Last week the US Treasury Department released the long-awaited “Green Book”, explaining the tax proposals of the Biden Administration. The final version is shorter and less detailed than expected. Nevertheless, the Green Book includes several changes or new rules that may affect Belgium based multinationals with a US business unit. The main part of these rules would be applicable as of January 1st 2022, so it is a matter of being prepared if one does not want to be surprised.
Increase of the tax rate
A first important change is the proposed corporate tax rate. At this moment the corporate tax rate is set at 21% for the so-called C corporations. C corporations are corporations in which the shareholders are taxed separately from the company and includes most large corporations. The Biden Administration plans to raise this corporate tax rate to 28%. The Biden plan explicitly states that a significant part of the effects of the increase in tax rate will be borne by foreign investors. The tax rate of 28% would be effective for taxable years beginning after December 31, 2021. A dollar in profit is therefore worth more after tax in 2021 than it will be in 2022.
Measures relating to a global minimum tax
A second series of changes relates to a global minimum tax regime.
On the one hand, the Green Book provides for various changes in the current global minimum tax regime, GILTI (Global Intangible Low-Taxed Income). Under the GILTI regime, US shareholders of Controlled foreign corporations (CFC’s) are subject to a global minimum tax. This global minimum tax is based on the share of the shareholder in the ‘tested income’ of all its CFC’s.
- The changes include the elimination of the QBAI (qualified business asset investment) exemption, which provided a reduction for a 10% return on investments in certain foreign tangible property. According to the Biden administration, this exemption incentivized US corporations to invest in tangible assets outside of the US.
- Secondly, the so-called section 250 deduction (a general deduction against the global minimum tax of US shareholders) will be reduced from 50% to 25%. Consequently, and with a standard tax rate of 28%, the effective tax rate on GILTI would be 21% instead of the current 10,5%. The foreign effective tax rate above which no residual U.S. tax would be due under GILTI would rise from the current 13,125% to 26,25%.1
- Furthermore, the global minimum tax will be calculated on a jurisdiction-by-jurisdiction basis. Under the current rules, the global minimum tax is calculated per shareholder, making it possible to offset taxes paid to a high-tax jurisdiction against the tax liability for income earned in low-taxed jurisdictions. Under the new rules, this would no longer be possible and the residual US tax would be determined separately for each jurisdiction. The Foreign Tax Credit (FTC) limitation would also be calculated on a country-by-country basis, thus making it no longer possible to credit excess FTC’s from high-tax jurisdictions against GILTI-inclusions from low-tax jurisdictions. The recent proposal by the G7, which was instigated by the US, regarding a global minimum tax of 15% would e.g. also be determined on a jurisdiction-by-jurisdiction basis.
- A US company controlled by a foreign company, would be able to take into account taxes paid by the foreign parent under an income inclusion rule, consistent with the Pillar Two Agreement (if consensus on such agreement would be reached).
The Green Book also contains a remarkable proposal on a 15% minimum tax on book earnings. Large corporations, defined as corporations with a worldwide book income of more than $ 2 billion, would be subject to a 15% minimum tax on their book income before tax. The book income tax would equal the excess, if any, of tentative minimum tax over regular tax.
Finally, the proposal explicitly refers to the OECD’s Pillar Two Proposal. The proposal clearly states that the US will adhere to an agreement on minimum taxation negotiated under the OECD inclusive framework: “strong measures are needed to ensure that, if a Pillar Two agreement is reached, jurisdictions have an incentive to adopt the income inclusion rule”. This agreement would include an “income inclusion rule”, similar to the changed global minimum tax regime.
Adaptations to BEAT and FDII
The Base Erosion and Anti-abuse Tax (BEAT) is a tax on corporate tax payers, with gross receipts over $ 500 million, making deductible payments to foreign related parties above a certain threshold. This system would be repealed, because it does not adequately address the problem of the erosion of US corporate tax base. It would be replaced by the so-called SHIELD rule (Stopping Harmful Inversions and Ending Low-Tax Developments). This rule would apply to financial reporting groups with a global annual revenue exceeding $ 500 million. The $500 million threshold might look similar to the BEAT’s threshold, but the scope of SHIELD is much broader. Where BEAT applies to corporations with a three year average US revenue greater than $ 500 million, SHIELD would apply to financial reporting groups, having a minimal US presence, with a global revenue of $ 500 million. Under this new rule, the deduction of payments made to related parties, established in a low-taxed jurisdiction, would be disallowed. SHIELD is meant to apply fully to payments made to low-taxed jurisdictions, but to also apply partly to payments made to financial reporting group members to the extent that other financial reporting group members were subject to a low tax rate. To determine which jurisdictions should be considered as low-taxed jurisdictions, the proposal explicitly refers, again, to the Pillar Two agreement to be reached. If no agreement has been reached in time, the designated tax rate would be the US global minimum tax rate of 21%.
Furthermore, the Green Book provides for the abolishment of the deduction for Foreign-Derived Intangible Income (FDII). Currently, US corporations can obtain a 37,5% deduction on their FDII. This deduction for FDII would be repealed, because it is not considered an effective way to encourage research and development in the US.
Other proposals
The 107 page long Biden plan obviously contains a number of other proposed measures. We cannot list all of them, but two are perhaps worth mentioning in this brief newsflash. The first is a worldwide interest expense limitation. Basically, the new interest limitation rule is installed to counter the over leveraging of US-companies within a multinational group. The US tax administration is to look at the total interest cost of the multinational group and calculate the proportionate share of the US companies in this total cost. The amount of interests that exceed this proportionate share would not be tax deductible in the US.
The second regards so called ‘inversion transactions’.2 If the continuing former shareholder ownership of the foreign acquiring corporation is at least 80%, the latter is treated as a domestic corporation for all US tax purposes. If this percentage ranges between 60% and 80%, specific rules also apply. The definition of such inversion transaction would be broadened by replacing the current 80% test with a greater than 50% test and eliminating the existing 60% test In a number of cases, an inversion transaction would also be considered to occur, regardless of the level of shareholder continuity.
Finally, the proposal includes tax measures incentivizing US business and creating jobs in the US. The Biden plan wants to create a new general business credit, equal to 10%, for expenses incurred by US companies in connection with the creation of jobs in the US. Reversely, expenses incurred in connection with offshoring an existing US activity, resulting in the loss of US jobs, will no longer be deductible.
Conclusion
As we understand this plan is not without opposition – also amongst democrats - the question remains whether this Biden plan will survive in Congress. And if it does, whether it will do so entirely or if some parts may be dropped. Nevertheless, the Green Book demonstrates that the Biden Administration wants to fundamentally change the international tax rules. Not only by explicitly referring to the Pillar Two initiative of the OECD, but also by taking the lead in the G7 and G20 discussions on the subject and directing these in the direction of what we read in this Green Book. EU member states and smaller economies around the world – both advanced and upcoming – should be prudent and critical about these (r)evolutions, as much of it is tailored for the biggest economies. These new rules and changes will undoubtedly have an impact on al MNE’s doing business in the US. The Green Book shows the way the Biden Administration wants to go.
Rik Smet - Associate (rik.smet@tiberghien.com)
Jacob Huyzentruyt - Associate (jacob.huyzentruyt@tiberghien.com)
1Leaving aside issues with expense apportionment in the GILTI foreign tax credit calculation, which often results in residual U.S. tax even at foreign effective rates in excess of these thresholds.
2This – at present – refers to the situation in which a US corporation is acquired by a non-US corporation in a transaction where (1) substantially all of the assets held directly or indirectly by the domestic corporation are acquired directly or indirectly by the foreign acquiring corporation; (2) the former shareholders of the domestic corporation hold at least a 60-percent ownership interest in the foreign acquiring corporation by reason of the acquisition; and (3) the foreign acquiring corporation, together with its expanded affiliated group, does not conduct substantial business activities in the country in which the foreign acquiring corporation is created or organized.
Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of:
- Koen Morbée (International and EU corporate tax, koen.morbee@tiberghien.com);
- Michiel Boeren (International and EU corporate tax, michiel.boeren@tiberghien.com);
- Katrien Bollen (HR tax and global mobility, katrien.bollen@tiberghien.com);
- Ben Plessers (Transfer Pricing and Valuations, ben.plessers@tiberghien.com);
- Gert Vranckx (VAT, customs, excises and other indirect taxes, gert.vranckx@tiberghien.com);
- Rik Smet (International and EU corporate tax, rik.smet@tiberghien.com).
In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author(s) or one of the members of the editorial board.
This newsflash is for information purposes only and cannot be relied upon as legal advice.