Biden's FY 2022 budget and Treasury Green Book – additional details on international tax proposals

On May 28, 2021, the Department of the Treasury released its General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, commonly referred to as the Green Book. The 107-page document provides additional details on the White House’s American Jobs Plan, initially outlined on March 31 of this year, and its American Families Plan.

General corporate income taxation

The revenue proposals reaffirm previously announced proposals to increase the corporate income tax to 28 percent for taxable years beginning in 2022 (a blended rate would apply to fiscal years beginning in 2021) and introduce a 15 percent minimum tax on book earnings of large corporations.

International taxation – in general

The international tax proposals outline in more detail previously announced proposals, including the proposal to increase the GILTI tax rate to 21 percent (by reducing the Section 250 deduction from 50 percent to 25 percent); the proposal to overhaul the anti-inversion regime by treating a foreign-acquiring corporation as a US corporation based on a reduced 50 percent (rather than 80 percent) continuing ownership threshold; the proposal to repeal of the FDII regime; and the proposal to replace the BEAT regime with the SHIELD regime, which would disallow deductions to domestic corporations by reference to the effective tax rate on amounts paid to foreign entities that are members of the same financial reporting group as the domestic payor.

The Green Book also includes proposals not previously announced by the Biden Administration. These include the proposal to limit foreign tax credits on income from the sale of hybrid entities and an additional restriction on related party interest expense deductions (paid to members of the taxpayer’s “financial reporting group”). 

Effective date: In general, the proposals would be effective for tax years beginning on or after January 1, 2022, with proration for fiscal year taxpayers resulting in the new rate applying to the 2022 portion of the fiscal year.  The proposal to replace the BEAT with the SHIELD would generally apply to tax years beginning on or after January 1, 2023. The overhaul of the anti-inversion regime would be effective for transactions completed after enactment, departing from the typical approach where transactions that have been executed but not yet closed are grandfathered. 

International taxation – additional details

GILTI regime

The section 250 deduction would be reduced to 25 percent to achieve a 21 percent effective GILTI rate, and the QBAI deduction would be eliminated. The foreign tax credit limitation for the GILTI basket (as well as the branch basket) would be calculated on a jurisdiction-by-jurisdiction basis. The proposal would eliminate the subpart F high tax exemption, operationally resulting in the elimination of the GILTI high tax exclusion.

Notably:

• The proposals would not include a jurisdiction-by-jurisdiction determination for the general nor the passive basket.
• The GILTI high tax exclusion would also appear to be eliminated as Treasury provided this exclusion by extending the statutory high-tax exclusion under subpart F.
• The proposals would not include a modification to the 20 percent “haircut” on FTCs attributable to tested income.

Effective date: The GILTI regime modifications are proposed to be effective for tax years beginning after 2021 for both calendar and fiscal year taxpayers.

Limitation on inversions

The proposals would broaden the definition of an inversion transaction, as well as make modifications to the various tests within the inversion statute, with the objective of expanding the scope of potential transactions that would be treated as inversions.   Importantly, all transactions treated as inversions would result in the foreign acquiring corporation being treated as a domestic corporation. 

Effective date: Changes would be effective for transactions completed after the date of enactment.

Repeal of FDII

The proposals would repeal FDII. No additional detail is provided other than announcing that the resulting revenue will be used to “encourage” R&D.

Effective date: The repeal of FDII would be effective for tax years beginning after 2021.

Replacement of the BEAT with the SHIELD

The Green Book provides the following detail regarding the SHIELD proposal:

• The SHIELD would apply to financial reporting groups with greater than US$500 million in global annual revenues, determined based on a group’s consolidated financial statement.
• A deduction would be disallowed by reference to all payments made to “low-taxed members” of the taxpayers’ “financial reporting group.”
• The designated minimum tax rate (for purposes of defining a “low-taxed member”) would be determined by the rate agreed under the OECD’s Pillar Two or the proposed GILTI rate of 21 percent before the Pillar Two rate is agreed upon.
• A financial reporting group for these purposes would be any group of entities that prepares consolidated financial statements under GAAP, IFRS or other standard, which includes at least one US corporation, partnership or foreign entity with a US trade or business.
• The SHIELD provisions would apply differently to payments made to low-taxed members and other members of the financial reporting group.

Effective date: The proposal to repeal the BEAT and replace with SHIELD would be effective for tax years beginning after 2022.

Limit foreign tax credits from sales of hybrid entities

The source and character, for foreign tax credit purposes, of certain transactions related to hybrid entities would be treated as a disposition of stock rather than assets (applying the principles of Section 338(h)(16)).

Effective date: Effective for transaction occurring after the date of enactment

Interest expense limitations

Generally, the proposals would impose a limitation to interest expense deductibility for US purposes if an entity part of a “financial reporting group” has a higher proportion of net interest expense than earnings within its financial reporting group.

Effective date: This proposal would be effective for tax years beginning after 2021.

15 percent tax on book earnings

The proposals would impose a 15 percent “minimum tax” on corporations with book income in excess of USD 2 billion. The book income tax would be the excess of a “tentative” minimum tax over regular tax. The tentative minimum tax would equal 15 percent of worldwide pre-tax book income (without considering book NOLs), minus certain business credits (R&D, clean energy and housing credits) and foreign tax credits.

Effective date: This proposal would be effective for tax years beginning after 2021.

Incentives for onshoring jobs and business activities

The proposals would provide a 10 percent business credit equal to eligible expenses related with onshoring a US trade or business.

Effective date: This proposal would be effective for expenses paid or incurred after the date of enactment.

DLA Piper’s Tax team is closely following the latest international tax reform proposals.  To learn more about the implications of this trend and the topics covered in this alert, please contact any of the authors or your DLA Piper relationship attorney.

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