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The American Jobs Plan Proposes Important Corporate Tax Changes 

by Michael Cumming, James Brandell, Ph.D., Scott Kocienski, Richard Lieberman

Published: April, 2021

Submission: April, 2021

 



On March 31, 2021, the Biden Administration released a Fact Sheet for its proposed American Jobs Plan (the “AJP”). The full text of the AJP can be found here.


Although the AJP is primarily a proposal for rebuilding our country’s infrastructure, positioning the U.S. to compete with China and creating millions of jobs, it also proposes important corporate tax changes necessary to fund the AJP.


The AJP tax proposals are designed to support its proposed expenditures by modifying current corporate tax provisions to incentivize job creation and investment in the U.S., eliminating profit-shifting to low tax jurisdictions, and ensuring that large corporations pay a minimum amount of U.S. taxes.


These tax proposals include the following changes to the manner in which corporations are subject to tax:


  • Sets the corporate tax rate at 28 percent.
  • Discourages offshoring by strengthening the global minimum tax for U.S. multinational corporations.
    • President Biden’s tax reform proposal will increase the minimum tax on U.S. corporations to 21 percent and calculate it on a country-by-country basis. It will also eliminate the rule that allows U.S. companies to pay zero taxes on the first 10 percent of return when they locate investments in foreign countries.
  • Establishes a global minimum tax.
    • The proposal denies deductions to foreign corporations on payments that could allow them to strip profits out of the United States if they are based in a country that does not adopt a strong minimum tax and seeks a global agreement on a minimum tax through multilateral negotiations.
  • Prevents corporate inversions.
    • Under current law, a U.S. corporation can acquire or merge with a foreign company to limit or avoid U.S. taxes by claiming to be a foreign company, even though its primary place of management and operations remain in the U.S. The Biden Administration is proposing changes in U.S. tax policy making it more difficult for U.S. corporations to invert.
  • Denies U.S. corporations expense deductions for offshoring jobs and credit expenses for onshoring.
  • Eliminates the current tax incentive to offshore intellectual property and research and development activities.
    • The proposal calls for the complete elimination of the tax incentives in the 2017 Tax Act for “Foreign Derived Intangible Income” (“FDII”). The proposal would allocate all of the revenue from repealing the FDII deduction to support greater U.S.-based R&D investment activities
  • Proposes a minimum tax on large corporations’ book income.
    • A 15 percent minimum tax on the income corporations use to report their profits to investors,i.e., “book income,” would be imposed only on the very largest corporations.

Consistent with the foregoing proposals, Secretary Yellen officially called for a coordinated effort to establish a global minimum tax in a speech to the Chicago Council on Global Affairs on Monday, April 5. In her speech, Secretary Yellen signaled support for global tax changes consistent with the Organization for Economic Cooperation and Development’s Report on the Pillar One Blueprint (located here) and Report on the Pillar Two Blueprint (located here). Most importantly, Secretary Yellen’s comments make clear the Biden Administration’s intent to work closely with its allies around the world to establish a global tax system that avoids what is often referred to as the “race to the bottom,”i.e., to create a structure limiting opportunities for global profit shifting and tax base erosion that, like water, generally seeks its own level.


Lastly, it is important to understand the corporate tax proposals referenced in the AJP should not be viewed as the Biden’s Administration’s final statement on tax reform. The AJP tax proposals are designed to meet a specific purpose and are not intended to reflect the full extent of expected tax proposals that will directly impact noncorporate businesses and wealthy individuals. The Biden Administration is expected to issue another proposal in the near future to address “social infrastructure” investments that would include child care, health care, and college tuition. That plan would be subsidized by increased taxes on wealthy households and could cost more than $1 trillion.


Also, Senate Finance Committee Chairman Ron Wyden (D-OR) and other Democratic Senators unveiled an international tax reform “framework“ on April 5 that would make significant changes to the taxation of revenue by U.S. businesses overseas that were part of the 2017 Tax Act. The framework appears to in part support and in part supplement the President’s proposals.


We will provide regular updates as further proposals are announced.


If you have any questions about the AJP tax proposals, please contact Michael Cumming ([email protected] or 248-203-0740), Scott Kocienski ([email protected] or 248-203-0868), Richard Lieberman ([email protected] or 312-627-2250), James Brandell ([email protected] or 202-906-8633), or your Dykema relationship attorney.


 


 

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