After much speculation about how the new administration would prioritize changes to tax legislation, President Joe Biden tabled an agenda in late April. By raising taxes on the richest earners, Biden proposes expanding family vacations, childcare, health care, and preschool and college education for millions of people. The $ 1.8 trillion social spending plan aims to build roads and bridges, expand social programs, and combat climate change.
Biden's vision depends heavily on increased tax revenue. To fully fund the American employment plan, the Made in America tax plan is proposing to reverse the corporate tax rate cut that was at the heart of the Trump administration's 2017 Tax Cuts and Jobs Act. President Biden's tax plan also proposes a number of other changes, mostly related to international taxation, with the stated aim of incentivising job creation and investment in the US
Business leaders should consider the key provisions and assess their organization's ability to adapt to the proposed changes.
Essential provisions of the Biden tax plan
The following elements of President Biden's tax plan come straight from the White House fact sheet. Few of these initiatives have received Republican support, so the prospects for their implementation remain uncertain.
Reset the corporate tax rate to 28%
"The President's tax plan will ensure companies pay their fair share of taxes by raising the corporate tax rate to 28%."
The stated aim of the proposed tax rate increase is to finance investments in infrastructure, clean energy and R&D. These investments are also intended to stimulate economic growth and maintain the competitiveness of the US worldwide.
Paving the way for a global minimum tax
“The United States is now seeking global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. "
This initiative aims to discourage companies from relocating their operations to low-tax countries in order to avoid higher domestic corporate tax. The Biden administration believes this call for solidarity between countries will position the US as the world leader in international taxation.
Prevent US companies from inverting
"Under current law, US companies can acquire or merge with a foreign company to avoid US taxes by claiming to be a foreign company even if they are headquartered and operated in the United States."
President Biden suggests making it harder for US-based companies to evade US taxation by relocating their country of incorporation from the United States to a foreign jurisdiction. In conjunction with this proposal, the von Biden government is proposing to increase IRS funding and implement stricter enforcement measures.
Increased audits for companies
“A decade ago, essentially all large companies were audited annually by the IRS; today the exam rates are below 50%. This plan will reverse these trends and ensure that the Internal Revenue Service has the resources it needs to effectively enforce tax laws. "
For years, large corporations have employed teams of tax professionals to develop and implement strategies that will minimize their tax liabilities, sometimes by questionable means. This broad-based enforcement initiative aims to more effectively detect cases of tax evasion and underreporting by businesses and high-income taxpayers.
Tax planning considerations
While large tax changes could be predicted, it is difficult to predict how seismic they will be. The datasheet published by the White House does not give any details. However, the Treasury Department recently published its annual "Green Paper" which provides a full explanation of all the proposals in the factsheet, as well as explanations of the additional tax reform proposals the Green Paper raises, including a proposal to increase tax rates on long-term capital gains and qualified dividends from taxpayers with a Adjusted gross income greater than $ 1 million. These proposed changes to capital gains taxes are already worrying investors and their tax advisors, particularly the ability to make them retrospectively.
The president's more ambitious proposals could face a congressional deadlock and potentially require significant overhaul in order to garner the support needed to implement them. To add to this mystery, several cabinet members, including Treasury Secretary Janet Yellen, have repeatedly suggested that proposed changes will be iteratively introduced into separate laws. This, combined with the lengthy process of reconciliation in Congress, makes it difficult to predict if and when a particular proposal could be passed, let alone come into force.
The likelihood of a lengthy legislative process makes preliminary tax planning difficult. Tax professionals cannot predict what is coming or when. The fastest possible deadline for legislative amendments to be passed would be the next six months; however, the schedule could be considerably longer.
Companies can take some financial and operational steps to mitigate the potential impact of Biden's tax plan in 2021. First and foremost, businesses should work with their tax advisors to model the potential impact of each of the proposals and, where possible, include more lenient variants of each (e.g. if the corporate tax rate were increased to 25% instead of 28). %). Based on the results of these modeling efforts, organizations could develop a strategic plan that considers the most likely changes and identifies both interim and follow-up steps to mitigate the impact of those changes.
Despite the uncertainty, some tax planning measures may make sense in 2021. For example, the likelihood of an increase in the corporate tax rate could make it appear sensible to accelerate the recording of income in 2021 as part of a preferential tax rate. Other timing measures could also prove beneficial, such as B. deferring losses and deductions to a later tax year, waiving the accelerated deduction of deferred income, capitalizing R&D expenses or the choice of bonus depreciation. Businesses should work with their tax advisors to determine actions to take in the meantime before tax law changes go into effect.
Taxpayers and their advisors should also communicate with lawmakers about how each proposal would affect their bottom line, profitability, hiring practices, or any other aspect of their business.
I'm looking forward to
The stated goal of Biden's “Made in America” tax plan is “to raise over $ 2 trillion in the next 15 years and more than pay for the mostly one-time investments in the American employment plan, and then permanently reduce the deficits”. It remains to be seen whether these changes will ultimately be implemented or have the desired effect. For now, US-based companies, especially those with international operations, need to be prepared for changes in their tax obligations without knowing exactly what those changes will be.
This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Sanjay Agarwal is head of tax practice at MGO and Patrick Roach is an international tax advisor.
Bloomberg Tax Insights articles are written by seasoned practitioners, academics and policy experts who discuss developments and current issues in the tax arena. To make a contribution, please contact us at [email protected].