“Green Paper” of the Treasury – Corporate tax perspective – Taxation

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On May 28, 2021, the US Department of the Treasury released its general report explanations (the “Green Book”) of the Biden administration’s revenue proposals for fiscal year 2022. The green paper provides additional details on tax proposals previously included in the “Made in America Tax Plan” and the “United States Tax Plan”. families ”of President Biden that we’ve discussed in previous client updates (including those available here and here), as well as new proposals.

While it remains to be seen whether the Green Paper’s proposals will be enacted, they could have significant effects on corporate taxpayers and their shareholders. Some of the proposals that may be of particular interest to these taxpayers are discussed below.

General corporate tax proposals

The Green Paper proposes to increase the corporate tax rate from 21% to 28%, in effect for tax years starting after December 31, 2021. For tax years starting after January 1, 2021 and before on January 1, 2022, the tax rate would be 21% plus 7% of the part of the tax year that falls in 2022.

The Green Paper also proposes a minimum corporate income tax of 15% on global pre-tax accounting income (i.e. net income reported to shareholders) for companies with income exceeding $ 2 billion, in force for tax years beginning after December 31, 2021. In particular, under this proposal, the provisional minimum tax would be equal to 15% of worldwide accounting income before tax (calculated after subtracting deductions for net losses operating account of accounting income), less general tax credits applicable to businesses (including R&D, sanitation, energy and housing tax credit) and foreign tax credit. The tax on accounting income would then be equal to the excess, if any, of the provisional minimum accounting tax over the ordinary tax. Taxpayers would be allowed to claim a book tax credit (generated by a positive accounting income tax) to reduce ordinary tax in future years, but not below the interim minimum tax this year- the.

International tax proposals

The Green Paper includes many proposals to reshape the international tax landscape. Some of the highlights include the following:

  • Increase the US tax imposed on the global low-tax intangible income (“GILTI”) of a US shareholder by broadening the tax base of GILTI by eliminating the 10% return exemption on investment in qualified business assets, by increasing the GILTI tax rate from a minimum rate of 10.5% to 21% and calculating the GILTI jurisdiction by jurisdiction.
  • Repeal the anti-base erosion abuse tax (“BEAT”) and replace it with the Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”) rule, under which certain national companies or branches would not be not permitted to deduct a payment that is made directly (or, in some cases, deemed to be made) to a member of its financial reporting group whose income is subject to an effective tax rate below an agreed aggregate minimum rate internationally (or, if no rate has been agreed on, the GILTI minimum tax rate of 21% under the proposal).
  • Dramatically expand anti-inversion rules.
  • Restrict interest deductions for disproportionate borrowing in the United States by limiting the interest deductions of an entity that is a member of a multinational financial reporting group if the member’s net interest expense for the purposes of l financial information is greater than its proportional share of the group’s net interest charges reported on the group’s consolidated accounts. Alternatively, if the member fails to justify its proportional share of the group’s net interest expense for financial reporting purposes, or so chooses, the member’s interest deduction would be limited to his or her interest income plus 10 % of their adjusted taxable income (as defined under section 163 (j)).
  • Repeal the deduction for intangible income of foreign origin (“FDII”) and use the resulting income to “encourage R&D”.

These and other proposals relating to international taxation are discussed in more detail here.

Energy proposals

The Green Paper proposes to repeal many tax preferences for fossil fuels (including, for example, the expensing of intangible drilling costs, the enhanced oil recovery credit for eligible costs attributable to an enhanced recovery project of eligible oil, the marginal well production credit, percentage depletion for oil and gas wells and two-year depreciation of geological and geophysical expenses of independent producers) and reinstate the excise taxes of the Superfund which have expired in 1996 at double the previous rates. In addition, the Green Paper proposes to establish, extend or strengthen various tax incentives for clean energy. For more details on these and other energy tax proposals, check out our client updates here and here.

Tax administration proposals

The Green Paper includes various proposals related to tax reporting and administration that may have an impact on corporate taxpayers or their shareholders, including the obligation to electronically file corporate income tax returns with $ 10 million in assets. of dollars or more or more than 10 shareholders and the imposition of a secondary liability on shareholders to collect taxes on unpaid income from certain companies involved in “tax shelters for intermediate transactions” under Notice 2001 -16. Please see our client update here for more information on the tax administration’s proposals.

Tax proposals at shareholder level

The Green Paper proposes to raise taxes on corporate shareholders by increasing the top federal personal income tax rate on capital gains and dividends to 39.6% (plus Medicare tax of 3%. 8%) to the extent that the adjusted gross income of the taxpayer exceeds $ 1 million for the taxpayer ($ 500,000 for a separate deposit), indexed to inflation after 2022. The Green Paper explains that this increase would be effective for gains made after the proposal announcement date, which is understood to refer to April 28, 2021, the date on which President Biden announced this proposal as part of the American Families Plan.

In addition, the Green Paper proposes to increase the taxes of shareholders of S corporations for tax years beginning after December 31, 2021 by expanding the application of the self-employment tax to all ordinary business income. (other than certain types of income which are exempt from self-employment). such as rent, dividends and capital gains) from S corporations for which the shareholder is materially involved in the business, to the extent that the shareholder’s income exceeds certain thresholds. The proposal would also expand the Medicare tax by 3.8% to include all business income and earnings that are not otherwise subject to employment taxes for taxpayers whose adjusted gross income exceeds $ 400,000 for the year. taxation.

We will continue to monitor developments in potential federal tax legislation and provide further updates as appropriate. In the meantime, Baker Botts will be happy to help you in your analysis of these proposals.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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