By Anthony Diosdi
With the Democrats gaining control of the executive and legislative branch of the government, there will likely be major changes to the Tax Code. Recall that in the 2017, the Tax Cuts and Jobs Act overhauled the corporate and international systems. The Tax Cuts and Jobs Act reduced the corporate income tax rate from a maximum rate of 35 percent to 21 percent. The Tax Cuts and Jobs Act also enacted the global low-taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) tax regimes. President-elect Joe Biden seeks a major overhaul of the U.S. corporate income tax system. The Biden team also proposes significant changes in the way cross-border transactions are taxed.
We will begin with a discussion regarding the proposed corporate tax rate increase. During the campaign. President-elect Joe Biden proposed to elevate the corporate income tax rate from 21 percent to 28 percent. However, an increase in the corporate tax rate from 21 to 28 percent will make U.S. multinational corporations less competitive than their foreign peers. This will likely become the nucleus of strong political debates in the very near future. Sensing this hot political topic, President-elect Joe Biden recently softened to a rate change to the mid-20s. Given the sensitive nature of this topic, it is possible that corporate tax rates may only increase slightly, if at, over the next four years.
The Tax Cuts and Jobs Act did not just reduce the corporate tax rate, the Tax Cuts and Jobs Act also eliminated the corporate alternative minimum tax. The Biden team has proposed to reinstate the corporate alternative minimum tax. Under the Biden plan, the corporate alternative minimum tax would be reinstated to apply to book income similar to the formation that existed prior to the repeal of this regime by the Tax Cuts and Jobs Act. However, the tax rate would be at 15 percent versus the pre-Tax Cuts and Jobs Act 20 percent rate. The Biden plan would also have a more generous threshold for application of this alternative minimum tax for corporations with defined “book profits” in excess of $100 million as compared to the pre-Tax Cuts and Jobs Act threshold of $40,000.
Besides proposing a corporate tax increase, the Biden team has suggested significant changes in the area of cross-border taxation will take place in 2022. President-elect Joe Biden has presented a new penalty tax designed to incentive U.S.-based multinationals to stop the practice of “round-tripping.” “Round-tripping” is a practice whereby U.S.-based multinational corporations uses U.S.-developed intellectual property to manufacture offshore and sell the same products back in the United States. The Biden team has discussed a 10 percent surtax on profits of any overseas production by U.S. companies back to the United States. This surtax on profits may not only apply to manufactured goods, but also to call centers and certain services. The practice of “round-tripping” has been the target of both Democrats and Republicans over the years. Thus, the surtax has a good chance of being enacted into law before the 2022 tax year.
In addition, the President-elect Joe Biden has indicated that the GILTI rate may double from 10.5 percent to 21 percent. An alternative minimum tax may also be established on all foreign income. There may also be different GILTI tax rates depending on the country foreign source income is derived. To counterbalance these tax increases, the President-elect Joe Biden is proposing a “Made in America” tax credit to offset any GILTI tax increases. This credit would be in the form of a 10 percent “advanceable credit” to companies making investments into domestic manufacturing. Furthermore, the President-elect Joe Biden has proposed to repeal GILTI’s QBAI.
Finally, the Biden team has discussed making the following additional changes to the corporate and international taxing regimes:
1. Tighten anti-inversion rules.
2. Impose a financial risk fee on financial institutions with more than $50 billion in assets.
3. Disallow deductions for direct-to-consumer prescription drug advertising.
4. A 10 percent tax credit for new investments in manufacturing.
5. Expand clean energy tax incentives.
For individuals, estate and gift taxes, the Biden team has proposed the following significant changes to the Internal Revenue Code:
1. Apply 12.4 percent Social Security payroll tax to individual earnings above $400,000.
2. Tax capital gains and dividends at ordinary tax rates for individuals earning more $1 million annually.
3. Eliminate the step-up basis rules for capital gains exceeding $100,000 at death or by gift, other than to a spouse or charity.
4. Limit the tax benefit of itemized deductions.
5. Restore the itemized deduction for state taxes.
6. Restore the estate, gift, and GST rules to 2009 levels or a unified credit of $3.5 million dollars per person.
7. Phase out the 20 percent qualified business income deduction above $400,000 of income.
8. Increase income to rates to 39.6% for income above $400,000.
9. Restore limitations on itemized deductions above $400,000 of income
10. Increase child and dependent care credit.
11. Enact a first-time homebuyer credit.
12. Expand retirement savings incentives.
13. Provide a tax credit for family caregivers.
Obviously, changes to the Tax Code by the Biden team will have a significant impact on millions of businesses and individuals. We will be carefully monitoring any proposed legislation in regards to international, corporate, estate, and gift taxes. As more information becomes available, we will be blogging extensively on these topics and tax planning strategies in the very near future.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. As an international tax attorney, Anthony Diosdi has substantial experience advising U.S. multinational corporations and other international tax practitioners plan for and calculate GILTI inclusions.
Diosdi Ching & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.