Will proposed corporate, international tax changes survive Congress?
The Made in America Tax Plan: An opening salvo
Authored by RSM US LLP
By announcing his Made in America Tax Plan on March 31, President Joe Biden kicked off negotiations about his $2 trillion infrastructure plan and how to fund it. The proposals face Congressional obstacles in a highly partisan political environment with narrowly split chambers. Jim Alex, RSM’s national tax go-to-market leader, and Mathew Talcoff, national tax industry leader, react to the proposals and assess the legislative cycle ahead in a discussion with Dan Ginsburg, RSM’s public affairs leader, on “Tax Policy Now.” Below is a transcript of their conversation, edited for clarity:
Dan Ginsburg: The $2 trillion infrastructure proposal announced March 31 is part of The American Jobs Plan, and while certainly a significant announcement, it’s really just an opening salvo, as we know. Negotiations are already heating up, and with a virtual even split in Congress, policy will continue to be driven in a highly partisan political environment, for sure.
The headline, of course, is a jump in the corporate tax rate from 21% to 28%, though it also includes meaningful changes to international tax rules and others.
It was also noteworthy what wasn’t included: state and local taxes (SALT), increases in individual rates for high earners, and others, though it may be just a matter of time before these make it into the administration’s next proposals, which could be announced as soon as later in April.
So, Jim, help us unpack this a little bit further.
Jim Alex: Thanks Dan. There are three key takeaways from what we heard last week from President Biden in a plan that’s called Made in America Tax Plan supporting the overall infrastructure plan. Three things:
First, there’s a proposed increase in the corporate rate from 21 to 28%. Now, that’s only 7%, but in reality, that’s a 33% increase, so that’s obviously a material number for corporations.
Second, what was interesting about the proposal was the emphasis on corporations—businesses, but particularly corporations. Not even pass-throughs or partnerships, but really about corporations. And a heavy emphasis on international tax. So it’s really about what’s in there and what’s not.
Third, there’s a heavy emphasis with regard to enforcement on the corporate business side, but also reference to enforcement with regard to individuals. Those are the key headlines from what we heard March 31 from the president.
Dan: What are your thoughts exactly on that? Is the focus on international tax and the corporate rate, and that’s it? And why corporate rate versus individual top marginal rate?
Jim: That’s a great question. What we sensed is and what our read is that this is the first salvo, that there will be a second plan discussed that focuses more on the human capital side of infrastructure and therefore, more on the individual side with regard to taxes. So, this is Round 1, essentially.
With regard to the corporate rate, obviously that can be politically palatable to move the rate up on a corporation. One thing to note, too: The lowering of the corporate rate in tax reform in 2017 to 21% was quite a surprise, and it had no bipartisan support. So, politically, it appears to be an easy move to make a recommendation to raise the corporate rate from 21 to 28%. And, indeed, that’s what we’re seeing in this first salvo.
One other thing to note about that: We’ve heard recently that Sen. Manchin, D-W.Va., who we’ve emphasized in prior discussions is at the center of the tax policy discussions, has indicated that he may be willing to see the rate go up, maybe at 25% or something like that. So we’re getting indications, as well, with the center may be suggesting that the corporate rate might be going up, as well, hence the focus on the corporate rate in this Round 1.
Dan: Besides the proposed corporate rate increase, the plan also contains some international tax proposals that amount to undoing corresponding portions of the TCJA. It would raise the GILTI tax to 21% from 10.5%; repeal the FDII deduction, among other changes. It also removes the ability of certain companies to claim deductions for payments to foreign-related parties under the BEAT provisions enacted as part of TCJA. So, Jim, take us a little bit further on that part of the proposal.
Jim: The reaction—at least my own reaction, candidly—is surprised. There’s just a lot of fatigue in the international tax space because of the enormous change that was implemented via tax reform, moving from effectively a worldwide income approach to territorial. We worked a lot with our clients implementing that change—modeling, planning, execution and finally the enormous burden of tax compliance. All of that kind of created a lot of sense of fatigue about implementing that regime. So now what we’re seeing is proposals for significant change, hence my comment that I’m surprised.
What are those changes? You just identified them. A real focus on the GILTI regime—raising it, providing substantive rules. Potentially an elimination of something called FDII, which essentially is about providing an incentive to businesses here with regard to intangible income from overseas—eliminating that whole provision, which has gotten plusses and minuses in reviews by various evaluators.
A potential elimination or change of the BEAT regime, which is one of the guardrails that prevents overseas planning and trying to move income different directions. A provision regarding anti-inversions, which is taking a company overseas so you have a lower tax rate overseas compared to here in the United States.
There are several provisions—a lot of that amounts to significant change, and hence I think there is some degree of surprise with what we’re seeing compared to what was discussed in the campaign.
All of that, again, will come back to what we’ve talked about previously through the House and the Senate. And particularly in the Senate, it looks like it’s going to have to be through budget reconciliation. That is where only 50 senators plus the vice president are necessary to pass it as compared to the normal 60 senators. So, to implement that kind of change, which could be significant, is likely going to have to go through budget reconciliation.
One thing also to note: Very recently, U.S. Treasury Secretary Janet Yellen has been quoted as saying that she’s interested on behalf of tax policy in the United States in studying and maybe implementing a worldwide minimum tax rate. That would be enormous to pull off, getting countries to agree. But that gives you a sense of the possibility of change in the international space. Again, all of this has to ultimately work through Congress.
Dan: Yeah, certainly a lot to unpack there. And, look, when it comes to reconciliation, no doubt it will be politically more difficult to go that route when it involves raising taxes versus last time when we were talking about handing out stimulus checks. But it can happen, and we certainly need to watch closely what transpires.
Matt, let’s dig a little bit deeper. How do you see it playing out? More importantly, what should we be doing to prepare?
Mathew Talcoff: I think about what we’re hearing from our clients, and our clients are saying that they want to stay informed. This is really the reason why you, Jim and I and others are following these talks on Capitol Hill really closely. What we’re hearing is businesses—the executives there, as well as the business owners—they’re really focused on the tax rate and how it’s applied to business income. As Jim noted, we are getting indications that the corporate rate may go up to possibly 25%, maybe even more as we’ve been hearing.
However, many of our clients, they own pass-through entities. As Jim mentioned, the discussion to date has been around the corporate rate. But owners of pass-through entities, they are really concerned also about what that means for the flow-through business income they receive. And we expect that the rate will increase, as well, on those through a reduction in what is known as qualified business income. I think we have to pay really close attention to that.
And it’s not just the corporate tax rate and changes in the international taxes that we were just talking about. But it’s also possible increases in the personal income tax rate, perhaps by as much as almost 3%, as well as possible changes in tax rates on investment incomes, like long-term capital gains, potential changes in the estate rules, and even the state and local tax deductions. There’s a lot of discussion around that.
So, there are a lot of things going on, and as you can see, there’s just so much we need to be following. I think Jim used the right word before: modeling—being proactive and being flexible in our planning is going to be key.
Dan: That’s sound advice. Can you go a bit further on what you see coming on the individual tax side, as well as anything else we might see in the administration’s next tax proposal, which we could see as soon as later in April?
Matt: What we know is President Biden has reiterated since being on the campaign trail that he does not plan to raise taxes on anyone earning less than $400,000 a year. So we can look at that tax plan he proposed last year and see a fairly clear picture of what’s coming. And I think what’s coming will be very likely a 2% increase or more on the individual income tax rate on high earners. We might see an increase in the capital gains tax rate. We’ll likely see a reduction in the exemption for estate and gift taxes. And we will continue to follow all of those potential changes.
Let me provide one bonus item because I think this is a fascinating one for us to follow: SALT, the state and local tax deduction. We’re continuing to hear that both House and Senate Democrats from higher tax states, as well as even Democratic governors, are strongly pushing for a reduction or a full elimination of the $10,000 SALT cap.
Dan: So, what’s the key takeaway? What are you telling your clients?
Matt: What we have continued to say all along has been that you should prepare to extend your tax returns—if you haven’t already done that—so you can develop your models and have them be flexible models. Think about your accounting methods. Think about your capex spend. You may want to take a different position on depreciation, for example. So, be prepared with models so that if the changes do happen, you can look at your scenarios and not be defensive, but instead be proactive and offensive in your tax plan.
Our advice is to be prepared, have your models ready, be flexible and work closely with your advisors.
Dan: Yes, there is so much to digest and to get ready for in coming weeks and months. It’s going to be interesting, to say the least.
This article was written by Dan Ginsburg, Mathew Talcoff, James Alex and originally appeared on 2021-04-08.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Pugh CPAs is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Pugh CPAs can assist you, please call 865.769.0660.
Call us at 865.769.0660 or fill out the form below and we'll contact you to discuss your specific situation.