Democratic plans to reform international tax rules to pay for infrastructure evolved last week as President Joe Biden released additional information on his tax plan and top Senate tax writers released their own international reform white paper. Biden narrowed the scope of his proposed minimum tax on book income, while Senate Finance Committee Chair Ron Wyden, D-Ore., endorsed major aspects of Biden’s plan while breaking from it in others.
Biden’s Made in America Tax Plan would raise taxes to cover more than $2 trillion in infrastructure with provisions to:
- Raise the corporate rate to 28%
- Impose a 15% minimum tax on financial statement income
- Raise the tax rate on global intangible low-taxed income (GILTI) to 21% and reform it
- Repeal the foreign derive intangible income (FDII) deduction
- Replace the base erosion and anti-abuse tax (BEAT)
The tax plan is light on details, but Treasury did release a policy paper narrowing the proposed impact of the 15% minimum tax to companies with $2 billion in financial statement income and providing slightly more information on the proposed BEAT replacement. The tax plan represents only the first stage in what could be a long and contentious legislative process, and Congress will have significant influence shaping anything this ultimately enacted.
Wyden introduced a white paper on international tax reform along with Sens. Sherrod Brown, D-Ohio, and Mark Warner, D-Va., that aligns closely with Biden’s international reform but with several key distinctions.
Biden proposes raising the GILTI rate to 21% and applying it on a country-by-country basis, while repealing the exclusion for qualified business asset investment (QBAI) to make it operate more like a true global minimum tax. The Senate white paper offers two options for the GILTI rate, raising it to match the full corporate rate or imposing it at 75% of the corporate rate. The Senate proposal likewise considers two options for foreign tax credit rules, weighing Biden’s country-by-country approach against the creation of two baskets of high- and low-taxed income. High-tax income would be subject to a mandatory high-tax exclusion similar to the election in the current GILTI high tax regulations. Low-tax income would be grouped together and presumably would have limited FTC coverage, as “excess credits” from high-taxed income would not be available. The Senate proposal also endorsed repealing the QBAI exception.
While Biden’s plan would repeal FDII altogether, Wyden is proposing to repeal the FDII QBAI rules and reform the deduction to incentivize “innovation income” instead of “intangible income.”
The Biden plan would replace BEAT with a new regime denying deductions to related parties in countries not in alignment with a potential agreement in the Organisation for Economic Co-operation and Development on a global minimum tax. The Biden administration is pushing hard for an agreement, but if it cannot be reached, Treasury clarified that the threshold for his new proposal would be the U.S. GILTI rate. The Senate proposal envisions retaining BEAT and even allowing full value for credits and addressing an FTC issue. It also, however, discusses strengthening the regime by raising the rate.
These proposals will continue to evolve as lawmakers get into the difficult business of legislating. More information will likely become available as the Senate Finance Committee begins its work and with the potential release of a Treasury “greenbook” on budget tax proposals.
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