In April 2021, President Biden announced the American Families Plan, which included some significant changes to tax law. Proposed changes to the American Families Plan included an increase in the tax rate on long-term capital gains, significant restrictions on the amount of profit that can be deferred on the sale of properties of a similar nature and exchange rules of Section 1031 of the Internal Revenue Code (the "Code") and a planned tax event on certain fixed assets that are transferred as a result of the death of the owner.
On May 2021, the US Treasury Department released a report entitled “General Explanation of the Administration's Fiscal 2022 Revenue Proposals. Similar reports are issued each year by the Treasury Department as part of the annual budget process and these reports are commonly referred to as the "Green Paper". Relevantly, the May 28 Green Paper provided more details on tax law changes previously proposed in President Biden's American Families Plan.
The following is a summary of the main tax changes proposed in the Green Paper:
Proposed tax law change applicable to long-term capital gains from non-corporate taxpayers.
Entities that are taxable as C companies for US federal income tax purposes are subject to the same tax rate on taxable income whether the income is ordinary income or capital gains. In contrast, a different tax rate applies to individuals who record income directly or as a result of the inflow of income, gains, losses and deductions from a limited liability company or an S company, depending on whether it is the income ordinary income or capital gain.
In general, when an individual sells an asset that has been held for more than 12 months, the above regular threshold rates do not apply and instead a tax rate of 20% on the excess of the realized amount on the sale is applied over the seller's tax base in the asset . Since these profits are of a passive nature, there is also a net capital gains tax of 3.8%.
According to the tax law change proposed in the Green Paper, gains from the sale of a capital asset held for more than 12 months (i.e., a long-term capital gain) would be subject to U.S. federal income tax at ordinary income rates, with the highest marginal rate of 37%. This proposed tax rate increase would apply only to the extent that the taxpayer's income exceeds $ 1 million. As above, this threshold would be adjusted by the consumer price index, which is used to index other tax rate thresholds. Under this proposal, if the sale were also subject to net investment tax of 3.8%, the tax rate for US federal tax purposes would be 40.8%.
Proposed amendment to the tax law for the marginal income tax rate
The Green Paper provides, somewhat cryptically, that the above-mentioned tax increase would "be effective for profits that are to be recognized after the date of the announcement". It is unclear whether this retroactive entry would be April 28, the date President Biden first announced the capital gains rate proposal in connection with his proposal for the American Families Plan, or whether it would be April 28 May act, the date on which the Green Paper was published.
The TCJA changed the marginal tax rates that applied to individuals to determine the U.S. federal income tax rate applicable to normal income. According to the TCJA, the upper marginal tax rate on such income has been reduced from 39.6% to 37% for income over $ 628,300 for married individuals filing a joint tax return (for 2021). The abolition of the 39.6% tax bracket under the TCJA should expire on January 1, 2026.
The Green Paper provides for a change in marginal tax rates to reintroduce the 39.6% marginal tax rate and apply it to taxable income over $ 509,300 for married individuals filing a joint tax return for 2022. For future tax years, the threshold would be $ 509,300 after adjusting for the consumer price index, which is used to index other tax rate thresholds. The reintroduction of the 39.6% tax bracket and the lowering of the income limit for this peak rate would apply to tax years beginning after December 31, 2021.
Proposed tax law change to increase the tax rate applicable to C companies.
The Tax Cuts and Jobs Act of 2017 (the "TCJA") eliminated the concept of marginal tax rates for companies that are treated as C companies for US federal income tax purposes. Under the TCJA, C companies were subject to US federal income tax at a flat rate of 21%. According to the proposal outlined in the Green Paper, the abolition of marginal tax rates would continue, but the tax rate would be increased to a flat rate of 28%.
According to the information in the Green Paper, this tax rate increase would apply to tax years beginning after December 31, 2021. The Green Paper contains a transitional regulation for corporations whose tax year begins after January 1, 2021 and ends after December 31, 2021, whereby the higher tax rate is to be applied for the part of the tax year that occurs in 2022.
Proposed tax law amendment on the tax treatment of profit-sharing.
In the last few years the tax treatment of "carried interests" has been discussed a lot. In general, a "carried interest" is structured as a participation in a GmbH or a limited partnership and awarded to service providers. From a tax perspective, the carried interest qualifies as profit interest for US federal income tax purposes so that it is tax-free for the recipient when it is spent. The perceived abuse is that in many cases, when distributions are made on the carried interests, the nature of the profit flowing through is a capital gain rather than ordinary income (as would be the case if payment were made directly in exchange for services he follows). .
In 2017, the TCJA changed the code to include section 1061 to introduce new tax rules on carried interest that would require normal income treatment if the carried interest was held for less than three years. According to the TCJA, this mandatory holding period of three years did not apply to certain real estate companies.
Under the proposal set out in the Green Paper, the rules for “carried interests” would be amended again to allow any amount allocated to an investment in an investment services company (an “ISPI”) regardless of the nature of the profit at the partnership level. Under this proposal, the gain from the sale of an ISPI would also be treated as ordinary income regardless of the holding period. The income allocated in relation to an IPSI would also be subject to the SECA whether it is a limited partnership interest otherwise exempt from the SECA or a non-manager interest in an LLC. This normal income treatment would only apply if the individual's income from all sources exceeded $ 400,000.
For the purposes of this proposed tax law amendment, an ISPI would be defined as an interest in a limited liability company or partnership held by a person who provides services to the company and (i) the company's assets are essentially fixed assets, such as z as securities and real estate; and (ii) more than half of the company's contributed capital comes from partners in whose hands the interest is assets that are not held in connection with the pursuit of any trade or business. The proposal provides for special rules that allow participation in a limited liability company or a partner held by a service provided in order to avoid ISPI treatment if the partner has brought in capital in exchange for the interest and the interest is essentially subject to the same conditions as those on. Interest issued by non-service providers. Interest does not fall under this “invested capital” exception if the capital contribution is financed by a loan or an advance that is guaranteed by another partner.
The proposal would repeal Section 1061 of the Code and apply to tax years beginning after December 31, 2021 (even if interest was paid before that date).
Proposed amendment to the Tax Code to postpone the profit from the sale of real estate according to the rules for exchanges of similar species.
Section 1031 of the Code enables a taxpayer to bypass the current recognition of taxable gain on property sales by participating in a similar exchange. In 2017, the TCJA amended Section 1031 to restrict the application of similar exchange rules to real estate.
The proposal set out in the Green Paper would further limit the application of Section 1031 by limiting the amount of profit that could be deferred on a similar exchange to $ 500,000 ($ 1,000,000 for married persons filing a joint declaration). As it is drafted, it is unclear how this restriction would apply to REITs or real estate owned by an entity taxable as a C company. It is believed that the $ 500,000 would apply to these companies, but this is not entirely clear.
The new restriction would apply to exchanges that take place after December 31, 2021.
Proposed tax law change for the new requirement to recognize long-term capital gains for assets held in the event of death or transferred during lifetime.
In general, current tax laws provide that the basis of the recipient's assets acquired upon death is the market value of those assets at the time of the death of the deceased. The recipient's ownership base acquired through a donation is the same as that of the donor at the time of the donation. There is no liquidation event when property is acquired in the event of death or gift, unless and until that property is subsequently sold (and any gain would be determined on the recipient's adjusted basis).
Under the current Green Paper proposal, capital gains will be realized when those gains exceed a foreclosure of US $ 1 million per person, in the transfer of valued assets in the event of death or through a gift, including transfers to and distributions from irrevocable trusts and partnerships. The proposal would include various exclusions and exceptions for certain family businesses.
In addition, gains from unrealized appreciation will be recognized by a trust, partnership, or other non-corporation at the end of an applicable 90 year "trial period" if that property was not the subject of a recognition event during that trial period. The 90-year review phase for real estate begins later January 1, 1940, or the date of the original purchase of the property, with the first possible recognition event taking place on December 31, 2030.
Under the proposal outlined in the Green Paper, realized gains could be paid out on death over 15 years (unless the gains come from cash such as publicly traded securities). There would be no recognition of profit for transfers to U.S. spouses or charities in the event of death. The Green Paper states that the effective date of the above changes would apply to property transferred by gift and to property of deceased deceased after December 31, 2021.
Proposed amendment to tax law to increase income subject to net investment income tax or SECA tax.
Under applicable tax law, individuals filing joint declarations whose taxable income exceeds $ 250,000 are subject to 3.8% net investment tax. In general, net capital gains tax applies only to the following categories of income and profits: (i) interest, dividends, rents, annuities and royalties, (ii) income from a trade or business in which the individual does not have a material interest, and (iii ) Net profit from the sale of property (excluding property held for use in a business in which the person has a material interest).
The net capital gains tax does not apply to income from self-employment. However, income from self-employment is subject to self-employment tax ("SECA"). Under Section 1402 of the Code, limited partners are exempt from the SECA by law, as are S corporation shareholders from the inflow of S corporation income. In general, the statutory exclusion of limited partners from the SECA has been interpreted broadly to include members of limited liability companies from the SECA.
The Green Paper points out that active owners of a company may be treated differently under the net investment tax and SECA, depending on the type of business unit used, and that there are circumstances in which an active owner of a company can legally avoid imposing both the net Capital Gains Tax and SECA. To counteract this perceived abuse, the Green Paper contains a proposal to ensure that all commercial or business income is subject to an additional tax of 3.8% either through the net investment tax or SECA. If an individual had adjusted gross income greater than $ 400,000, net wealth tax would be payable on all income and profits from a company that is otherwise not subject to SECA (or regular employment tax).
The proposal also provides for a change in the scope of SECA. According to this proposal, all natural persons who provide services and have a material interest in a partnership or a limited liability company would be subject to the SECA with their distributing portion of the income that accrues from the company. In addition, under this proposed tax law amendment, a shareholder of an S company who was materially involved in the operations of the S company would be subject to the SECA for their distributing portion of the income that flows from the company.
SECA's exemptions for rents, dividends, capital gains and certain other income would continue to apply. Nonetheless, these two proposed tax law amendments to Net Withholding Tax and SECA would result in a 3.8% increase in the tax rate on all income generated by a company, whether it was a sole proprietorship, a limited liability company, a partnership, or an S-company. The Green Paper states that the entry into force of the above changes will apply to tax years beginning after December 31, 2021.
Proposed amendment to tax law to widen restrictions on the deduction of operating losses.
The TCJA added section 461 (l) to the code to set a limit on the amount of loss from a run-through business that can be used by a taxpayer to offset other income. In the currently applicable version, this restriction applied to taxpayers without corporation tax for tax years beginning after December 31, 2020 through 2027.
This limit applies to “excessive business losses,” which is defined as the excess of losses on a business over the sum of (x) profits from business and (y) $ 524,000 for married persons filing a joint declaration. This threshold is indexed to inflation. The determination of whether there is an "excess business loss" is determined at the individual level rather than at the corporate level. As a result, all losses and gains attributable to an entity are aggregated for the purpose of applying the loss limit.
According to the proposal in the Green Paper, this limit would not expire after 2027, but would be permanent.
Proposed tax law change to require financial institutions to provide comprehensive financial account information to the IRS through 1099 reporting.
The IRS estimates that the corporate income tax gap is $ 166 billion per year. The IRS believes that the main cause of this tax loophole is the lack of comprehensive information reporting and the resulting difficulty in identifying the non-compliance outside of an audit. In order to reduce the trade tax gap, the IRS should require comprehensive reporting on inflows and outflows of financial accounts.
Under the proposal, financial institutions would report information return data on financial accounts that would report gross inflows and outflows from the accounts. In addition, the return of information would break down the amount of physical cash, all transactions with foreign accounts, and transfers to and from accounts of related parties. This rule would apply to all business and personal accounts with financial institutions, including bank, credit and investment accounts. Additionally, it is suggested that payment processors continue to report gross receipts on Form 1099-K, but also report gross purchases, cash, payments to overseas accounts, and remittance inflows and outflows on their payee accounts. Similar reporting would also apply to cryptocurrency.
The proposal would apply to tax years beginning after December 31, 2022.
Fifteen percent minimum tax on book profits of large companies
The Green Paper is concerned about reducing the discrepancy between the income reported by large corporations on their federal income tax returns and the profits reported to shareholders in their financial statements. Accordingly, it proposes introducing a minimum tax of 15% on global book income for companies with such incomes in excess of US $ 2 billion. Taxpayers would charge a provisional minimum accounting tax of 15% of global pre-tax book income less certain tax credits. Book income tax corresponds to any excess of the provisional minimum tax over the regular tax. The proposal is intended to apply to tax years beginning after December 31, 2021.
Proposed Changes to Global Intangible Low Taxed Income ("GILTI")
The TCJA enacted the GILTI rules as a kind of minimum tax on the income of controlled foreign companies ("CFCs"). A US shareholder's inclusion in GILTI is determined by the combination of their proportional share of tested income and tested loss of all of their CFCs. The audited income is the excess of a certain gross income of the CFC over the deductions of the CFC, which are to be properly allocated to the audited gross income of the CFC. However, this inclusion is reduced by an assumed 10% return on depreciable property of the CFC (referred to as Qualifying Business Income or "QBAI").
In addition, a US corporate shareholder is generally granted a 50% deduction from their GILTI inclusion. Additionally, for US corporate shareholders, 80% of GILTI's foreign corporation tax can be recognized as a foreign tax credit. Finally, the Treasury Regulations provide that if the effective foreign tax rate on a CFC's gross income exceeds 90% of the U.S. corporate tax rate, the CFC's U.S. shareholder will generally have that gross income (and associated deductions and foreign income taxes) from inclusion by GILTI.
The Green Paper proposal would make several changes to these rules. First, the QBAI exemption would be abolished, leaving the US shareholder's entire CFC audited income subject to US tax. Second, the Section 250 deduction would be reduced to 25% for a global minimum tax credit. Given the increased corporate tax rate, the GILTI tax rate would generally increase to 21% (excluding the impact of possible foreign tax credits). Third, the average method used to calculate the GILTI inclusion of a US shareholder would be replaced by a country-specific rule. Under this standard, the inclusion of a US shareholder in GILTI would be determined separately for each foreign jurisdiction in which its CFCs operate. At the same time, a separate restriction on the foreign tax credit would be required for each foreign legal system. Finally, the proposal would remove the high tax exemption (for both GILTI income and subsection F income). These proposals would apply to tax years beginning after December 31, 2021.
Taken together, these changes will significantly increase the tax rate of many US multinationals on foreign income. Essentially, the Green Paper's proposals envisage a system of full inclusion exacerbated by the inability of US shareholders to offset losses in one country with income in another. Additionally, the increased tax rate resulting from the combination of an increased corporate tax rate and a reduced GILTI deduction coupled with country-specific restrictions on foreign tax credits will significantly increase the effective tax rates of some taxpayers on foreign income.
Adopt new restrictions on corporate tax base erosion
Elimination of Provisions for Foreign Intangible Income ("FDII")
The FDII regulations (also a TCJA decree) should encourage the export of intangible goods and services. More broadly, FDII is the excess of the taxpayer's income from certain U.S. sources related to property or services sold by the taxpayer to a foreign person for a foreign use over the amount of QBAI used to produce that property.
Believing that FDII is not an effective way of boosting research and development (R&D) in the United States, rewarding previous innovation rather than incentivizing new R&D and motivating companies to offshore manufacture, the Green Paper suggests To cancel FDII completely. The Green Paper indicates that the resulting proceeds will be used to fund R&D in the United States, but does not provide details on how to do this. The cancellation would be effective for tax years beginning after December 31, 2021.
Abolition of the property tax to combat erosion against abuse ("BEAT"); Adopt the Ending Harmful Inversions and Ending Low Taxes (“SHIELD”) Act
The BEAT was another innovation from TCJA. Under the BEAT rules, certain large corporation taxpayers who also make payments to foreign related companies deductible have been imposed a minimum tax that exceeds a certain threshold. A taxpayer's BEAT liability is calculated by reference to the taxpayer's changed taxable income and comparing the resulting amount to the taxpayer's regular tax liability. The taxpayer's BEAT obligation is generally equal to the difference, if any, between 10% of the taxpayer's modified taxable income and the taxpayer's regular tax liability.
The Green Paper proposal would repeal the BEAT and replace it with a new rule called SHIELD. According to SHIELD, a deduction (whether related or unrelated) would be in whole or in part to a domestic company or branch by reference to any gross payments made to "Low Taxed Members," which is any member of a financial reporting group, whose income is subject to an effective tax rate that is below a specified minimum tax rate. The established minimum tax rate is determined with reference to a rate agreed under one of the pillars of the basic erosion and profit shifting plan submitted by the OECD. If SHIELD goes into effect before an agreement has been reached, the minimum applicable tax rate will be 21%.
A financial reporting group is a group of business units that prepare consolidated financial statements and that includes one or more domestic corporations, domestic partnerships, or foreign corporations with a US trade or business. Consolidated financial statements are those that have been prepared in accordance with US GAAP, IFRS, or another method approved by the Department of the Treasury. The effective tax rate of a member of an accounting group is determined based on the individual financial statements of the members in each country. Payments made directly to low-tax members by a domestic corporation or branch would be fully subject to SHIELD. Payments to members of the accounting group who are not low-tax members would be subject, in part, to the SHIELD rule based on the aggregate ratio of the accounting group's low-taxed profits to its total profits.
The proposal empowers the secretary to exempt SHIELD payments in relation to financial reporters who meet an effective minimum tax level depending on the jurisdiction. The SHIELD rule would apply to financial reporters with annual worldwide sales greater than $ 500 million and apply to tax years beginning after December 31, 2022.
New restrictions on the withdrawal of disproportionate loans in the United States.
The Green Paper expresses concern that multinational corporations may be able, under applicable law, to lower their US tax on income from US businesses by making their US businesses more leverage than those in countries with lower taxes. Under the Proposal, a member of a financial reporting group would generally limit the deduction of interest expense if the member has net interest expense for U.S. tax purposes and the member's net interest expense for financial reporting purposes (calculated on a separate company basis) exceeds the member's pro rata share of net interest expense of the group, which is reported in the group's consolidated financial statements. A member's proportionate share of the accounting group's net interest expense would be determined on the basis of the member's proportional share of the group's profits (calculated by adding net interest, tax, depreciation, depreciation and amortization), which is reflected in the consolidated balance sheet.
If a member of a financial reporting group has excess net interest expense in its financial statements, a deduction for the member's excess net interest expense will not be allowed for US tax purposes. For this purpose, the member's excess net interest expense is equal to the member's net interest expense for US tax purposes multiplied by the ratio of the member's net excess interest expense to the member's net interest expense for financial reporting purposes. However, certain financial services companies would be excluded from the accounting group. In addition, the proposal does not apply to financial reporters who would otherwise report less than $ 5 million total net interest expense on one or more U.S. income tax returns for a tax year.
A member of an accounting group subject to the proposal would continue to be subject to the application of the undercapitalization rules (section 163 (j)). Somit würde der Betrag der Zinsaufwendungen, die für ein Steuerjahr eines Steuerpflichtigen, der beiden Zinsaufwendungsverzichtsvorschriften unterliegt, nicht berücksichtigt werden, basierend auf derjenigen der beiden Vorschriften bestimmt, die die niedrigere Begrenzung vorsieht. Ein Mitglied einer Rechnungslegungsgruppe kann ebenfalls der oben erörterten Shield-Regel unterliegen.
Die anhaltende Verbreitung von Zinsabzugsbeschränkungen dürfte multinationale Konzerne besorgniserregend sein, die nun nicht nur die Anwendung der Regeln für die Verschuldung des Eigenkapitals und der Regeln für die geringe Kapitalisierung berücksichtigen müssten, sondern auch die Regeln für unverhältnismäßige Kreditaufnahmen der Vereinigten Staaten und möglicherweise die SHIELD Regeln. Da Kreditgeber häufig Kredite an die Muttergesellschaft multinationaler Konzerne vergeben möchten (und diese Konzerne oft ihre Kreditkapazität maximieren möchten), ist es typisch, dass ein multinationales Unternehmen mit US-amerikanischer Muttergesellschaft der Hauptkreditnehmer ist und seine ausländischen Tochtergesellschaften dazu veranlassen, die Schuldenverpflichtung zu garantieren . Die vorgeschlagene Beschränkung unverhältnismäßiger Kreditaufnahmen in den Vereinigten Staaten könnte diese Kreditnehmer dazu zwingen, nach Möglichkeiten zur Einführung von Fremdkapital bei ihren ausländischen Tochtergesellschaften zu suchen, oder diese Tochtergesellschaften dazu veranlassen, Mitkreditnehmer zu werden. Dies kann jedoch in zahlreichen Ländern den Spießrutenlauf der Zinsabzugsbeschränkungen, der Quellensteuern und der Devisenanforderungen erfordern.
Bieten Sie einen Kredit für Neugeschäft für das On-Shoring eines US-amerikanischen Handels oder Unternehmens
Der Vorschlag würde eine neue allgemeine Geschäftsgutschrift in Höhe von 10 % der förderfähigen Ausgaben schaffen, die im Zusammenhang mit dem Onshoring eines US-amerikanischen Handels- oder Geschäftsunternehmens gezahlt oder angefallen sind. In diesem Sinne bedeutet Onshoring eines US-amerikanischen Handels- oder Geschäftszweigs die Reduzierung oder Beseitigung eines Handels oder Geschäfts, das derzeit außerhalb der Vereinigten Staaten betrieben wird, und die Gründung, Erweiterung oder anderweitige Verlegung desselben Handels oder Geschäfts an einen Standort innerhalb der Vereinigten Staaten, sofern Diese Aktion führt zu einem Anstieg der US-Arbeitsplätze. Darüber hinaus würde der Vorschlag Abzüge für gezahlte oder angefallene Ausgaben im Zusammenhang mit der Verlagerung eines US-amerikanischen Handels oder Unternehmens verbieten.
Jeffrey M. Glogower und Brandon Bickerton haben zu diesem Artikel beigetragen.
© Polsinelli PC, Polsinelli LLP in KalifornienNational Law Review, Band XI, Nummer 159