Implications of recent Treasury Green Book tax proposals

Yesterday, the Biden Administration released its Green Book, a package of tax proposals to accompany the proposed budget for the US for fiscal year 2023, which begins on October 1.  While these proposals are simply the Administration’s preferred markers to kick off the congressional appropriations process – and require further congressional action to take effect – they are, historically, annual documents that Congress looks to as it undertakes legislative action going forward. Taken together, the Treasury Department concludes that these proposals would raise more than $2.5 trillion over the ten-year budget cycle, and those revenues are included in the budget plan.

The Administration’s tax proposals take on renewed significance as recent statements by West Virginia Democratic Senator Joe Manchin have indicated that he may be open to renewing negotiations on a budget reconciliation package, currently estimated to cost around $1.5 trillion to fund energy, environmental, healthcare and some limited social programs.  Senator Manchin’s objections to the pending Build Back Better Act (BBBA) at 2021 year’s end, which contained Democratic priorities and required the votes of all fifty Democratic senators, ultimately prevented that legislation from proceeding to a vote in the Senate. 

Discussed in greater detail below, the Administration’s FY2023 Green Book contains some proposals that have a good chance of being included in a new BBBA package, and others that reflect the president’s 2020 campaign positions but have been rejected previously by a Democratic senator.  The latter group includes any proposals to raise individual and corporate rates and to tax unrealized capital gains.

Please note that the Green Book does not contain all of the proposed tax increases that are in the currently-pending BBBA version before the House and Senate, and it is entirely possible that other tax increases will make their way into a new BBBA package in the coming weeks if negotiations do, in fact, restart in earnest.

Timeline

It is generally assumed that a new BBBA package will begin to emerge in late April or early May after the pending Supreme Court nomination is completed and will be considered by Congress before the start of the Congressional August recess.

Congressional Democrats have the ability, through the budget reconciliation process, to pass legislation on their own using a simple majority vote in the Senate and that would raise taxes and push forward social programmatic spending priorities. While Democratic senators were unable to reach a consensus on the terms of the given legislation largely due to the objections of Senator Manchin and Arizona Senator Kyrsten Sinema, the political landscape may be changing.  Both senators now appear likely to find common ground, and, while many House Democrats may be disappointed that the final product may be smaller and less focused on social spending, there are recent indications they may be ready to compromise. 

Of particular note, however, is Senator Manchin’s consistent focus on allocating more of any reconciliation or BBBA package’s raised revenue toward deficit reduction. The stance begs the question as to whether the proposed increase in the corporate topline rate, increase in the global intangible low-taxed income (GILTI) rate and continued focus on social programmatic spending (if left without amendment) will continue to dampen the legislation’s prospects, or if Senator Manchin’s colleagues will attempt to meet him in the middle on revising these aspects of the BBBA, or both.

Given this context and the need for Democrats to secure a legislative “win” in passing BBBA in advance of November elections, these proposals are worth considering carefully, and affected taxpayers are encouraged to make their views known to policymakers and their staffs promptly.  If a modified version of BBBA does emerge in the summer, it would need to move through the legislative process quickly in order to meet the probable shift in focus to the midterm elections, likely in September.

Key proposals

While the majority of the Green Book focuses on provisions impacting domestic aspects of the Code, the key proposals of note on the corporate and international side of the Green Book are as follows:

• Corporate rate increase: Increase in topline rate to 28 percent, with an increase in the GILTI effective rate to 20 percent.
• Base Erosion and Anti-Abuse Tax (BEAT): Repeal the BEAT and replace it with an Under Profit Tax Rule (UPTR) that is consistent with the rule found in the Pillar Two Model Rules. Generally, the UPTR ensures that a minimum per-jurisdiction rate of tax of 15 percent is paid on income earned in each jurisdiction in which foreign-based multinationals operate.
  • Under the UTPR, both domestic corporations that are part of a foreign-parented multinational group and domestic branches of foreign corporations would be disallowed US tax deductions in an amount determined by reference to low-taxed income of foreign entities and foreign branches of the financial reporting group. Specifically, the domestic group members would be disallowed US tax deductions to the extent necessary to collect the hypothetical amount of top-up tax required for the financial reporting group to pay an effective tax rate of at least 15 percent in each foreign jurisdiction in which the group has profits.
• Tax incentives for locating jobs in the US: Create a new general business credit equal to 10 percent of the eligible expenses paid or incurred in connection with onshoring a US business. Onshoring a US business means (i) reducing or eliminating a business or line of business currently conducted outside the US and (ii) starting up, expanding or moving the same business within the US, and that (iii) this action results in an increase in US jobs. While the eligible expenses to onshore a US business may be incurred by a foreign affiliate of the US taxpayer, the tax credit would be claimed by the US taxpayer.
• Denial of deductions for moving jobs outside the US: Disallow deductions for expenses paid or incurred in connection with offshoring a US business. In addition, no deduction would be allowed against a US shareholder’s GILTI or subpart F income inclusions for any expenses paid or incurred in connection with moving a US business outside the US. The rule is meant to reduce tax benefits associated with US companies moving jobs outside the country.
• Tax carried (profits) interests as ordinary income: The proposal would treat as ordinary income the carried interest of a partner in an investment partnership regardless of the character of the income at the partnership level. The proposal would also require partners receiving a carried interest to pay self-employment tax. These proposals would apply if the partner’s taxable income (from all sources) exceeds $400,000.
• Eliminate basis shifting through partnership: In the case of a distribution of a partnership property that results in a step-up of basis of the partnership’s non-distributed property (because the partnership has a section 754 election in effect), proposed law would apply a matching rule to prohibit any partner in the distributing partnership that is related to the distributee-partner from benefiting from the partnership’s basis step-up until the distributee-partner disposes of the distributed property in a fully taxable transaction.
• Conform the definition of “control” with a corporate affiliation test: Confirm the control test under section 368(c) with the affiliation test under section 1504(a)(1) of the Code. Currently, control under section 368(c) is defined as ownership of stock possessing at least 80 percent of the total combined voting power of all classes of voting stock and at least 80 percent of the total number of shares of each class of outstanding nonvoting stock of a corporation. The affiliation test under the section 1504(a)(1) requires ownership of stock possessing at least 80 percent of total voting power of the stock of the corporation and has a value of at least 80 percent of the total value of the stock of the corporation.
• Expand access to retroactive qualified electing fund (QEF) elections: Modify section 1295(b)(2) to permit taxpayers to make a retroactive QEF election in a broader range of fact patterns without requesting the consent of the Internal Revenue Service (IRS) in the context of passive foreign investment companies (PFICs).
• Expand the scope of tax-free loans of securities to include digital assets: The proposal would amend the loan nonrecognition rules to generally include loans of actively traded digital assets recorded on ledgers.
• Improve tax administration and compliance: The proposal would include measures to enhance accuracy of tax information by expanding the Secretary’s authority to require electronic filing of forms and returns and improve information reporting for items subject to withholding.

For more information, please contact any of the authors.