On April 5, Senate Finance Committee Chair Ron Wyden (D-OR), as well as Sens. Sherrod Brown (D-OH) and Mark Warner (D-VA), offered an international tax framework as a starting point to discussions on revamping the current system put in place by the 2017 Tax Cuts and Jobs Act.
Are Wyden and Biden Colliding? While the framework includes some proposals similar to what was outlined by the Biden administration’s American Jobs Plan, there are key differences as well. Additionally, it does not address other proposals that were included in Biden’s plan like the corporate tax rate. In fact, the Wyden-Brown-Warner international tax framework marks a third area where the Finance Committee chairman offers a significantly different approach than President Biden. First, Wyden’s tech-neutral energy tax credits took a different approach than the Biden-House Democrats’ GREEN Act. Second, Wyden’s Mark-to-Market individual tax proposal has not been embraced by the president. Now, Wyden and President Biden are at odds on how to craft the BEAT, FDII and, to a lesser extent, GILTI. At a minimum, working out a common approach will take weeks.
Yellen’s Global Minimum Tax Presser. In addition to Chair Wyden’s international tax framework release, Treasury Secretary Janet Yellen held her first major press conference today urging a global minimum tax rate on corporations. Yellen presented a global minimum tax as a way to prevent companies from relocating to lower-tax jurisdictions, thereby preventing a race to the bottom. Yellen noted that a more level playing field in the tax rate applied to multinational corporations would result in innovation and growth. This message complements Senate Democrats’ international framework and President Biden’s tax proposals to raise the corporate tax rate and double the rate on Global Intangible Low-Taxed Income (GILTI) from 10.5% to 21%.
The Senate Finance Committee is interested in comments and feedback on the Wyden framework no later than April 23. Please contact a Brownstein team member if you are interested in engaging or submitting comments.
Below is an overview of the Senate Finance Democrats’ international tax framework.
I. Senate Democrats’ International Tax Framework
- Discourage Offshoring by Strengthening the Global Minimum Tax for U.S. Multinational Corporations. Democrats contend that the GILTI system gives corporations a huge reduction in the U.S. tax rate on foreign earnings, creating incentives to offshore jobs. To address this, Democrats propose the following solutions:
- Problem: Tax exemption for foreign earnings up to 10% of the adjusted basis of tangible depreciable assets owned abroad (i.e., qualified business asset investment or QBAI) encourages foreign investment, or shutting down U.S. factories to move operations and jobs overseas.
Solution: The framework suggests repealing the exemption.
Brownstein Takeaway: This is similar to what was proposed by the administration in the American Jobs Plan. However, the Organization for Economic Cooperation and Development is pushing for an exemption, similar to what is included in the GILTI. This could lead to a potential misalignment between U.S. tax policy and global policy.
- Problem: The GILTI tax rate on foreign income at half the domestic corporate rate, creating a strong preference for overseas income.
Solution: Shrink the gap between the tax rate on U.S. earnings and foreign earnings to reduce incentives to shift more profit abroad and help level the playing field between multinational corporations and corporations operating primarily in the U.S.
Brownstein Takeaway: The framework questions whether the tax rate on GILTI should equal the U.S. corporate tax rate, or remain at a lower proportion of the U.S. rate (e.g., 75%). Current Democratic proposals suggest a rate between 60% and 100% of the U.S. corporate tax rate. The American Jobs Plan suggests a GILTI rate of 21%, which is about 75% of its proposed U.S. corporate tax rate of 28%. The framework notes that the final rate will depend on decisions with regard to the U.S. corporate rate, base stripping protections and other potential incentives or disincentives.
- Problem: The GILTI’s global tax rate calculation, which encourages income shifting to low-tax jurisdictions.
Solution: The framework proposes a shift to a country-by-country system for applying GILTI. It outlines two potential options:
- expand the existing system for foreign tax credits—with the use of foreign tax credit “baskets”—essentially applying the current GILTI rules separately for each country in which a corporation operates. For example, if a corporation operates in nine countries, it would have nine GILTI “country baskets,” with no aggregation among them.
- divide global income into two groups—low-tax and high-tax. Rather than applying the foreign tax credit system to every country separately, GILTI would only be applied to income from low-tax jurisdictions. This would allow a significant amount of global income to be aggregated. Income from high-tax jurisdictions would be excluded—if a corporation paid a foreign country a tax rate that was above the GILTI rate, it would be excluded from GILTI altogether.
Brownstein Takeaway: Under either option, U.S. multinational corporations could face a significant increase in U.S. tax liability. When combined with Biden’s administration proposal to increase the corporate rate, many U.S. multinationals will face higher tax rates than before TCJA.
- Problem: Foreign tax credit rules interact with GILTI to create disincentives for domestic investments. For example, taxes owed under GILTI increase when a corporation invests in research and development in the U.S. or expands a U.S. headquarters office.
Solution: Treat expenses for research and management that occur in the U.S. as entirely domestic expenses, eliminating foreign tax credit penalties under GILTI and helping retain these activities in the U.S.
Brownstein Takeaway: As a standalone provision, this could encourage additional investment in research activities in the U.S. However, some of the other proposed changes may undermine this effort.
- Deny Companies Expense Deductions for Offshoring Jobs and Credit Expenses for Onshoring. GILTI and Foreign-Derived Intangible Income (FDII) are both contributing factors to moving jobs and equipment offshore, giving companies tax incentives for taking steps that hurt domestic jobs. To address this problem, Democrats propose the following solutions:
- Problem: U.S. companies are penalized for growing their domestic footprint and are incentivized to offshore operations. The FDII allows companies to write off expenses that come from offshoring jobs that are deductible under current law.
Solution: The framework eliminates the deductions for TCJA’s FDII provision. FDII is a portion of a U.S. corporation’s intangible income from foreign sources, and TCJA allows a deduction of a specified percentage of FDII.
Brownstein Takeaway: Similar to the administration’s proposal, the framework eliminates the FDII deduction. It also includes a proposal to create a new tax credit to incentivize research and development.
- Problem: The current FDII does not sufficiently incentivize domestic research and development.
Solution: Rebrand the current FDII as “foreign derived innovation income” focused on U.S. innovation to reward companies that continually invest in the economy and strengthen the workforce. To do so, FDII’s “deemed intangible income” would be replaced with a new metric—deemed innovation income. The new “DII” would be an amount of income equal to a share of expenses for innovation-spurring activities that occur in the U.S., such as research and development and worker training. It would only apply if the expense were for U.S. activities.
Brownstein Takeaway: This proposal is similar to the OECD’s Base Erosion and Profit Shifting (BEPS) Project Action 5, which outlines a modified nexus standard for IP regimes. The Action 5 proposal ties tax preferences for IP and other intangible assets to research and development spending.
- Problem: The current FDII allows companies that hold intellectual property in the U.S. to tax profits from sales to foreign customers at a lower rate of 13.125%. However, Democrats contend that this incentivizes corporations to move operations abroad since the GILTI rate is lower.
Solution: Equalize the GILTI and FDII rates. Democrats believe that as a result of both provisions, a company moving offshore increases its ability to earn tax-free income offshore and increases its FDII deduction, encouraging offshoring.
Brownstein Takeaway: The FDII and GILTI were intended to work together as a “carrot” and “stick” approach to equalizing the treatment of foreign earnings. Equalizing the GILTI and FDII rates might help incentivize domestic investments, but this will largely depend on other politics enacted by the administration. For example, will a higher corporate rate or a potential book profits tax serve as a disincentive?
- Reconfiguring the BEAT. The base erosion and anti-abuse tax (BEAT) rules were created to target base-eroding activities conducted by very large corporations. The BEAT is a minimum tax imposed on corporations that make certain deductible payments to foreign-related parties. Democrats have criticized the BEAT as failing to capture revenue from income stripping of foreign companies, while also diminishing the value of U.S. investments in things like renewable energy, low-income housing and job creation in low-income neighborhoods as a result of how tax liability is calculated. The framework includes the following proposals to address this issue.
- Problem: Corporations currently pay BEAT to the extent that the tax exempts its ordinary income tax liability. However, the calculation of BEAT requires corporations to calculate tax liability without adding back any tax credits under Sec. 38 of the tax code. Democrats believe the BEAT should be reformed to capture more revenue from companies eroding the U.S. tax base, and use that revenue to support companies that are investing in America.
Solution: Restore the full value of tax credits that support domestic investment and opportunity.
Brownstein Takeaway: The framework does not include details on how Democrats would change the calculation of the BEAT to achieve this result. It is also unclear as to how the desire to restore the value of certain tax credits stacks up with tax proposals from the administration—for example, a minimum book profits tax. Based on how such a tax is structured, it could be at odds with the desired effects of a BEAT restructuring.
- Problem: Addressing disincentives for domestic investment in the BEAT could result in further tax decreases for corporations. Additionally, it could result in a loss of revenue since the BEAT was intended to be a revenue raiser.
Solution: The current BEAT applies a 10% tax rate to both “regular” income and to income tied to “base erosion payments.” As an alternative, it creates a bifurcated system that would apply different tax rates to “regular” income and income tied to “base erosion payments”—with regular taxable income still being subject to the 10% rate.
II. What Elements of the Biden Tax Plan as Outlined in the American Jobs Act Were Excluded from the Senate Framework?
- Set the Corporate Tax Rate at 28%. The President’s tax plan will increase the corporate tax rate from 21% to 28%. When the corporate tax rate was reduced by the Tax Cuts and Jobs Act (TCJA), Democrats have criticized that it was not accompanied by a lasting boost in jobs or investment. Senate Finance Committee Chair Ron Wyden (D-OR) has called for Congress to adopt a framework based on two propositions: (1) multinationals must pay their “fair share” of taxes, and (2) the tax code should reward companies that invest in the U.S. and create good-paying jobs. Republicans counter that corporate rate increases will be borne by American workers through reduced wages and lower retirement account values. The nonpartisan Joint Committee on Taxation estimates that 25% of the corporate income tax is borne by workers.
- Prevent U.S. Corporations from Inverting or Claiming Tax Havens as Their Residence. Under current law, U.S. corporations can acquire or merge with a foreign company to minimize U.S. taxes by claiming to be a foreign company, even though their places of management and operations are within the U.S. President Biden is proposing to make it harder for U.S. corporations to invert. This will backstop the other reforms that should address the incentive to do so in the first place. Both parties have made efforts in the past and enacted legislation and regulation to curb corporate inversions.
- Enact a Minimum Tax on Large Corporations’ Book Income. The administration has proposed a 15% minimum tax on the income corporations use to report their profits to investors (book income). The TCJA repealed the alternative minimum tax for corporations. Democrats intend to target companies that reported large net profits while paying little or no federal income tax. However, few details on the minimum book tax have been provided, and critics claim it will add unnecessary complexity to the tax code.
- Eliminate Tax Preferences for Fossil Fuels and Make Sure Polluting Industries Pay for Environmental Cleanup. Democrats say the current tax code includes billions of dollars in subsidies and special foreign tax credits for the fossil fuel industry. Oil and gas companies, for example, can take a tax deduction for a majority of their costs for drilling domestic wells. As part of the president’s commitment to put the country on a path to net-zero emissions by 2050, this proposal eliminates all special preferences. This coincides with Sen. Ron Wyden’s (D-OR) proposal to replace existing provisions in order to equally incentivize all types of clean energy production.
- Ramping Up Enforcement Against Corporations. Over the past decade, audits on large corporations have decreased, from substantially all large corporations to less than half. This proposal pairs tax increases mentioned above with additional IRS funding to ensure the agency is able to increase tax audits on corporations.
This document is intended to provide you with general information regarding Democratic tax proposals. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.
On April 5, Senate Finance Committee Chair Ron Wyden (D-OR), as well as Sens. Sherrod Brown (D-OH) and Mark Warner (D-VA), offered an international tax framework as a starting point to discussions on revamping the current system put in place by the 2017 Tax Cuts and Jobs Act.
Are Wyden and Biden Colliding? While the framework includes some proposals similar to what was outlined by the Biden administration’s American Jobs Plan, there are key differences as well. Additionally, it does not address other proposals that were included in Biden’s plan like the corporate tax rate. In fact, the Wyden-Brown-Warner international tax framework marks a third area where the Finance Committee chairman offers a significantly different approach than President Biden. First, Wyden’s tech-neutral energy tax credits took a different approach than the Biden-House Democrats’ GREEN Act. Second, Wyden’s Mark-to-Market individual tax proposal has not been embraced by the president. Now, Wyden and President Biden are at odds on how to craft the BEAT, FDII and, to a lesser extent, GILTI. At a minimum, working out a common approach will take weeks.
Yellen’s Global Minimum Tax Presser. In addition to Chair Wyden’s international tax framework release, Treasury Secretary Janet Yellen held her first major press conference today urging a global minimum tax rate on corporations. Yellen presented a global minimum tax as a way to prevent companies from relocating to lower-tax jurisdictions, thereby preventing a race to the bottom. Yellen noted that a more level playing field in the tax rate applied to multinational corporations would result in innovation and growth. This message complements Senate Democrats’ international framework and President Biden’s tax proposals to raise the corporate tax rate and double the rate on Global Intangible Low-Taxed Income (GILTI) from 10.5% to 21%.
The Senate Finance Committee is interested in comments and feedback on the Wyden framework no later than April 23. Please contact a Brownstein team member if you are interested in engaging or submitting comments.
Below is an overview of the Senate Finance Democrats’ international tax framework.
I. Senate Democrats’ International Tax Framework
- Discourage Offshoring by Strengthening the Global Minimum Tax for U.S. Multinational Corporations. Democrats contend that the GILTI system gives corporations a huge reduction in the U.S. tax rate on foreign earnings, creating incentives to offshore jobs. To address this, Democrats propose the following solutions:
- Problem: Tax exemption for foreign earnings up to 10% of the adjusted basis of tangible depreciable assets owned abroad (i.e., qualified business asset investment or QBAI) encourages foreign investment, or shutting down U.S. factories to move operations and jobs overseas.
Solution: The framework suggests repealing the exemption.
Brownstein Takeaway: This is similar to what was proposed by the administration in the American Jobs Plan. However, the Organization for Economic Cooperation and Development is pushing for an exemption, similar to what is included in the GILTI. This could lead to a potential misalignment between U.S. tax policy and global policy.
- Problem: The GILTI tax rate on foreign income at half the domestic corporate rate, creating a strong preference for overseas income.
Solution: Shrink the gap between the tax rate on U.S. earnings and foreign earnings to reduce incentives to shift more profit abroad and help level the playing field between multinational corporations and corporations operating primarily in the U.S.
Brownstein Takeaway: The framework questions whether the tax rate on GILTI should equal the U.S. corporate tax rate, or remain at a lower proportion of the U.S. rate (e.g., 75%). Current Democratic proposals suggest a rate between 60% and 100% of the U.S. corporate tax rate. The American Jobs Plan suggests a GILTI rate of 21%, which is about 75% of its proposed U.S. corporate tax rate of 28%. The framework notes that the final rate will depend on decisions with regard to the U.S. corporate rate, base stripping protections and other potential incentives or disincentives.
- Problem: The GILTI’s global tax rate calculation, which encourages income shifting to low-tax jurisdictions.
Solution: The framework proposes a shift to a country-by-country system for applying GILTI. It outlines two potential options:
- expand the existing system for foreign tax credits—with the use of foreign tax credit “baskets”—essentially applying the current GILTI rules separately for each country in which a corporation operates. For example, if a corporation operates in nine countries, it would have nine GILTI “country baskets,” with no aggregation among them.
- divide global income into two groups—low-tax and high-tax. Rather than applying the foreign tax credit system to every country separately, GILTI would only be applied to income from low-tax jurisdictions. This would allow a significant amount of global income to be aggregated. Income from high-tax jurisdictions would be excluded—if a corporation paid a foreign country a tax rate that was above the GILTI rate, it would be excluded from GILTI altogether.
Brownstein Takeaway: Under either option, U.S. multinational corporations could face a significant increase in U.S. tax liability. When combined with Biden’s administration proposal to increase the corporate rate, many U.S. multinationals will face higher tax rates than before TCJA.
- Problem: Foreign tax credit rules interact with GILTI to create disincentives for domestic investments. For example, taxes owed under GILTI increase when a corporation invests in research and development in the U.S. or expands a U.S. headquarters office.
Solution: Treat expenses for research and management that occur in the U.S. as entirely domestic expenses, eliminating foreign tax credit penalties under GILTI and helping retain these activities in the U.S.
Brownstein Takeaway: As a standalone provision, this could encourage additional investment in research activities in the U.S. However, some of the other proposed changes may undermine this effort.
- Deny Companies Expense Deductions for Offshoring Jobs and Credit Expenses for Onshoring. GILTI and Foreign-Derived Intangible Income (FDII) are both contributing factors to moving jobs and equipment offshore, giving companies tax incentives for taking steps that hurt domestic jobs. To address this problem, Democrats propose the following solutions:
- Problem: U.S. companies are penalized for growing their domestic footprint and are incentivized to offshore operations. The FDII allows companies to write off expenses that come from offshoring jobs that are deductible under current law.
Solution: The framework eliminates the deductions for TCJA’s FDII provision. FDII is a portion of a U.S. corporation’s intangible income from foreign sources, and TCJA allows a deduction of a specified percentage of FDII.
Brownstein Takeaway: Similar to the administration’s proposal, the framework eliminates the FDII deduction. It also includes a proposal to create a new tax credit to incentivize research and development.
- Problem: The current FDII does not sufficiently incentivize domestic research and development.
Solution: Rebrand the current FDII as “foreign derived innovation income” focused on U.S. innovation to reward companies that continually invest in the economy and strengthen the workforce. To do so, FDII’s “deemed intangible income” would be replaced with a new metric—deemed innovation income. The new “DII” would be an amount of income equal to a share of expenses for innovation-spurring activities that occur in the U.S., such as research and development and worker training. It would only apply if the expense were for U.S. activities.
Brownstein Takeaway: This proposal is similar to the OECD’s Base Erosion and Profit Shifting (BEPS) Project Action 5, which outlines a modified nexus standard for IP regimes. The Action 5 proposal ties tax preferences for IP and other intangible assets to research and development spending.
- Problem: The current FDII allows companies that hold intellectual property in the U.S. to tax profits from sales to foreign customers at a lower rate of 13.125%. However, Democrats contend that this incentivizes corporations to move operations abroad since the GILTI rate is lower.
Solution: Equalize the GILTI and FDII rates. Democrats believe that as a result of both provisions, a company moving offshore increases its ability to earn tax-free income offshore and increases its FDII deduction, encouraging offshoring.
Brownstein Takeaway: The FDII and GILTI were intended to work together as a “carrot” and “stick” approach to equalizing the treatment of foreign earnings. Equalizing the GILTI and FDII rates might help incentivize domestic investments, but this will largely depend on other politics enacted by the administration. For example, will a higher corporate rate or a potential book profits tax serve as a disincentive?
- Reconfiguring the BEAT. The base erosion and anti-abuse tax (BEAT) rules were created to target base-eroding activities conducted by very large corporations. The BEAT is a minimum tax imposed on corporations that make certain deductible payments to foreign-related parties. Democrats have criticized the BEAT as failing to capture revenue from income stripping of foreign companies, while also diminishing the value of U.S. investments in things like renewable energy, low-income housing and job creation in low-income neighborhoods as a result of how tax liability is calculated. The framework includes the following proposals to address this issue.
- Problem: Corporations currently pay BEAT to the extent that the tax exempts its ordinary income tax liability. However, the calculation of BEAT requires corporations to calculate tax liability without adding back any tax credits under Sec. 38 of the tax code. Democrats believe the BEAT should be reformed to capture more revenue from companies eroding the U.S. tax base, and use that revenue to support companies that are investing in America.
Solution: Restore the full value of tax credits that support domestic investment and opportunity.
Brownstein Takeaway: The framework does not include details on how Democrats would change the calculation of the BEAT to achieve this result. It is also unclear as to how the desire to restore the value of certain tax credits stacks up with tax proposals from the administration—for example, a minimum book profits tax. Based on how such a tax is structured, it could be at odds with the desired effects of a BEAT restructuring.
- Problem: Addressing disincentives for domestic investment in the BEAT could result in further tax decreases for corporations. Additionally, it could result in a loss of revenue since the BEAT was intended to be a revenue raiser.
Solution: The current BEAT applies a 10% tax rate to both “regular” income and to income tied to “base erosion payments.” As an alternative, it creates a bifurcated system that would apply different tax rates to “regular” income and income tied to “base erosion payments”—with regular taxable income still being subject to the 10% rate.
II. What Elements of the Biden Tax Plan as Outlined in the American Jobs Act Were Excluded from the Senate Framework?
- Set the Corporate Tax Rate at 28%. The President’s tax plan will increase the corporate tax rate from 21% to 28%. When the corporate tax rate was reduced by the Tax Cuts and Jobs Act (TCJA), Democrats have criticized that it was not accompanied by a lasting boost in jobs or investment. Senate Finance Committee Chair Ron Wyden (D-OR) has called for Congress to adopt a framework based on two propositions: (1) multinationals must pay their “fair share” of taxes, and (2) the tax code should reward companies that invest in the U.S. and create good-paying jobs. Republicans counter that corporate rate increases will be borne by American workers through reduced wages and lower retirement account values. The nonpartisan Joint Committee on Taxation estimates that 25% of the corporate income tax is borne by workers.
- Prevent U.S. Corporations from Inverting or Claiming Tax Havens as Their Residence. Under current law, U.S. corporations can acquire or merge with a foreign company to minimize U.S. taxes by claiming to be a foreign company, even though their places of management and operations are within the U.S. President Biden is proposing to make it harder for U.S. corporations to invert. This will backstop the other reforms that should address the incentive to do so in the first place. Both parties have made efforts in the past and enacted legislation and regulation to curb corporate inversions.
- Enact a Minimum Tax on Large Corporations’ Book Income. The administration has proposed a 15% minimum tax on the income corporations use to report their profits to investors (book income). The TCJA repealed the alternative minimum tax for corporations. Democrats intend to target companies that reported large net profits while paying little or no federal income tax. However, few details on the minimum book tax have been provided, and critics claim it will add unnecessary complexity to the tax code.
- Eliminate Tax Preferences for Fossil Fuels and Make Sure Polluting Industries Pay for Environmental Cleanup. Democrats say the current tax code includes billions of dollars in subsidies and special foreign tax credits for the fossil fuel industry. Oil and gas companies, for example, can take a tax deduction for a majority of their costs for drilling domestic wells. As part of the president’s commitment to put the country on a path to net-zero emissions by 2050, this proposal eliminates all special preferences. This coincides with Sen. Ron Wyden’s (D-OR) proposal to replace existing provisions in order to equally incentivize all types of clean energy production.
- Ramping Up Enforcement Against Corporations. Over the past decade, audits on large corporations have decreased, from substantially all large corporations to less than half. This proposal pairs tax increases mentioned above with additional IRS funding to ensure the agency is able to increase tax audits on corporations.
This document is intended to provide you with general information regarding Democratic tax proposals. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.