A look at the Biden administration’s revenue proposals for fiscal 2022 | Cadwalader, Wickersham & Taft LLP
On May 28, 2021, the Treasury Department released the Biden administration’s revenue proposals for fiscal year 2022 (the Green Book). In short, the Green Paper proposals, if adopted:
- Increase domestic corporate tax rates from 21% to 28% and impose a minimum tax of 15% on corporations with global accounting income exceeding $ 2 billion;
- In-depth reform of the international tax system;
- Increase the ordinary personal income tax rate from 37% to 39.6% and tax long-term capital gains and eligible dividends as ordinary income for individuals with adjusted gross income over $ 1 million ;
- Eliminate or significantly reduce other important tax advantages, such as exchanges of the same nature and obtaining non-recognition on death;
- Encourage investments in clean energies; and
- Develop tax reporting and compliance.
This memorandum summarizes the tax proposals of most interest to U.S. taxpayers, financial institutions, insurance companies, hedge funds, private equity funds, and high-income individuals.
II. Tax measures for companies
- Increase the corporate tax rate. The current federal corporate tax rate is 21%. Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), the top marginal tax rate that applied to corporations was 35%. The Green Paper proposes to raise the corporate tax rate to 28%. The proposal would apply to tax years that begin after 2021. For corporations that do not have a calendar year, the 2021-2022 tax rate would be 21% plus 7% of the portion of the year. taxation which is in 2022.
- Impose a minimum tax of 15% on book income. The Green Paper would impose a minimum tax of 15% on the global accounting income of domestic companies with global accounting income in excess of $ 2 billion. The proposal would be in effect for tax years beginning after 2021.
- Expand the anti-inversion rules. The anti-inversion rules in Section 7874 aim to eliminate the incentive for domestic companies to relocate to lower tax jurisdictions. The Green Paper proposes to expand the circumstances in which Section 7874 applies and would treat any expatriate company as a domestic company for all US tax purposes if, immediately after expatriation, the pre-transaction shareholders hold at least 50% of the expatriate entity. In contrast, the current law enforces an 80% ownership test to treat an expatriate company as a domestic company and subjects expatriate companies to US tax on certain transactions only if a 60% ownership test is met.
- Increase the GILTI tax. Under the TCJA, U.S. corporations are generally taxed annually at a rate of 10.5% (rising to 13.125% in 2026) on the excess of certain “low-tax global intangible income” earned by their controlled foreign corporations. (SEC) on an imputed 10% rate. return on depreciable tangible assets held by CFCs. The Green Paper proposes to eliminate the 10% imputed return for tax years beginning after 2021, thereby increasing the amount of a CFC’s income that is subject to current GILTI taxation in the hands of its US parent company . The Green Paper would also increase the GILTI tax rate to 21% and apply a separate foreign tax credit limit to each foreign jurisdiction instead of allowing a US parent company to use an averaging method ( which generally allows foreign taxes paid to high tax jurisdictions to reduce residual U.S. tax paid on income earned in low tax jurisdictions). These changes would be reconcilable with any multilateral agreement reached under the “second pillar” of the inclusive OECD / G20 BEPS framework, which calls for a global minimum tax.
- Repeal of the high tax exemption of GILTI and of subpart F on income. Under the GILTI and Subpart F regimes (both of which tax U.S. parent companies each year on some of their SEC income), U.S. corporations are not taxed on any income earned by an SEC if the rate d The SEC’s foreign effective taxation exceeds 90% of the US rate. corporate tax rate. The Green Paper proposes to remove this high tax exemption for tax years starting after 2021.
- Repeal of the FDII deduction. The TCJA grants American companies a deduction of 37.5% (decrease to 21.875% in 2026) for certain “intangible income” that they derive from exports. The Green Paper proposes to repeal the deduction in effect for tax years starting after 2021.
- Replace BEAT with SHIELD. Under the TCJA’s “Base Erosion and Anti-Abuse Tax”, companies with average gross revenues over $ 500 million are subject to a minimum tax increase typically equal to 10%. (rising to 12.5% in 2026) multiplied by the excess by which their “BEAT Obligation” (calculated by adding certain deductible payments made to foreign affiliates) exceeds their usual tax liability. The Green Paper proposes to replace BEAT with a rule “to stop harmful reversals and put an end to low tax rate developments”. The SHIELD rule would deny certain deductions to U.S. member companies and branches of financial reporting groups with more than $ 500 million in annual worldwide revenue (determined on the basis of their consolidated financial statements) for payments made to group members. Financial reporting whose income is subject to a tax rate lower than a designated minimum tax rate. The designated minimum tax rate would be 21%, unless and until a different rate is required by “pillar two” of the OECD / G20 inclusive framework on BEPS. The proposal would be in effect for tax years beginning after 2022.
- Limit deductions for disproportionate US loans. Under Section 163 (j) (enacted by the TCJA), U.S. corporations are generally allowed to deduct business interest expenses only to the extent that they exceed their business interest income plus 30% of the EBITDA (or EBIT, as of 2021). The Green Paper would further limit the interest deductions of certain U.S. members of multinational groups that prepare consolidated financial statements if their net interest expense for financial reporting purposes exceeds their proportionate share of the net interest expense reported in the financial statements. consolidated financial statements of the group. The amount of interest expense disallowed for US tax purposes would be proportional to the excess interest expense for financial reporting purposes. The proposal would be in effect for tax years beginning after 2021.
III. Individual tax measures
- Increase the personal income tax rate. Under the TCJA, the top federal marginal tax rate applicable to individuals is 37%, rising to 39.6% after 2025. The Green Paper would increase the rate to 39.6% for tax years beginning after 2021. In 2022, the rate would generally apply to taxable income greater than $ 509,300 for married persons filing a joint return and $ 452,700 for unmarried persons.
- Tax long-term capital gains and eligible dividends at regular high income rates. Currently, individuals are subject to a maximum rate of 20% on long-term capital gains and eligible dividends. The Green Paper proposes to subject long-term capital gains and eligible dividends to ordinary tax rates for individuals with adjusted gross income over $ 1 million. The proposal would apply to items recognized after April 28, 2021.
- Force recognition of income from donors, deceased persons and legal persons. At present, donations and transfers on death are not taxable events, although heirs generally take an “increased” basis on the property they receive from a deceased. The Green Paper proposes to generally require donors and deceased persons to account for capital gains on transfers to donees or heirs. Certain exclusions would apply, including a lifetime exclusion of $ 1 million per person (indexed to inflation). Starting in 2030, the proposal would also require unincorporated entities to recognize unrealized gain on any asset that has not been the subject of a taxable event in the previous 90 years. The proposal would generally come into effect after 2021.
- Increase Medicare tax by 3.8%. Currently, limited partners who materially participate in the activities of a partnership are not subject to self-employment tax, and members of S corporation who materially participate in the activities of an S corporation are not subject to self-employment tax. self-employment tax only on the “reasonable remuneration” they receive in their capacity as an employee. These individuals are also exempt from “net investment income tax”, which currently only applies to certain passive income and gains. The Green Paper proposes to subject all business or business income of individuals earning more than $ 400,000 to self-employment tax or net investment income tax for tax years beginning after 2021.
- The tax bore interest at ordinary rates. The Green Paper proposes to tax investment professionals at regular rates on income and gains from the disposition of their deferred interest if their taxable income from all sources exceeds $ 400,000. Investment professionals with taxable income of less than $ 400,000 would continue to be subject to Section 1061 (enacted by the TCJA), which imposes a three-year holding period as a prerequisite for recognition of overdue. long-term values on deferred interest issued to investment professionals, and otherwise treats capital gains as short-term capital gains. If the separate Green Paper proposal to tax long-term capital gains at regular rates for individuals with income over $ 1 million is passed, then the deferred interest proposal is likely to materially affect only holders. deferred interest with taxable income between $ 400,000 and $ 1 million. The proposal would be in effect for tax years beginning after 2021.
- Limit the carry-over of gains on exchanges of the same nature. Under Section 1031, owners of valued real estate used in a trade or business or held for investment purposes can defer the gain on exchanging the property for real estate of “like kind”. The Green Paper would limit a taxpayer’s ability to defer recognition of a gain greater than $ 500,000 on any putative exchange under section 1031.