to the bottom’ on corporate tax rates, imposing a global minimum corporate tax rate. The details of this minimum rate are still subject to negotiation, however, separately to the OECD the G7 has committed to a rate of 15%, consistent with the made in America tax plan.
- While details are light and negotiations continue, Australia could potentially be a clear winner from these new frameworks. This is especially so because extractive industries such as mining which is on track to pay more than $40 billion in tax and royalties in 2021, are not intended to be subject to the new frameworks.
If you liked this blog, be sure to check out more of our tax related articles here.
Co-written by Felicity Rose.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.