What recent proposed changes impact international tax matters? Biden’s plan to cut back on some of the corporate friendly provisions under the Tax Cuts and Jobs Act (TCJA) and creating U.S. based tax incentives could have a big impact on international tax planning. Here’s what you should know.

What are the proposed changes?

During the 2020 presidential campaign, the Biden administration proposed that they would roll back certain elements of the 2017 Tax Cuts and Jobs Act (TCJA) which they saw as tax breaks and loopholes for corporations and high net worth individuals. In essence, the goal for his administration would be to spur economic growth through tax incentives relative to a corporation’s manufacturing and production in the United States. President Biden’s plan to cut back on some of the “corporate friendly” TCJA provisions, as well as to create U.S. based tax incentives, will prove to have a significant effect on how corporation’s approach their international tax planning. Here are a few of President Biden’s proposed changes that will affect international tax reporting.

What are the current regulations?

Currently, U.S. multinational corporations pay a foreign tax rate between 10.5% and 13.125% on GILTI, with an increase to 16.406% in line to start in 2026. However, the Biden administration has proposed to double this rate to 21%, with a tax assessed on a country-by-country basis. The incremental U.S. federal tax on GILTI is computed on an aggregate basis from all controlled foreign corporations (CFC). Tested losses of CFCs can offset tested income of other CFCs, and a single foreign tax credit limit applies to GILTI income from all CFCs. The proposition to apply GILTI tax separately for each country may help prevent CFC tested losses from offsetting CFC tested income earned in a different country.

High-tax exclusion rate

Regarding the applicable high-tax exclusion rate, CFC income must be subject to foreign tax income at a rate higher than 18.9% (90% of the 21% U.S. corporate tax rate) to qualify for the Subpart F and GILTI high-tax exclusions. Before Trump’s tax plan kicked in, the rate for U.S. corporations was a staggering 35%. President Biden’s proposal is to establish a U.S. corporate tax rate of 28%. This rate can be expressed as a middle ground between the staggering 35% and the “corporate friendly” 21% rate established by TCJA. For the high-tax exclusion rate this means that CFC income would need to be subject to foreign income tax at a higher than 25.2% rate (90% of 28% U.S. corporate tax rate) to qualify for the Subpart F and GILTI high-tax exclusions. Essentially, this would bring more income under GILTI at a higher rate, which would be costly for corporate taxpayers.

What about the exclusion of deemed tangible income from GILTI income?

In addition to raising the tax rates on U.S. corporate and GILTI income, President Biden plans to eliminate the exclusion of deemed tangible income return from GILTI income as well. Currently, GILTI income for a U.S. shareholder of a CFC is calculated net of deemed tangible income return. Deemed tangible income return is defined as 10% of aggregate CFC qualified business asset investment (QBAI) less any specified interest expense. In combination with the increased tax rates, this would more than double the tax burden on offshore operations of U.S. parented businesses.

President Biden’s other tax provisions regarding U.S. international tax include

• A denial of all deduction and expensing write-offs for moving jobs or production overseas
• A 10% offshoring penalty surtax on offshore production income from sales and services provided to American customers. This would result in a 30.8% tax rate to U.S. corporations on offshore income
• Creating a “Made in America” tax credit. This entails a 10% advanceable tax credit for companies that revitalize closed or closing U.S. facilities or retool existing U.S. facilities to advance manufacturing competitiveness and employment

Ultimately, President Biden’s proposed tax plans will likely result in an increased tax liability for international corporations. To negate some of this tax burden, corporations will need to sharpen their focus on international tax planning.

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