On May 28, 2021, the U.S. Department of the Treasury released its general explanations (the “Greenbook”) of the Biden Administration’s fiscal year 2022 revenue proposals. The Greenbook provides additional detail regarding the tax proposals previously included in President Biden’s “Made in America Tax Plan” and “American Families Plan” that we discussed in prior client updates (including those available here and here), as well as some new proposals.
While it remains to be seen whether the proposals in the Greenbook will be enacted into law, they may have significant effects on corporate taxpayers and their shareholders. Some of the proposals that may be of particular interest to such taxpayers are discussed below.
General Corporate Tax Proposals
The Greenbook proposes to increase the corporate income tax rate from 21% to 28%, effective for taxable years beginning after December 31, 2021. For taxable years beginning after January 1, 2021 and before January 1, 2022, the tax rate would be equal to 21% plus 7% times the portion of the taxable year that occurs during 2022.
The Greenbook also proposes a 15% minimum corporate income tax on worldwide pre-tax book income (i.e., the net income reported to shareholders) for corporations with such income in excess of $2 billion, effective for taxable years beginning after December 31, 2021. In particular, under this proposal, the book tentative minimum tax would be equal to 15% of worldwide pre-tax book income (calculated after subtracting book net operating loss deductions from book income), less applicable general business tax credits (including R&D, clean energy and housing tax credits) and foreign tax credits. The book income tax would then be equal to the excess, if any, of the book tentative minimum tax over the regular tax. Taxpayers would be allowed to claim a book tax credit (generated by a positive book income tax liability) to reduce regular tax in future years, but not below the book tentative minimum tax in that year.
International Tax Proposals
The Greenbook includes numerous proposals to reshape the international tax landscape. Some of the highlights include the following:
- Increase the U.S. tax imposed on a U.S. shareholder’s global intangible low-taxed income (“GILTI”) by expanding the GILTI tax base by eliminating the exemption for a 10% return on qualified business asset investment, increasing the GILTI tax rate from a minimum rate of 10.5% to 21% and calculating GILTI on a jurisdiction-by-jurisdiction basis.
- Repeal the base erosion anti-abuse tax (“BEAT”) and replace it with the Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”) rule, under which certain domestic corporations or branches would not be allowed a deduction for any payment that is directly made (or, in certain cases, deemed to be made) to a member of their financial reporting group whose income is subject to an effective tax rate below an internationally agreed global minimum rate (or, if no such rate has been agreed upon, the 21% GILTI minimum tax rate under the proposal).
- Significantly expand the anti-inversion rules.
- Restrict interest deductions for disproportionate borrowing in the United States by limiting the interest deductions of an entity that is a member of a multinational financial reporting group if the member’s net interest expense for financial reporting purposes is greater than its proportionate share of the group’s net interest expense reported on the group’s consolidated financial statements. Alternatively, if the member fails to substantiate its proportionate share of the group’s net interest expense for financial reporting purposes, or the member so elects, the member’s interest deduction would be limited to its interest income plus 10% of its adjusted taxable income (as defined under Section 163(j)).
- Repeal the deduction for foreign derived intangible income (“FDII”) and use the resulting revenue to “encourage R&D.”
These and other proposals related to international tax are discussed in greater detail here.
The Greenbook proposes to repeal many tax preferences for fossil fuels (including, for example, the expensing of intangible drilling costs, the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project, the marginal well production credit, percentage depletion for oil and gas wells and two-year amortization of independent producers’ geological and geophysical expenditures) and reinstate the Superfund excise taxes that expired in 1996 at double the previous rates. In addition, the Greenbook proposes to establish, extend or enhance various tax incentives for clean energy. For additional details regarding these and other energy-related tax proposals, see our client updates here and here.
Tax Administration Proposals
Included in the Greenbook are a variety of proposals related to tax reporting and administration that may impact corporate taxpayers or their shareholders, including requiring electronic filing of corporate returns for corporations with $10 million or more in assets or more than 10 shareholders and imposing secondary liability on shareholders to collect unpaid income taxes of certain corporations involved in “Intermediary Transaction Tax Shelters” under Notice 2001-16. Please see our client update here for additional information on the tax administration proposals.
Shareholder-Level Tax Proposals
The Greenbook proposes to raise taxes on shareholders of corporations by increasing the top federal individual income tax rate on capital gains and dividends to 39.6% (plus the 3.8% Medicare tax) to the extent that the taxpayer's adjusted gross income exceeds $1 million for the taxable year ($500,000 for married filing separately), indexed for inflation after 2022. The Greenbook explains that this increase would be effective for gains realized after the date on which the proposal was announced, which is understood to refer to April 28, 2021, the date on which President Biden announced this proposal as part of the American Families Plan.
In addition, the Greenbook proposes to increase taxes on S corporation shareholders for taxable years beginning after December 31, 2021 by broadening the application of self-employment tax to all ordinary business income (other than certain types of income that are exempt from self-employment tax, such as rent, dividends and capital gain) derived from S corporations for which the shareholder materially participates in the business, to the extent the shareholder’s income exceeds certain threshold amounts. The proposal would also expand the 3.8% Medicare tax to include all business income and gain that is not otherwise subject to employment taxes for taxpayers with adjusted gross income in excess of $400,000 for the taxable year.We will continue to monitor developments with respect to potential federal tax legislation and will provide further updates as appropriate. In the meantime, Baker Botts would be pleased to assist you in your analysis of these proposals.
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