The Biden Administration released the United States (US) FY2023 Budget on 28 March, including major tax proposals some of which were previously floated by the Administration or congressional Democrats and others that are new. Treasury also released the General Explanation (Green Book), available here. The Budget folds most of the House-passed Build Back Better Act (BBBA) into the baseline and assumes it has been enacted.

The Budget continues to call for tax provisions that fell out of the House-passed BBBA due to opposition in Congress, including raising the corporate tax rate to 28% and increasing the top marginal income tax rate (to 39.6%) for high earners, among other provisions.

The Budget includes seven proposals that focus on reforming business and international taxation that are estimated to raise US$1.628 trillion over 10 years.

The Budget proposal to increase the 21% corporate rate to 28% would consequently increase the global intangible low-taxed income (GILTI) rate in tandem. The corporate and GILTI rate increases would apply to tax years beginning after 31 December 2022. For an earlier tax year ending after 31 December 2022, a blended corporate rate would apply equal to 21% plus 7% multiplied by the portion of the tax year that takes place in the 2023 calendar year.

Another Administration proposal would repeal the base erosion and anti-abuse tax (BEAT), as modified by the BBBA, and replace it with an undertaxed payment rule (UTPR) that is consistent with the UTPR described in the Organisation for Economic Co-operation and Development (OECD) Pillar Two Model Rules, including a global annual revenue threshold (US$850 million), de minimis exclusions and allocation among jurisdictions. Further, a US domestic minimum top-up tax would be part of the rules to protect US revenues from the imposition of UTPR by other countries. The proposal to repeal the BEAT and replace it with the UTPR would be effective for tax years beginning after 31 December 2023.

A proposal for a new incentive to bring jobs to the US would provide a new general business credit. It would equal 10% of the eligible expenses paid or incurred in connection with onshoring a US trade or business that is linked to reducing or eliminating a trade or business or line of business currently conducted outside the US or starting up, expanding, or otherwise moving the same trade or business within the US, to the extent that this action results in an increase in US jobs. The proposal would be effective for expenses paid or incurred after the date of enactment.

Other budget proposals to reform business and international taxation include:

Disallowing stepped-up basis of a partnership's non-distributed property to a related partner until the property is disposed. The proposal would be effective for partnership tax years beginning after 31 December 2022.

Conforming the definition of control to test the ownership of at least 80% of the total voting power and at least 80% of the total value of a corporation's stock. The proposal would be effective for transactions occurring after 31 December 2022.

Permit taxpayers to retroactively elect, in certain circumstances, to treat a passive foreign investment company (PFIC) as a qualified electing fund without Internal Revenue Service consent, generally applicable upon the date of enactment.

Require Internal Revenue Code¹ Section 6038 reporting for each foreign "taxable unit" to facilitate the BBBA's proposals for country-by-country GILTI and foreign tax credit rules, applicable beginning after 31 December 2022, and to annual accounting periods of foreign business entities ending with or within those tax years.

A Global Tax Alert provides details on these and other budget proposals.

The US Senate Foreign Relations Committee on 29 March approved the long-delayed US-Chile income tax treaty. The proposed treaty next goes to the full Senate which must give its advice and consent to ratification. The Chilean Government in 2015 undertook the steps necessary for the treaty to be approved in Chile. The treaty will enter into force when all applicable approval procedures in the United States and Chile have been satisfied. The Foreign Relations Committee approval was subject to two reservations concerning the BEAT and Article 23 (Relief from Double Taxation). The reservation concerning BEAT clarifies that the treaty shall not prevent the imposition of BEAT under Section 59A.

No date has been set for full Senate action.

The OECD expects to hold a public consultation on the crypto-asset reporting framework by the end of May after the close of a public consultation on 20 April. The plan, according to an OECD official this week, would be to finalize work on the framework by this fall in time for an October 2022 G-20 leaders’ summit.

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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

Arlene Fitzpatrick | arlene.fitzpatrick@ey.com

Joshua Ruland | joshua.ruland@ey.com

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Endnotes

1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.