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US tax reforms: what to prepare for

Biden discussing the US tax reform

By Ian Lavis on behalf of Praxity Global Alliance

 

Accounting firms and their clients are gearing up for sweeping tax changes in the US under reforms proposed by President Joe Biden.

The reforms would remove tax breaks and loopholes for large companies, multinationals and high-net worth individuals.

Penalties could be imposed in relation to overseas income and business operations. In contrast, to encourage domestic growth, new tax breaks and incentives could be introduced for manufacturing and clean energy companies based in the US.

The proposals are far-reaching but they are by no means guaranteed. Much will depend on the level of bipartisanship in US Congress to enable the planned reforms to go through. There may also be delays in implementation due to the pandemic.

To give some steer, we spoke to tax experts at independent accounting firms within Praxity Global Alliance to find out what’s happening right now, what changes to expect and what clients can do as a result.

 

Biden’s priorities

Jessica Wargo, CPA and Principal, International Tax Services, at Plante Moran in Michigan, believes Biden’s proposals, if implemented, will have a big impact on both companies and individuals but it could be a little while before we see the reforms coming into effect.

She explains: “In the short term, the focus is on economic recovery and Covid-related relief. The tax policy right now is focused more on individuals, low-income families, small businesses, and individual tax credits. In the longer term, there are some particularly significant things to look out for from a business perspective. The most prominent and likely measure is a change in the rate of corporate tax.”

 

Corporates and high earners

The Biden team proposes to increase the standard corporate tax rate seven points to 28%. This would considerably roll back the 2017 Tax Cuts and Jobs Act (TCJA) introduced under Donald Trump. Although it would fall short of the pre-TCJA level of 35%.

High net worth individuals also face significant changes. Biden plans a 2.6% tax rate increase to 39.6% for individuals earning over $400,000. He also proposes to reduce the estate tax exemption from $11.58 million to $3.5 million. In addition, Biden is looking to increase the top tier estate tax to 45% while simultaneously making obsolete the favourable step-up in basis of assets transferred upon death.

Tifphani White-King, Principal, National Tax Leader, at Mazars USA in New York, says: “There is a clear view that existing rates are skewed towards a certain group of individuals and companies. From Biden’s perspective, the idea is to right-size [realign] that and think philosophically about what we are doing as a nation.”

She adds: “It’s important because if you are a wealthy individual or a business with existing big tax breaks, you will be thinking, ‘what’s next?’”

 

Companies with offshore operations

One of the biggest ‘hits’ for companies could be Biden’s plans to increase taxes for multinationals and companies with offshore operations.

The proposed corporate tax hike would trigger changes to the tax rate imposed on global intangible low-taxed income (GILTI) and foreign-derived intangible income.

An article posted by Bloomberg entitled Potential Tax Reforms of a Biden Administration outlines the following key changes proposed by Biden:

  1. Doubling the foreign tax rate paid by US multinationals from between 10.5% and 13.125% to 21%, with a minimum tax assessed on a country-by-country basis
  2. Introducing a penalty surtax of 10% for imported goods
  3. Making businesses return tax benefits if they send jobs overseas
  4. Introducing a 10% tax credit for goods manufactured in the US

Under these proposals, Biden would remove the exemption from GILTI for the 10% return on the average adjusted basis of foreign tangible property. GILTI would be calculated on a country-by-country basis, thus preventing GILTI amounts to be offset between high-tax and low-tax countries.

He also plans to reinstate the Alternative Minimum Tax whereby companies that report net income of $100 million or more would pay the standard rate of tax or a 15% minimum on book income, whichever is higher.

Commenting on the changes to GILTI, Jessica says: “It is likely companies that were taking advantage of high-rate exemption will not be able to do so in as m any jurisdictions as before. I think generally the message is to do away with the 10% Qualified Business Asset Investment shelter, but I don’t know if this have a big impact on multinationals”.

She believes the goal of the surtax is to encourage US-based companies that manufacture offshore to move their manufacturing operations back to US soil. She adds: “How effective this will be depends on the company lifecycle and whether it has the capital to buy facilities, hire people and make other necessary investments. Companies must also give consideration to local labour law and legal challenges of moving operations out of foreign jurisdiction.”

 

Tax credits

On the plus side, there are also significant tax breaks planned by the Biden administration, including the proposed expansion of the New Markets Tax Credits (NMTC) scheme. These credits are for qualified equity investments in low-income communities. They are currently due to finish this year, but Biden has indicated they could become permanent.

The President also plans to expand tax credits for renewable energy, including those for carbon capture, use and storage, and residential energy efficiency. In addition, energy investment tax credits (ITCs) and the electric vehicle tax credit may be reintroduced, according to Bloomberg.

Tifphani comments: “There is a lot of hope and there are a lot of incentives, with tax credits for businesses focused on areas such as environmental protection, mitigating climate change and developing solar power. There are pros and cons, but a lot of the tax breaks will go in favour of domestic manufacture and distribution, and the companies that are really suffering especially as a result of the pandemic.”

 

Tax planning

It is not yet clear which reforms will likely get through Congress and whether they will be watered down or delayed. Jessica says Biden will need to “push very hard within the next year” to get his proposals through as mid-term congressional elections will take place in Autumn 2022 and could change the balance of power in congress. She points out there has already been opposition from Biden’s own party to corporate tax of 28%, with one Democrat calling for 25%.

Despite this, both Jessica and Tifphani advise companies and individuals to consider tax planning sooner rather than later.

A key focus of corporate tax planning will be income offshore, repatriation of earnings, and how much of a company’s business is performed by offshore labour.

She explains: “For manufacture and distribution clients, if all production is done outside the US, the proposal is to tax you on a proportion of income generated offshore. If your production is offshore, but you are selling in the US, instead of regular corporation tax of 28%, it might be 30 or 31%.”

She says companies should look at all aspects of the supply chain when it comes to tax planning. Those with offshore operations should consider whether they still want to manufacture and distribute offshore, whether they want to sell outside the US, and whether there are some offsets if they keep things offshore.

Individuals, on the other hand, should look at the “often-overlooked” area of estate planning, whereby wealth is distributed out to trusts, for example, or through charitable giving, Tifphani says.

 

Supporting clients through Praxity

To help individuals and companies further understand and anticipate the proposed changes, both domestically and internationally, Plante Moran, Mazars USA and other independent accounting firms are connecting through Praxity to share knowledge and expertise.

This strong collaborative spirit came to the fore during the last big tax shakeup in the US in 2017. “When the TCJA came out, we had a committee of people from the US firms to talk about new legislation being put in place,” Jessica explains. “We are highly collaborative and we make sure we are putting out the same message. I think that will continue.”

Commenting on the Praxity knowledge share, Tifphani says: “We have a lot of clients asking, ‘what is the state of play today?’ Together, as the Praxity Alliance, we have access to great insights to help them get ahead of planning and legislation.  We collaborate via round tables with our Praxity colleagues to promote understanding of all tax issues impacting today’s tax landscape.  One of the best points about being in Praxity is its cooperation and in times like this we really pull together.”