After much speculation about how the new administration would prioritize tax code changes, President Joe Biden laid out an agenda in late April. By increasing taxes on the wealthiest earners, Biden proposes to expand family leave, childcare, health care, and preschool and college education for millions of people. The $1.8 trillion social spending plan is intended to build roads and bridges, expand social programs, and combat climate change.
Biden’s vision depends heavily on increased tax revenue. To fully fund the American Jobs Plan, the Made in America Tax Plan proposes reversing the corporate tax rate decrease that was the centerpiece of the Trump Administration’s Tax Cuts and Jobs Act of 2017. President Biden’s tax plan also proposes a number of other changes, mostly concerning international taxation, with the stated goal of incentivizing job creation and investment in the U.S.
Corporate leaders should consider the key provisions and assess their organization’s ability to adapt to the proposed changes.
Key Provisions of the Biden Tax Plan
The following elements of President Biden’s tax plan are drawn directly from the White House fact sheet. Few of these initiatives have found support among Republicans, so prospects for the implementation of these proposals remains uncertain.
Reset the Corporate Tax Rate at 28%
“The President’s tax plan will ensure that corporations pay their fair share of taxes by increasing the corporate tax rate to 28%.”
The stated goal of the proposed tax rate increase is to fund investments in infrastructure, clean energy, and R&D. These investments are also intended to fuel the growth of the economy and maintain the competitiveness of the U.S. globally.
Leading the Way to a Global Minimum Tax
“The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear.”
This initiative aims to disincentivize corporations from relocating operations to low-tax countries to avoid higher domestic corporate income tax. The Biden Administration believes this call for solidarity among countries will position the U.S. as a global leader on international taxation issues.
Prevent U.S. Corporations from Inverting
“Under current law, U.S. corporations can acquire or merge with a foreign company to avoid U.S. taxes by claiming to be a foreign company, even though their place of management and operations are in the United States.”
President Biden proposes making it more difficult for corporations headquartered in the U.S. to avoid U.S. taxation by shifting their country of incorporation from the United States to a foreign jurisdiction. In conjunction with this proposal, the Biden Administration proposes increasing IRS funding and implementing stricter enforcement measures.
Increased Audits for Corporations
“A decade ago, essentially all large corporations were audited annually by the IRS; today, audit rates are less than 50%. This plan will reverse these trends, and make sure that the Internal Revenue Service has the resources it needs to effectively enforce the tax laws.”
For years, large corporations have employed teams of tax professionals to devise and implement strategies that minimize their tax liabilities, sometimes through questionable means. This broad enforcement initiative is intended to more effectively identify instances of tax evasion and underreporting by corporations and high-income taxpayers.
Tax Planning Considerations
While major tax changes could be in the forecast, it is difficult to predict how seismic they will be. The fact sheet released by the White House is light on detail. However, the Treasury Department recently released its annual “Green Book,” which includes a comprehensive explanation of each of the fact sheet’s proposals as well explanations of the additional tax reform proposals the Green Book raises, including a proposal to raise the tax rates applicable to long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million. These proposed changes to capital gains taxes are already worrying investors and their tax advisers, particularly the possibility of making them retroactive.
The president’s more ambitious proposals could face congressional gridlock and may require considerable revision to amass the support necessary for enactment. Compounding this conundrum, several cabinet members, including Treasury Secretary Janet Yellen, have repeatedly indicated that proposed changes will be introduced iteratively in separate legislation. That, combined with the lengthy congressional reconciliation process, makes it difficult to predict if and when a particular proposal might be enacted, let alone take effect.
The likelihood of a prolonged legislative process makes interim tax planning difficult. Tax professionals can’t predict what is coming, or when. The fastest possible timeline for changes to be voted into law would be the next six months; however, the timetable could be considerably longer.
Companies can implement some financial and operational measures in 2021 to mitigate the potential impact of Biden’s tax plan. First and foremost, companies should work with their tax advisers to model the potential impact of each of the proposals and, to the extent possible, include milder variants of each (e.g., if the corporate income tax rate were raised to 25% rather than 28%). Using the results of these modeling efforts, companies could devise a strategic plan that accounts for the likeliest changes and identifies both interim and post-enactment steps to mitigate the impact of those changes.
Despite the uncertainty, some tax planning measures may well be advisable in 2021. For example, the likelihood that the corporate income tax rate will increase could make it wise to accelerate income recognition in 2021 under a preferential tax rate. Other timing measures could also prove beneficial, such as deferring losses and deductions to a later tax year, refraining from accelerating the deduction of prepaid expenses, capitalizing R&D expenses, or electing out of bonus depreciation. Businesses should work with their tax advisers to identify actions to take in the interim period, before any tax law changes become effective.
Taxpayers and their advisers should also communicate with lawmakers about how each proposal would impact their bottom line, profitability, hiring practices, or other aspects of their business.
The stated goal of Biden’s Made in America Tax Plan is to “raise over $2 trillion over the next 15 years and more than pay for the mostly one-time investments in the American Jobs Plan and then reduce deficits on a permanent basis.” Whether these changes will ultimately be implemented or have the desired effect remains to be seen. For now, U.S.-basedcorporations, especially those with international operations, must be prepared for changes to their tax-compliance obligations without knowing exactly what those changes will be.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Sanjay Agarwal is tax practice leader at MGO, and Patrick Roach is an international tax senior manager.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.