‘Devil is in the Details’ of Corporate Tax Reform

Just as corporations and tax practitioners are beginning to adjust to the 2017 Tax Cuts and Jobs Act, the Biden administration’s proposed changes would introduce further complexities into an already complicated system, according to three U.S.-based tax attorneys.

Biden’s proposal increases the standard corporate tax rate, imposes minimum rates for an increased foreign-sourced income tax, a domestic tax, and a controversial global corporate tax. 

However, until the plans proceed from outlines to specifics, both Patrick Cox, partner at Nixon Peabody, and Anna Derewenda, partner at Williams Mullen, said,“the devil is in the details.” 

The Tax Cut and Jobs Act enacted in December 2017 decreased the regular statutory rate from 35% to 21% and replaced the corporate minimum tax with a Global Intangible Low Tax Income of 10.5% on foreign-sourced income. The new changes would increase this GILTI rate to 21% and reestablish a domestic minimum corporate tax of 15%. However, these rates are under discussion, as President Biden has already indicated he would consider Sen. Joe Manchin´s, D-W.Va., proposal of an increase limited to 25% instead of 28% for the regular tax.

Cox explained that a minimum tax limits the use of costs, depreciation, tax credits and exemptions, and other deductions normally used to determine “taxable income” under regular corporate taxation, a practice that often results in little or no corporate tax for companies. 

Application of a domestic minimum tax has caused concern, but Biden announced yesterday that the 15% minimum tax would be applied only to companies that exceed $2 billion in revenue, so “we don’t really have to worry about mom-and-pop in Indiana.” Biden had previously mentioned a threshold of $100 million.

There is also concern for those companies that recently decided to expand globally and build out expecting these tax deductions, Cox said, only to have someone “[pull] the rug” from under them. The point of having tax incentives is to promote a competitive and thriving economy.  

Alarm bells have also sounded over whether the increased U.S. corporate taxation could harm U.S. competition with foreign jurisdictions that offer lower rates. Full international collaboration may be wishful thinking. 

“It’s a collusive mechanism designed to prevent countries from using low taxes to compete for businesses and the workers they employ,” said Luke Froeb, professor of economics at Vanderbilt University and former chief economist at the Justice Department.

Most controversial is the fourth change, the global corporate minimum tax proposed by U.S. Treasury Secretary Janet Yellen, which sounds like a “great idea” but may not be a “realistic” nor “practical” plan, the third attorney said.

All attorneys raised doubts about the ability to come to a full agreement this year, as well as how an international framework would be governed. 

What Yellen is proposing entails “multi- and bilateral agreements” with over 20 jurisdictions that would take treaties, he said, which usually take years for countries to wrestle through before coming to agreement. 

“If [the agreements] are not binding, it’s not worth the paper they are on,” he added.

Each country could tweak proposals in their own legislation, Derewenda said, noting that GILTI is “almost a global minimum” already. GILTI could be the minimum the countries applied while hammering out agreements, she added, as “tax laws are trying to catch up with modern commerce and a digital world.” 

However, the third tax attorney said that the proposed 15% minimum was a “smart” regime, as it is known that not all companies would actually pay the proposed 28% regular rate. The past critiques by Sen. Elizabeth Warren, D-Mass., and others “were not inaccurate.” 

The benefits from cross-border tax planning techniques, domestic tax credits, deductions and the like allowed companies like Google and Amazon to have significantly lower global “effective” tax rates – often reported to be in the 5-10% range – than most other companies lacking the scope and resources. This is “mind boggling” considering how much these companies make, he explained. The minimum required “floor” would have “some bite to it” for the larger corporations, ensuring that they would have to pay at least 15%.