International tax planners today live in a period of great uncertainty. In the US, in particular, we expect soon to have significant changes made to our international tax rules. Non-US tax planners also soon will have changes with which to deal if implementation of the proposed OECD changes takes place.
President Biden's tax proposals would increase the corporate tax rate to 28%. The Global Intangible Low-Tax Income ("GILTI") rules would be "strengthened" and the tax rate on GILTI would be 21%. The Foreign-Derived Intangible Income ("FDII" an export benefit) would be repealed and the Base Erosion and Anti-Abuse Tax ("BEAT") provisions would be replaced by "an under-tax payments rule" to bring the US rules more in line with the OECD's Pillar 2.
The President's proposals also involve "achieving global agreement on a strong corporate minimum tax through multilateral negotiations." Obviously, this reflects a new US approach to the OECD's Pillar 2. The apparent reason for this change is that the President would increase US corporate tax rates and without a global minimum tax, foreign-owned businesses operating internationally could be significantly more profitable than US-owned businesses.
Biden has suggested that his plan may eliminate BEAT and replace it with a new anti-abuse erosion regime more akin to the undertaxed payment rule being developed by the OECD as a backstop to the global minimum tax. His new plan is called SHIELD – Stopping Harmful Inversions and Ending Low-tax Developments. SHEILD appears to be similar to the OECD undertaxed payment rule proposal. SHIELD would seem to provide a strong incentive for other jurisdictions to implement a similar Pillar 2 minimum tax, because if they did not, they would effectively be losing tax revenue to the US.
To make matters more uncertain, a number of US Senators and House members have introduced their own legislation that would require multinational corporations to pay tax at the same rate on profits earned offshore as they do on US profits. One of the bills would also disallow interest deductions for US corporations that are part of the multinational corporate group in situations in which a disproportionate share of the worldwide group's debt is in the US. The other bill would require detailed country-by-country disclosure regarding revenues, profits, tax, employees, and so forth and would be publicly available. Numerous other changes are proposed by these bills as well.
The views of moderate Democrats in both the House and Senate will be important. In the House, Democrats have a thin margin and can only afford to lose the votes of 3 members. In the Senate, there is exactly a 50 – 50 Democrat – Republican split. While the Vice President can break a tie vote in the Senate, this means that Senate Democrats cannot afford to lose any votes if all Republicans were to vote against a tax bill. Some moderate Senate Democrats have already indicated that they prefer less onerous changes than those proposed by President Biden. For example, some Senate Democrats would prefer a 25% corporate tax rate or to retain the FDII rules. The Democrats that are pushing for a 25% rate instead of a 28% rate, note that 25% is more in line with the global average. They don't disagree with the President's general direction, just regarding some important details.
The 28% would increase the combined federal and state average top tax rate on corporate income to 32.4%, which is the highest in the OECD, reducing US competitiveness. The combined rate can be higher or lower depending on which state or states a company operates in. For example, a lot of companies are looking to get out of California because the state tax rate is so high at 8.84%. At the current 21% federal rate the combined California corporate income tax rate is already 28%. If the federal rate goes up to 28% the combined rate in California will be close to 35%.
The elimination of FDII is a big issue. FDII was implemented in the US by the Trump administration to encourage domestic manufacturing and exports. There has always been concern about the fact that the FDII benefit could be eliminated or significantly reduced.
Internationally, the OECD has proposed significant changes in the form of well-known Pillars 1 and 2. How Pillar 1 is implemented by various countries could be far reaching and go beyond initial discussions concerning sales made digitally. In addition, Pillar 2's minimum tax could materially change tax planning in the international community. Already, there has been some indication that if the US were to tax GILTI at 21% that would be too high a tax rate to be compatible with Pillar 2.
All of this makes it nearly impossible to do rationale international tax planning at the current time. It is impossible to know how all of these rules ultimately will evolve.
Finally, to complicate matters further, whatever tax rules are implemented this year can be expected to change in the future. This can be a result of politics (the Trump Administration's changes lasted only four years) or further OECD action. Anyone who thought the BEPS changes of 5 years ago were final or even semi-final probably never expected the full effects of the OECD's Pillar 1 and Pillar 2. In fact, we do not yet even know what those full effects will be.