April 9, 2021
Report on recent US international tax developments – 9 April 2021
The United States (US) Treasury on 7 April released a 19-page report further explaining President Joe Biden’s Made in America Tax Plan to complement last week’s US$2 trillion-plus Build Back America infrastructure proposal. The report provides additional details to last week’s White House Fact Sheet in regard to a series of proposed corporate tax reforms to address profit shifting and offshoring incentives and to level the playing field between domestic and foreign corporations. The plan reportedly raises approximately US$2.5 trillion over 15 years, which the Administration contends would fully offset the cost of its infrastructure proposals.
Among other things, the report describes repealing and replacing the Base Erosion and Anti-abuse Tax (BEAT) with the “SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments), which denies multinational corporations US tax deductions by reference to payments made to related parties that are subject to a low effective rate of tax. The low effective rate of tax would be defined by reference to the rate agreed upon in the multilateral agreement.” The plan also calls for repealing the Foreign Derived Intangible Income (FDII) provision.
Although the latest report confirms the Administration’s plan to raise the corporate tax rate to 28%, President Biden this week was quoted as saying he is willing to negotiate a lower corporate rate. The press is quoting Administration officials and others as saying that a 25% corporate tax rate may be closer to the rate included in a final infrastructure package. Senator Joe Manchin – a critical vote for any future infrastructure legislation – earlier said a 28% corporate rate is too high, and that he could support a 25% rate.
In what was billed as her first major speech since becoming US Treasury Secretary, Janet Yellen on 5 April again called for a global minimum tax. A global minimum tax is the basis of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two proposal and has gotten a significant push by the Biden Administration and figures prominently in the Made in America Tax Plan. The Treasury Secretary has said that a global minimum tax is necessary to forestall a continuing “race to the bottom” which has resulted in countries unable to raise revenue to pay for necessary public services.
Senate Finance Committee Chairman Ron Wyden and Senators Sherrod Brown and Mark Warner on 5 April released “Overhauling International Taxation: A framework to invest in the American people by ensuring multinational corporations pay their fair share.” The framework focuses on changes to the 2017 Tax Cuts and Jobs Act’s (TCJA) Global Intangible Low-taxed Income (GILTI), FDII, and the BEAT international provisions. According to the authors, it aims to “reboot the international tax system” to better “focus on rewarding companies that invest in the U.S. and its workers, stop incentivizing corporations to shift jobs and investment abroad, and ensure that big corporations are paying their fair share.”
A new “incentive to onshore research and management jobs” called for under the framework would provide relief from US expense allocation rules that currently impact the GILTI foreign tax credits. According to the framework “expenses for research and management that actually occur in the U.S. should be treated as entirely domestic expenses, eliminating foreign tax credit penalties under GILTI and helping retain these activities in the U.S.”
The nine-page document leaves several policy options undetermined, does not include legislative language, and in some ways suggests alternative approaches to the Made in America Tax Plan’s international changes proposed by President Biden on 31 March.
The press is reporting that Treasury Secretary Yellen on 8 April presented an OECD BEPS 2.0 Pillar One proposal to the steering group of the Inclusive Framework on BEPS. Described as a “comprehensive scoping” idea, the proposal reportedly would be based on revenue and profitability to limit Pillar One’s impact to a narrower group of multinational corporations. According to the reports, the Biden Administration is calling its comprehensive scoping proposal the “simplest and most principled of administrable option,” noting it would eliminate the need for business line segmentation.
The US Government reportedly would be flexible with respect to nexus thresholds to address the concerns of developing countries. The proposal also includes a requirement for a “binding nonoptional dispute prevention and resolution process” as well as the need for a “precise definition of relevant unilateral actions.”
Pascal Saint-Amans, OECD Director of the Center for Tax Policy and Administration, was optimistic about the latest US proposal. He was quoted as saying the proposal addresses concerns about complexity as well US opposition to limiting the effects of Pillar One to a narrow group of generally US-based multinationals, adding that it is “rebooting the negotiations.”
The United Nations (UN) Subcommittee on Taxation of the Digital Economy on 6 April released a final updated draft of a new digital taxation article for the UN Model Treaty that would allow for source country taxation of revenue from certain digital services. New Article 12B (Income from Automated Digital Services) reportedly will be presented and approved for inclusion of the article in the UN Model Treaty later this month.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC