The Biden administration's funds for fiscal yr 2022 and its tax will increase for companies, rich

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Africa tax in brief - Lexology

Highlights

  • The Biden administration published its budget for fiscal year (FY) 2022 on May 28, 2021. The $ 6 trillion budget, the largest since World War II, is focused on rebuilding the country's obsolete infrastructure, expanding the social safety net and tackling income inequality. The issue is to grow the US economy from the bottom up and down the middle, not the top down.
  • To help fund some of that spending, the Biden administration is proposing to raise taxes for the wealthy and corporations, and improve compliance, information, and enforcement initiatives of the Internal Revenue Service (IRS) that have earned over a decade in revenue To achieve $ 3.6 trillion.
  • This Holland & Knight Warning provides an overview of the proposed corporate and income tax increases as set out in the U.S. Treasury Department's May 2021 General Explanation of the Government Revenue Proposals for Fiscal Year 2022 (the so-called Green Paper). Subsequent warnings will focus on individual topics, such as the impact of proposals on planning inheritance and asset transfers, carried interests, green energy, selected international tax changes, BEAT repeal and replacement by SHIELD, interaction of the US proposal on global minimum tax with the Organization for Economic Co-operation and Development (OECD) Integrative Pillar 1 and Pillar 2 initiatives and improved IRS compliance, enforcement and information reporting.
  • These proposals reflect the government's priorities and should be viewed as an opening offer for negotiations with Congress. Changes are likely, particularly because of the tight margins that Democrats use to control the House and Senate, and also because of the views of some of the more moderate Democratic members in the Senate. It will be important to carefully follow the deliberations of Congress.

As a background, the budget that the President presents to Congress contains estimates of the federal government's income and expenditure for the coming fiscal year and also recommends the level of funding for the federal government. Congress then reviews and passes the granting laws. If Congress does not pass all budgetary measures by the start of the fiscal year (October 1), it will have to pass a rolling resolution to keep the government going. The judiciary committees are responsible for reviewing proposed revenue and changes to the Internal Revenue Code.

As far as relevant to this discussion, the Biden Administration (FY) 2022 fiscal year includes the government's proposed infrastructure for the American Jobs Plan (and accompanying Made in America tax plan) and its American Families Plan, and adds details of the government's request for annual operating expenses for government agencies. It focuses on redistributing wealth, not growth. (See previous warnings from Holland & Knight, "Biden Administration's Made in America Tax Plan: Procedural Aspects," April 8, 2021; "Biden Administration's Made in America Tax Plan: Interaction with OECD Inclusive Framework" April 15, 2021; and "Biden's American Families Plan Proposes Income Tax Hikes," April 29, 2021.)

The government budget, which reflects the government's fiscal and political priorities, is an opening offer to negotiations with Congress and is likely to change as Congress progresses, particularly due to the tight margins the Democrats use to control the House and Senate , and also because of the views of the more moderate Democratic MPs in the Senate.

The US Treasury Department's General Explanatory Notes on Government Proposed Revenue Proposals for Fiscal Year 2022 (the so-called Green Paper) accompanies the government budget and provides an explanation and revenue estimates for the proposed government revenue. The 2021 Green Paper is the first Green Paper since the Obama administration and contains details (current law, reasons for changes, explanation of the proposal and effective date) and revenue estimates for the American Jobs Plan and the American Families Plan.

The generally proposed tax reforms aim to modernize the US tax system to address current fiscal challenges, including increasing revenue, improving tax administration, and making the tax system fairer and more efficient.

A rough overview of the changes in corporate tax and income tax is given in tabular form

American Employment Plan: Corporate Tax Reform

Plan aimed at generating sufficient income, building a fairer tax system, and reducing incentives that encourage profit shifting and offshoring.

items

Current law

suggestion

Effective Date

1. Increase the tax rate

21 percent

28 percent

Tax years after December 31, 2021

2. Global minimum tax

10.5 percent rate

21 percent rate

Tax years after December 31, 2021

3. Deductions attributable to tax-exempt income or taxed at preferential rates and Section 904 (b) (4)

Deductions of claimed expenses for deductible income according to §§ 245A or 250, which are claimed by the administration in order to subsidize foreign investments

Extend Section 265 to prohibit deductions that are to be assigned to the class of tax-exempt or preferentially taxed foreign gross income

Tax years after December 31, 2021

4. Inversions

§ 7874 definition

Eliminate the 60 percent test

Add additional restrictions to expand the scope of the inversions, including the domestic shareholder fair market value test (FMV), the US management and control test, and essential business activities for the location of the overseas parent company's incorporation

Post-Effective Transactions

5. Reform of fossil fuel revenues

Foreign oil and gas production income (FOGEI) not GILTI; foreign oil-related income (FORI) is GILTI; and also Subpart F income

Availability of Foreign Tax Credits (FTCs) for oil and gas income

Limit FTC for dual taxpayers as if the taxpayer were not a dual taxpayer

Tax years after December 31, 2021

6. Foreign Intangible Income (FDII)

Deduction for FDII

Cancel FDII

Tax years after December 31, 2021

7. Base Erosion and Anti-Abuse Tax (BEAT) and Stopping Harmful Inversions and Ending Low Tax Developments (SHIELD)

Taxation of certain corporation taxpayers in addition to regular tax liability if certain conditions are met and there are reductions in the tax base

Replace with SHIELD, whose intent is to tax low-taxed profits by not allowing deductions to domestic companies and branches in respect of gross payments made directly or indirectly to low-taxed members

Applies to financial groups with annual worldwide sales greater than $ 500 million

Tax years after December 31, 2022

8. Restricting FTCs from selling hybrid companies

Hybrid company sales that are not currently subject to Section 338 (h) (16)

Apply the principles of § 338 (h) (16) to hybrid sales to determine the source and character of each item

Post-Effective Transactions

9. Restricting Excessive Interest Deduction for Disproportionate Borrowing in the United States

No provision

Applicable law Section 163 (j) does not take into account the leverage of the US operations of a multinational group of companies (MNC) relative to the leverage of the worldwide operations of the group; Therefore, the US company can take over indebtedness in order to lower the US tax

Exceptions: Financial services companies and groups reporting less than $ 5 million in net interest expense

Previous iterations included in President Obama's Green Paper and House and Senate Republican legislation

Tax years after December 31, 2021

10. 15 percent minimum tax on book profits of large companies

No provision

15 percent minimum tax on worldwide book income for companies with income greater than $ 2 billion

Tax years after December 31, 2021

11. Create incentives for onshoring and reject incentives for offshoring

No provision

Offshoring: Prohibit deductions for expenses paid or incurred in the offshoring business

Expenditures paid or incurred after the enactment

  • The table above identifies the proposal and gives an overview of its application. For details, see the full description in the Green Book.
  • The Biden campaign previewed many of the proposals, including numbers 1, 2, 4, 5, 6, 7 (partially), 10 and 11.
  • The Made in America Tax Plan expanded on the above suggestions, but did not specifically address No. 11.
  • The new proposals include Nos. 3, 8 and 9.
  • Several Democratic senators have raised concerns about a corporate tax rate of 28 percent and proposed a tax rate of 25 percent; In addition, they have raised concerns about other internal company regulations. Republicans see the change to the beneficial provisions of the Tax Cuts and Jobs Act (TCJA) as a "red line" that must not be crossed.
  • The Treasury Department characterizes most of the international provisions in the Green Paper as incremental (apart from SHIELD and select others) because they do not change the basic US international tax architecture.
  • As for the interaction of the global minimum tax of 21 percent in the US and Pillar 2 of the OECD Inclusive Framework, the US recently proposed a minimum tax of 15 percent. The design of the SHIELD to generally conform to Pillar 2 IIR reflects the close coordination that the US is devoting to achieving its national priority of 21 percent GILTI integration while complying with the Inclusive Framework's goals of a robust minimum tax. Not all members of the Inclusive Framework need to agree to the Pillar 2 Minimum Tax in order to reach an agreement (e.g. the Cayman Islands, which have a zero tax rate but may require substance); rather, there needs to be a critical mass, like the G-7 and G-20 (which could be reached in the next few weeks in the G-7 and G-20 meetings).

American family plan

Plan aims to generate more revenue from high-income taxpayers by increasing income tax rates and closing loopholes; Reform of the taxation of capital income by aligning the income taxation of labor income and capital income; Eliminate the reinforced rule of law that the Biden Administration claims that capital gains can escape taxation and provide resources, information (through new laws) and technology to the IRS to 1) improve taxpayer service, 2) the Improve taxpayer compliance and 3) improve enforcement to fill the tax gap in order to build a fairer and more efficient tax administration system. (Another portion of the American Families Plan that extends tax credits for low- and middle-income workers and families is not discussed here).

items

Current law

suggestion

Effective Date

1. Increase the upper limit rate

37 percent

39.6 percent

Tax years after December 31, 2021

2. Increase the tax rate on long-term capital gains and qualified dividends

20 percent highest rate

Long-term capital gains and qualified dividends from taxpayers with Adjusted Gross Income (AGI) greater than $ 1 million and subject to normal income tax rates

Valid for recognized winnings after the date announced (i.e. April 28, 2021)

3. Treat the transfer of valued property by gift or death as a liquidation event

Transfers of esteemed property by gift or death over $ 1 million will be treated as an Appreciation Event

Transfers of valued ownership and distributions in kind from a non-transferring trust / partnership / other entity are appreciation events

Trust / partnership / other company that owns real estate recognizes gains from unrealized appreciation if this property has not been the subject of a recognition event within the previous 90 years (first recognition event is December 31, 2030)

Transfers defined in accordance with gift and inheritance tax regulations and valued using gift and inheritance tax methodologies

Exclusions: Includes transfers to U.S. spouses or charities, $ 1 million per person is transferable to other spouses and indexed for inflation and other exclusions

Family business: special regulations for implementation events and 15-year payment plan

Gains on gift and property in the event of death from the death of a deceased person after December 31, 2021, and on certain property owned by trusts, partnerships and other non-corporate entities on January 1, 2022

4. Streamline Net Investment Income Taxes (NIIT) and Self Employment Contribution Act (SECA)

Bridge a gap that allows certain pass-through income, especially limited partners and suburban owners, Medicare payroll tax and NIIT. to avoid

Ensure all trade and business income from taxpayers with AGI over $ 400,000 is subject to either NIIT or SECA tax

Tax years after December 31, 2021

5. Supported interests

Taxed at capital gains rates rather than ordinary income

1061 waived for taxpayers with taxable income greater than $ 400,000

Tax years after December 31, 2021

6. Exchange under the same conditions

Delimitation of the profit when exchanging real estate “of the same type” that is used in a trade or business or is held for investment purposes

Exchanges in tax years starting after December 31, 2021

7. Make permanent § 461 (l) (Excessive Business Loss)

Excess business losses from transit companies that are not deductible for tax years beginning on December 31, 2020 and before January 1, 2027

Make provision permanent

Tax years after December 31, 2026

  • The table above identifies each proposal and provides an overview of its application. For details, see the full description in the Green Book.
  • Elements in Biden campaign proposals that are not in the Green Paper:
    • Inheritance and gift tax changes that reset the Tax Cuts and Jobs Act (TCJA) have improved lifelong inheritance and gift tax exemptions; these elements were also not considered when the American Families Plan was introduced.
    • Abolition of the qualified operating income allowance under Section 199A. Reportedly, this provision was not taken into account because of its anti-small business feel (although more than half of the allowance has been reported to target taxpayers who earn more than $ 1 million a year) Most small businesses operate in a pass-through fashion and many of these businesses are hardest hit by the COVID-19 pandemic.
    • Eliminate the TCJA SALT Cap on Reported Deduction for State and Local Taxes (SALT) that have been paid or accrued (unrelated to any trade or corporation). More than 20 Democrats and a number of Republicans have joined a bipartisan parliamentary group that has pledged not to vote for laws that do not remove the SALT cap.
    • Limit itemized deductions by restoring the gradual elimination of deductions for AGI greater than $ 400,000, and limit the overall benefit to 28 percent for those in the above categories.
    • A 12.4 percent social security tax is levied on wages over $ 400,000.
  • Some of the most controversial issues include not only the proposed tax hike, but also the seemingly retrospective April 28, 2021 deadline for imposing the increased tax rate on long-term capital gains and qualified dividends, which would prevent wealthy individuals from depriving taxpayers of their estimated assets before the end of the year sell to avoid a possible tax hike.2 In contrast, prior to the introduction of the American Jobs Plan and American Families Plan, Treasury officials publicly stated that retrospective tax law was not their preferred option.3 For taxpayers subject to the Medicare tax "subject, the addition of the 3.8 percent tax increases the federal tax rate to 43.4 percent compared to 23.8 percent under applicable law. This proposal is expected to meet stiff opposition not only from Republicans but also from a number of Democratic senators.
  • Another controversial proposal is to end the fortified foundation wealth planning technique in the event of death and treat gifts and death as appreciation events. The proposal described is complex and costly (assuming the maximum capital gains rate is increased to 39.6 percent) and requires careful analysis. It also has cross-border consequences, since, for example, under applicable law, a US beneficiary of a foreign testator can in principle make an increase.
  • The increase in the ordinary income tax rate from 37 percent to 39.6 percent will only affect 1 percent of taxpayers.
  • The proposed effective dates need to be carefully considered; For example, the proposal for Section 1031 applies to exchanges commencing in tax years beginning after December 31, 2021. Inquire how this works with the 180 day rule, which requires the entire transaction to be completed within six months or no longer than. must be completed 180 days? What if the transaction initiates in 2021 but closes in 2022?

Improve the resources, information and technology of the IRS

This aspect of the American Families Plan is an important part of the plan. The Green Paper estimates that the improved compliance resulting from the additional investments to improve resources, update legacy technology and adopt comprehensive financial reporting will generate net income of $ 779 billion over the 2022-2031 budget period. The Green Paper provides that the increased focus on compliance and enforcement will be aimed at the highest income taxpayers, not taxpayers with actual incomes less than $ 400,000.

Two of the highlights are a new comprehensive annual information reporting from financial institutions and the expansion of broker information reporting with regard to crypto assets.

New reporting on financial institutions. The Biden Administration is proposing a new comprehensive annual financial institutions information report on financial account inflows and outflows to improve visibility of gross income and deductible expenses to be reported to the IRS, thereby improving the effectiveness of the IRS's enforcement efforts and voluntary compliance is encouraged. The annual information report produced by the financial institution would show gross inflows and outflows with a breakdown into cash, transactions with a foreign account, and transfers to and from another account with the same owner. The reporting of this information would apply to all business and personal accounts of financial institutions, including bank, credit and investment accounts, with the exception of the negligible gross flow of $ 600 or fair market value of $ 600. Other accounts with similar characteristics as financial institution accounts would also be reportable, as would cryptocurrency exchanges and custodians. Separately, there would be crypto reporting requirements in cases where taxpayers buy crypto assets from one broker and then transfer the crypto assets to another broker, and for companies that sell crypto assets in transactions with a fair market value greater than 10,000 US dollars received. This accounting proposal would have to be used for tax years beginning after December 31, 2022.

Broker crypto reporting. The Green Paper recognizes that the use of crypto assets is a rapidly growing problem and provides U.S. taxpayers with ways to hide assets and taxable income by leveraging offshore crypto exchanges and wallet providers, as well as creating entities through which they are can act. To combat this abuse, reporting information by third parties is critical. The proposal would expand the scope of information reporting by brokers reporting on crypto assets to include reporting on specific beneficial owners of companies holding accounts with the broker. The proposal would require brokers, including companies such as U.S. crypto asset exchanges and hosted wallet providers, to report information about certain passive companies and their material foreign owners when they relate to crypto assets held by those companies held in an account with the broker. The proposal, if adopted and combined with applicable law, would require a broker to report gross proceeds and other information that the Treasury Secretary provides in relation to the sale of crypto-assets to customers and, in the case of certain passive companies, their material foreign owners . The proposal would also allow the US to automatically exchange such information with appropriate contractors in order to reciprocate the information received from their contractors. The proposal would be effective for declarations submitted after December 31, 2022.

Other proposals to improve tax administration include 1) increased oversight of paid tax filers, 2) improved filing of electronic returns, 3) suggestions to improve compliance with listed transactions, and 4) a change in the centralized verification system for partnerships.

Prospects for enactment

There are several ways to get into the American Jobs Plan and American Families Plan, some of which are affiliated with the American Jobs Plan and some of which are not. The first is a bipartisan agreement with Republicans on a scaled-down version of the American employment plan as proposed by the GOP (and possibly without the corporate tax increases that the GOP does not advocate). A decision on whether a bipartisan agreement is viable can be made by early June. If not, one legislative path for the American employment plan and the American family plan would be the budget reconciliation process; in this case ask whether there would be one or more invoices?