The US corporate minimum tax, enacted as part of the Inflation Reduction Act in 2022, took effect this year and imposes a 15% minimum tax on the adjusted financial statement income of large corporations, with average annual financial statement income over $1 billion. The President has proposed further changes to bring the US more in line with 15 actions the Organization for Economic Cooperation and Development (OECD) has identified in its global initiative to limit international tax avoidance.
The Biden Administration’s proposals, contained in the 2024 budget Greenbook, would reform US international tax rules to reduce incentives to book profits in low-tax jurisdictions, stop corporate inversions to tax havens and raise the tax rate on US multinationals’ foreign earnings from 10.5% to 21%.
Details of Biden’s Proposed Changes
Below is a list of the international tax “reforms” contained in the Biden budget. These changes would raise $1 trillion over the next 10 years.
- Raise the GILTI tax rate to 21% and impose it on a jurisdiction-by-jurisdiction basis, meaning high-tax income could not be used to offset low-tax income from other countries. The proposal also would eliminate the 10% qualified business asset investments (QBAI) exemption for depreciable assets while allowing increased use of foreign tax credits and carryforwards to the foreign credit and losses.
- Adopt the undertaxed profits rule, which would replace the current 10% BEAT (base erosion and anti-avoidance tax) with a rule that would deny deductions to US subsidiaries of foreign multinationals when they pay an effective tax rate below 15% on their offshore operations.
- Repeal the deduction for foreign-derived intangible income (FDII) which allows US corporations a deduction of 37.5% of FDII.
- Provide tax incentives for locating jobs and business activity in the US and remove tax deductions for shipping jobs overseas. The proposal would create a new general business credit equal to 10% of eligible expenses paid in connection with onshoring a US trade or business. On the other hand, deductions for expenses paid to offshore a US trade or business would be disallowed.
- Eliminate mismatch in calculation of earnings and profits of controlled foreign corporations.
- Limit foreign tax credits from sales of hybrid entities.
- Restrict deductions of excessive interest of members of financial reporting groups. The deduction would be limited if a group member has net interest expense for US tax purposes and the member’s net interest expense for financial reporting purposes exceeds the member’s proportionate share of the group’s net interest expense reported on consolidated financial statements.
- Treat payments substituting for partnership effectively connected income as US source dividends.
- Expand access to retroactive qualified electing fund elections for passive foreign investment companies.
- Repeal the exemption from GILTI for foreign oil and gas extraction income.
The OECD Framework
To date, some 138 countries have joined the OECD’s two-pillar plan to reform international taxation. In February, the 27 member states of the European Union reached an agreement on the implementation of a corporate minimum tax. The US is moving in that direction.
The plan targets income that goes untaxed by imposing a 15% minimum tax. Pillar One would re-allocate taxing rights over multinationals from home countries to markets where they do business and earn profits, regardless of physical presence. Pillar Two provides for a comprehensive jurisdiction-by-jurisdiction global minimum taxation regime with a 15% minimum tax rate.
The OECD estimates that base erosion and profit-shifting of multinational corporations now costs countries 100-240 billion USD in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue.
Although these proposals have little chance of passing with the divided government, it is important to know where US full compliance with the OECD framework may be headed in the future. If you have concerns, consult your Frazier & Deeter international tax advisor for more information.
Dave Kim, Tax Partner & National Practice Leader, International Tax | dave.kim@frazierdeeter.com
Mike Whitacre, Tax Partner | mike.whitacre@frazierdeeter.com
David Patton, Tax Partner | david.patton@frazierdeeter.com
Malcolm Joy, Lead Partner, United Kingdom | malcolm.joy@frazierdeeter.com