The White House released a fiscal year 2023 budget blueprint on March 28, 2022, that is consistent with President Joe Biden’s longstanding calls for significant tax increases targeting large corporations. Along with the budget blueprint, the White House also released what is known as the “Green Book,” which provides more granular details from the Treasury Department on the administration’s tax and revenue proposals.
The proposals set forth target international tax reform and, if passed into law, would have an immediate impact on multinational corporations.
One notable proposal is to increase the tax rate for C corporations from 21 percent to 28 percent. The Administration suggests that “[r]aising the corporate income tax rate is an administratively simple way to raise revenue to pay for the Administration’s infrastructure proposals and other longstanding fiscal priorities.” Moreover, the Administration argues that “many multinational corporations pay effective tax rates that are far below the statutory rate, due in part to low-taxed foreign income.” As such, the proposal would keep the global intangible low-taxed income (GILTI) deduction constant, raising the GILTI rate in proportion to the increase in the corporate rate.
The Administration believes this avoids increasing the incentive to shift profits and activity offshore as the domestic rate is increased. The 28 percent corporate income tax rate will consequently increase the GILTI rate. The proposal is scored under the assumption of a Build Back Better Act baseline. Therefore, the new GILTI effective rate would be 20 percent, applied on a jurisdiction-by-jurisdiction basis.
The Administration looks to create a tax incentive to bring offshore jobs and investments back into the U.S. Accordingly, the Administration proposes to “reduce the tax benefits that exist under current law for expenses incurred to move U.S. jobs offshore.” To accomplish this, the proposal would create a new general business credit equal to 10 percent of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. For this purpose, onshoring a U.S. trade or business means reducing or eliminating a trade or business or line of business currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business within the U.S., to the extent that this action results in an increase in U.S. jobs.
In addition, to reduce tax benefits associated with U.S. companies moving jobs outside of the U.S., the proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. For this purpose, offshoring a U.S. trade or business means reducing or eliminating a trade or business or line of business currently conducted inside the U.S. and starting up, expanding, or otherwise moving the same trade or business outside the U.S., to the extent that this action results in a loss of U.S. jobs. In addition, no deduction would be allowed against a U.S. shareholder’s GILTI or subpart F income inclusions for any expenses paid or incurred in connection with moving a U.S. trade or business outside the U.S.
The Way Forward
While the Administration’s proposals will be monitored closely in the coming weeks and months, the political landscape in Washington remains uncertain and the likelihood of any proposals passing into law in their current form remains unclear. McGuire Sponsel will continue to monitor these developments.
We appreciate your continued trust in McGuire Sponsel as a technical resource to your firm. If you have any questions about this update or other international tax or global business issues, do not hesitate to reach out to our Global Business Services team.
Jason Rauhe, CPA is a Principal in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.
Rauhe previously served as Director of International Tax at a Top 100 CPA Firm, where he was responsible for the firm’s international tax division and major industry alliance networks.