The Biden Administration will likely revisit the Tax Cuts & Jobs Act, the outgoing administration's signature legislative achievement enacted in 2017, to free up money for infrastructure and other priorities, analysts say.
Expect the top corporate tax rate to rise to 28%, from 21%, and a new 15% minimum tax on book income for companies with net income of more than $100 million but owe no U.S. income tax, effectively an alternative minimum tax on companies.
The new tax on book income would complicate tax strategies by making it harder for companies to take advantage of targeted incentives, such as the immediate deduction for short-lived property and equipment investments. But companies might be able to offset some of these missed opportunities by tapping foreign tax credits and net operating loss carryovers, analysts say.
These foreign benefits "constitute a large part of the difference between book profits and taxable income for many corporations," a report by Washington law firm Skadden, Arps, Slate, Meagher & Flom LLP said.
The increase in the top corporate tax rate, to 28%, would represent a 33% increase over today's rate, but still be below the 35% top rate in place prior to the 2017 law. It would also remain below the typical comparative rate in Europe.
Dechert LLP analysts say the change, along with the new book income tax, as well as an increased tax rate on offshore income, is unlikely to change many companies' tactical decisions.
"Tax impacts are often only one of many factors motivating a transaction," Dechert analysts said in a report. "Likewise, although net returns may suffer relative to previous tax environments, it's likely to change expectations rather than change business models."
The Skadden analysis said the higher top rate would likely spur companies to structure more tax-deferred transactions, a tactic that has been declining since the 2017 law.
"The rate increase could cause the pendulum to swing back," the report said.
The higher tax on offshore income would come through an increase in the rate imposed on global intangible low-taxed income, known as GILTI. That rate is tied to the corporate tax rate, so, if that latter rate goes up to 28%, the GILTI rate would increase from 10.5% to 21%, according to a Deloitte analysis.
There would be two other impacts on GILTI: the exemption for a 10% return on the average adjusted basis of foreign tangible property would go away, and the tax would be calculated on a country-by-country basis, which, the Deloitte analysis said, "would prevent taxpayers from offsetting GILTI amounts between high-tax and low-tax countries."
Due to the GILTI rate change, CFOs would have to calculate whether it makes more sense to keep operations offshore, at the higher rate, or move them to the United States, which has a lower effective tax rate on foreign-derived intangible income but would also be subject to that new 15% minimum tax on book income, among other things.
The Skadden analysis recommends finance executives decide what to do now, while the top rate is still 21%, and the other tax increases aren't in place. "Weigh the benefit of achieving domestication at the current lower rates against taking a ‘wait-and-see' approach," the analysis said.
Another component to this calculation is a proposed 10% surtax on top of the 28% corporate rate on the profits on foreign production, which includes call centers and other types of services, if the products or services are sold in the U.S. The surtax is aimed at encouraging companies to locate operations in the U.S.
The proposal would also add an additional incentive by disallowing deductions associated with moving jobs and production offshore, and would add strong anti-inversion regulations and penalties, the Deloitte analysis said.
The incentive to locate operations in the U.S. wouldn't only be punitive; there would be enticements, too, starting with a 10%, advanceable "Made in America" credit that could be applied to costs to keep operations domestic.
These costs cover returning production to the U.S., revitalizing closed or closing manufacturing facilities, and increasing wages to U.S. manufacturing workers, among other things.
In sum, corporations can expect to face higher taxes, including on profits earned abroad, but there are incentives to keep operations in, or return them to, the U.S.