The Budget proposes to increase the income tax rate for C corporations from the existing rate of 21 percent to 28 percent. The proposal would be effective for taxable years beginning after December 31, 2021.
US President Joe Biden’s first Budget, released on May 28, seeks to increase the corporate income tax rate, revise the global minimum tax regime, disallow deductions attributable to exempt income, and limit inversions.
Corporate income tax rate
The Budget proposes to increase the income tax rate for C corporations from the existing rate of 21 percent to 28 percent. The proposal would be 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 percent plus seven percent times the portion of the taxable year that occurs in 2022.
Revisions to global minimum tax regime
According to the proposal, the qualified business asset income (QBAI) exemption would be eliminated, so that the US shareholder’s entire net controlled foreign corporation (CFC) tested income is subject to US tax.
Second, the section 250 deduction for a global minimum tax inclusion would be reduced to 25 percent, thereby generally increasing the US effective tax rate under the global minimum tax to 21 percent under the proposed US corporate income tax rate of 28 percent.
Third, the “global averaging” method for calculating a US shareholder’s global minimum tax would be replaced with a “jurisdiction-by-jurisdiction” calculation. Under the new standard, a US shareholder’s global minimum tax inclusion and, by extension, residual US tax on such inclusion, would be determined separately for each foreign jurisdiction in which its CFCs have operations.
Disallowing deductions attributable to exempt income
The proposal would expand the application of section 265 to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction.
The proposal would provide rules for determining the amount of disallowed deductions when only a partial deduction is allowed under section 245A with respect to a dividend or a partial section 250 deduction with respect to a global minimum tax inclusion.
According to the proposal, the definition of an inversion transaction would be broadened by replacing the 80 percent test with a greater than 50 percent test and eliminating the 60 percent test.
The proposal would also provide that, regardless of the level of shareholder continuity, an inversion transaction occurs if (a) immediately prior to the acquisition, the fair market value of the domestic entity is greater than the fair market value of the foreign acquiring corporation, (b) after the acquisition the expanded affiliated group is primarily managed and controlled in the US, and (c) the expanded affiliated group does not conduct substantial business activities in the country in which the foreign acquiring corporation is created or organized.
The Budget also seeks to replace the base erosion anti-abuse tax (beat) with the stopping harmful inversions and ending low-tax developments (SHEILD) rule. Specifically, under the SHIELD rule, a deduction (whether related or unrelated party deductions) would be disallowed to a domestic corporation or branch, in whole or in part, by reference to all gross payments that are made (or deemed made) to “low-taxed members,” which is any financial reporting group member whose income is subject to (or deemed subject to) an effective tax rate that is below a designated minimum tax rate.
The Budget also proposes to restrict deductions of excessive interest of members of financial reporting groups for disproportionate borrowing in the US. It is also proposed to limit foreign tax credits from sales of hybrid entities and impose a 15 percent minimum tax on book earnings of large corporations.
The author is Alex Hunter, Editor, TP News. He oversees and updates the publication and also regularly writes news stories about transfer pricing and international tax law. Alex is reachable at email@example.com