International Tax in 2021: Are You Prepared?by
The 2020 election and resulting change in administrations will likely bring about some new tax policies. For instance, President-elect Biden has mentioned raising taxes for US corporations, which could result in some moving overseas. Are you prepared to advise clients on the topic of international taxes in 2021? Expert Josh Gelernter of Withium discusses what you should be ready for.
It is mid-November 2020. Election Day has come and gone, but there is plenty still to be decided. It appears we have a President-elect, as the news agencies have called the presidential race in favor of Joe Biden. While President Trump is trying to contest the validity of the results in several key swing states, in all likelihood, come January 20, 2021, Mr. Biden will be sworn into office as the 46th president of the United States.
The Democratic Party, after taking over the majority of the House of Representatives during the 2018 mid-term elections, was poised to increase its stranglehold on the lower chamber. In fact, however, as of the writing of this article, the Republicans have chipped away at the Democratic majority, picking up 6 seats, with 15 seats still to be decided. Regardless of the outcome of those races still pending, the Democrats will retain a majority of the House of Representatives.
It is in the Senate where things get dicey. In recent days, races in Alaska and North Carolina have been called in favor of Republican incumbents. Both Georgia races are headed for run-off elections in January. Should the Democrat party win both, the Senate will be split 50-50 with Vice President-elect Kamala Harris giving the Democrats the decisive vote. If the Republicans win either of the Georgia races, they will retain control of the Senate, and the country will have a divided government for at least the first two years of the Biden administration.
On the campaign trail, Mr. Biden pledged that one of his first tasks after being inaugurated would be to undue the Trump administration’s tax cuts brought about by the Tax Cuts and Jobs Act of 2017. Perhaps most dramatically, Mr. Biden has discussed raising the corporate income tax rate from its current 21 percent up to 25 or even 28 percent. Over the past couple of years, many companies that previously considered moving assets and operations outside of the US were incentivized to keep those operations and assets in the US due to the lower corporate tax rate and the FDII deduction. While the Biden tax plan seems to keep the FDII deduction, the rise of the corporate tax rate would remove an incentive for US companies to maintain their operations domestically.
To combat this, the Biden proposal contains an amendment to the GILTI rules. Under current law, US shareholders of controlled foreign corporations (“CFCs”) are subject to an effective rate of 10.5 percent on the earnings of the CFC. The Biden tax proposal would double the effective rate to 21 percent by amending the 50 percent deduction provided by Section 250. The proposal would also remove the tax-free return on 10 percent of the CFC’s Qualified Business Assets Income (“QBAI”) and require that GILTI be calculated on a country-by-country basis. Furthermore, the Biden proposal contains more robust alternative minimum tax rules that would claw back the benefits afforded by the FDII deduction.
Mr. Biden also has called for a 10 percent offshoring surtax, a penalty on a US company’s profits derived from overseas production of goods or performance of services that are then sold domestically. The 10 percent surtax, applied to a 28 percent corporate tax rate, would mean that income is subject to an effective tax rate of 30.8 percent. In contrast, the Biden proposal calls for a so-called “Made in America” tax credit that would offset 10 percent of investment costs geared toward creating US-based jobs specifically in the manufacturing sector. The credit incentivizes companies to reopen, retool or expand manufacturing facilities in the US and to otherwise increase expenditures aimed at bringing offshore jobs back to the US. Interestingly, the proposal provides that this credit can be claimed immediately upon incurring the expense; the taxpayer would not need to wait till it files its annual tax return in order to benefit from this proposed credit.
Abroad, the Organization for Economic Cooperation and Development (OECD) continues its work to create a global minimum tax under the challenges that arise from the continued digitization of the global economy. The Trump administration did not hide its disdain for those efforts and acted swiftly in retaliation against countries that announced legislation that negatively impacted US companies doing business overseas. Mr. Biden has not indicated how he intends to interact with the OECD. On non-tax matters, he has indicated that he will bring the US back into the Paris climate accords and plans to halt the US exit from the World Health Organization. It remains to be seen how the Biden administration will deal with the OECD and any future recommendations it promulgates.
The main question to be decided over the first few months of the Biden administration is whether the President-elect will be able to implement any of the changes he has championed throughout his campaign. As the economy continues to struggle due to the ongoing pandemic and a potential second shutdown looming, it appears that it will be increasingly difficult for Mr. Biden to undo the tax cuts of the Trump administration. When President Obama was inaugurated in 2009, the Democrats held a strong majority in both the Senate and the House, which led to the passing of the Affordable Care Act. When President Trump was inaugurated in 2017, the Republicans controlled both the Senate and the House, which led to the passing of the Tax Cuts and Jobs Act. Without control of both Houses, President-elect Biden may find it difficult to have his agenda actualized.
There may be bipartisan support for some of the family-focused proposed tax changes, such as the Child Tax Credit and an expansion of the Earned Income Tax Credit, but the sweeping reform envisioned by the Democrats during the height of the anticipated “Blue Wave” will likely not occur in the foreseeable future. It remains to be seen if Democratic lawmakers will be able to bring anything to the negotiating table that would entice their Republican counterparts to acquiesce on the bigger-ticket items the Democrats want implemented.
One thing both Democrats and Republicans can agree upon is encouraging the return of supply chain activities to the US. As the country continues to combat the ongoing effects of the Covid-19 pandemic, the prospect of manufacturing medical devices and personal protection equipment domestically should be something both sides of the aisle support. The elected officials should find a way to put politics aside and come to some agreement that will entice US multi-national corporations to domesticate some of their offshore operations.