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April 2, 2021
2021-5389

Report on recent US international tax developments 2 April 2021

United States (US) President Joe Biden on 31 March delivered a speech in Pittsburgh where he sketched out an ambitious US$2 trillion-plus Build Back America infrastructure proposal. The President laid out his plans for the American Jobs Plan, which essentially provides for infrastructure investment over eight years extending to the power grid, electric vehicles, and broadband, among other areas. Prior to the speech, the White House outlined the proposed package, indicating it would be paid for with tax increases that, for the most part, were outlined during the Presidential campaign, including raising the corporate tax rate and major changes to the Tax Cuts and Jobs Act (TCJA) international tax provisions.

Specific details of the tax increase proposals will likely be included in the President’s FY 2022 budget plan, which is expected to be released later this spring. However, according to a White House fact sheet released on 31 March, the Made in America Tax Plan, proposed alongside the American Jobs Plan, would:

  • Increase the corporate tax rate from 21% to 28%

  • Increase the Global Intangible Low-taxed Income (GILTI) rate to 21%, calculate on a country-by-country basis, and eliminate the 10% return on tangible assets

  • Encourage other countries to adopt strong minimum taxes on corporations

  • “Deny[ies] deductions to foreign corporations on payments that could allow them to strip profits out of the United States if they are based in a country that does not adopt a strong minimum tax”

  • “Further replace[s] an ineffective provision in the 2017 tax law that tried to stop foreign corporations from stripping profits out of the United States”

  • Make it “harder for U.S. corporations to invert”

  • Deny companies expense deductions for offshoring jobs and provide a credit for expenses for onshoring

  • Eliminate the Foreign-derived Intangible Income (FDII) deduction

  • Impose a 15% minimum tax on corporations based on “book income”

  • Eliminate tax preferences for fossil fuels

  • Strengthen business tax enforcement

According to the White House fact sheet, “If passed alongside President Biden’s Made in America corporate tax plan, it [infrastructure plan] will be fully paid for within the next 15 years and reduce deficits in the years after.”

The second part of the Build Back Better plan, the American Families Plan, focused on social spending like health care, childcare, and education, is expected to be detailed in the coming weeks, and will include additional tax proposals targeting individuals.

The Internal Revenue Service (IRS) in Announcement 2021-5 this week indicated that the US and Japan competent authorities had reached agreement on the US-Japan tax treaty arbitration process. The agreement implements the arbitration process in paragraphs 5, 6 and 7 of Article 25 of the 2003 US-Japan income tax treaty, as amended.

The IRS Advance Pricing and Mutual Agreement (APMA) Program issued the 22nd annual Advance Pricing Agreement (APA) report (the Report) on 23 March, in Announcement 2021-06. The Report discusses the APMA Program, including its activities and structure for calendar year 2020, and gives useful insights into the operation of the APA Program.

The number of APA filings remained the same in 2020 as in 2019, with taxpayers filing 121 APA requests each year. The total number of APAs concluded, however, increased from 120 to 127 and the median amount of time to finalize an APA decreased from 38.8 months in 2019 to 32.7 months in 2020.

On 26 March, the US Trade Representative (USTR) announced proposed punitive tariffs of 25% on goods from Austria, India, Italy, Spain, Turkey, and the United Kingdom with regard to each country’s Digital Services Tax (DST). The proposed tariff amounts are directly tied to the amount of the DST that each country is estimated to collect from US companies. The USTR also provided a proposed list of impacted products per country and is asking for public comments due by 30 April 2021.

The USTR also announced the termination of investigations under Section 301 of the Trade Act of 1974 regarding the proposed DSTs for Brazil, the Czech Republic, the European Union, and Indonesia, as those jurisdictions have not adopted or have not implemented their respective DST since the initiation of the investigations.1

The USTR’s announcement comes on the heels of signals by US Treasury Secretary Janet Yellen on the US willingness to engage through the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 process. For the US, this commitment to multilateralism is not inconsistent with the USTR’s taking steps to address DSTs imposed by countries outside of the OECD process. It is likely that resolution of this dispute will require a willingness of these countries to bring their DSTs in line with the OECD approach.

The OECD this week announced that it has begun a consultation on the commentary to Article 9 (Associated Enterprises) of the OECD Model Tax Treaty. The 29 March OECD discussion draft includes proposed amendments to the commentary, and is largely focused on domestic laws deductibility of interest. According to an OECD statement, the project is “closely linked to the report Transfer Pricing Guidance on Financial Transactions published on 11 February 2020.” The deadline for comments is 28 May 2021.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC

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Endnotes

  1. See EY Global Tax Alert, USTR proposes 25% punitive tariff on Austrian, Indian, Italian, Spanish, Turkish and UK origin goods in response to each country’s DST; Terminates investigations for Brazil, Czech Republic, EU and Indonesia, dated 29 March 2021.

 
 

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