On March 28, 2022, the Biden Administration released the 2023 Fiscal Year Budget (the 2023 Budget). It is important to note that the Budget assumes the Build Back Better Act (the BBBA) will be enacted as passed by the House on November 19, 2021 (other than Section 137601 of the BBBA, which would increase the cap on the federal tax deduction for state and local income and real estate taxes (the SALT cap)). The 2023 Budget contains proposals that would be in addition to those included in the BBBA. Highlights of the BBBA are covered in prior alerts located here and here.

Among many other items, the 2023 Budget proposes several tax reforms that are projected to “more than offset the cost of new investments” and “reduce the deficit this year to less than half of what it was” in 2020.¹ The 2023 Budget was followed by the release of the Treasury’s Green Book, which provides explanations of the Biden Administration’s revenue proposals.

Key international and corporate tax highlights of the 2023 Budget are below.

Corporate tax proposals

• Increase in the corporate income tax rate to 28% as of January 1, 2023 (applied on a pro rata basis for tax years that start before such date and end after such date).
  • An increase in the rate to 28% is consistent with the Biden Administration’s 2021 proposal.
  • A 28% corporate income tax rate will increase the GILTI effective rate to 20%, which would apply on a country-by-country basis per the BBBA.
• Repeal of the Base Erosion Anti-Abuse Tax (BEAT) as modified in the BBBA and adoption of an undertaxed profits rule (UTPR) that is consistent with the OECD’s Pillar II UTPR and would apply to taxable years beginning after December 31, 2023.
  • The UTPR would apply only to foreign parented financial reporting groups (including domestic corporations that are part of such groups) operating in low-tax jurisdictions that have global annual revenue of $850 million or more in at least two of the prior four years.
  • The proposed UTPR is a complex calculation that is intended to backstop GILTI and similar OECD Pillar II compliant GloBE regimes by denying tax deductions to large groups that are not subject to a GloBE regime.
  • A top-up tax amount would be determined for large corporate groups that are not subject to GILTI or a similar qualified GloBE regime such that such groups would pay an effective tax rate of at least 15% of financial statement income in each jurisdiction in which they have more than a de minimis amount of revenue and income in excess of 5% of the book value of tangible assets and payroll with respect to such jurisdiction (defined as a three year average of less than $11.5 million of revenue and $1.5 million of profit, respectively).
  • The proposed UTPR would deny tax deductions in the aggregate in jurisdictions that have enacted a UTPR that complies with the OECD’s Pillar II (Qualified UTPR or QUTPR) in an amount necessary to ensure the full amount of the top-up tax is paid in the aggregate on a global basis.
  • The deductions denied would not be premised on tracing particular payments to particular recipients or jurisdictions and may not exclude cost of goods sold based on the Green Book description.
  • If multiple jurisdictions have enacted a QUTPR that applies to the same global group, the US share of the top-up tax would be determined as 50% of the (number of employees in the US divided by the number of employees in all QUTPR jurisdictions) plus 50% of the (total book value of tangible assets in the US divided by the total book value of tangible assets in all QUTPR jurisdictions).
  • The UTPR would deny a US tax deduction to domestic group members in an amount intended to collect a top-up tax equal to the US allocable share of the top-up tax (i.e., 28% of the denied deductions would equal the US share of the top-up tax if the corporate tax rate is increased to 28% as proposed).
  • When another jurisdiction adopts a UTPR, a US minimum top-up tax would apply to domestic financial statement income to protect US revenues from the imposition of UTPR by other countries.
  • The domestic top-up tax would be designed to preserve the continuing benefit of tax credits and other tax incentives that promote US jobs and investments.

• Provide a 10% “onshoring” credit and denial of deductions for “offshoring,” effective as of the date of enactment.
  • A new general business credit equal to 10% of eligible relocation expenses paid or incurred in connection with onshoring a US trade or business is proposed. Onshoring a US 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 United States, to the extent that this action results in an increase in US jobs.
  • The proposal would permit a credit in the US even if the costs were incurred outside the US
  • The proposal would disallow deductions for expenses paid or incurred in connection with offshoring a US trade or business to the extent that this action results in a decrease in US jobs.
  • Both aspects of the proposal would exclude capital expenditures and severance pay and other assistance for displaced workers.

• Amend the section 368(c) control test to align with section 1504(a)(2) for transactions occurring after December 31, 2022.
  • Currently, section 368(c) defines control for tax-free reorganizations as ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.
  • The proposed alignment of the control test to the section 1504(a)(2)’s affiliation test would require a corporation to effectively have at least 80% of vote and value for tax-free reorganization transactions and spin offs with a control requirement.

• Expansion of definition of foreign business entity to include taxable units for taxable years of controlling US persons beginning after December 31, 2022 and to annual accounting periods of foreign business entities that end with or within such taxable years of the controlling US person.
  • Consistent with the BBBA provisions that would apply GILTI, Subpart F and foreign tax credits on a country-by-country basis, the proposal would require separate US tax reporting for each taxable unit within each country.

Partnership tax proposals

• Taxation of carried interests as ordinary income.
  • Currently, carried interests receive a preferential capital gains tax rate, subject to certain restrictions.
  • The proposal would tax a partner’s share of income on an “investment services partnership interest” in an investment partnership, regardless of the character of the income at the partnership level, as ordinary income for partners with taxable income (from all sources) exceeding $400,000.
• Prevent basis shifting by related parties through partnerships.
  • Under current section 754, related-party partners may elect to shift basis between partners.
  • Effective for partnership taxable years beginning after December 31, 2022, the proposal would apply a matching rule that would prohibit any partner in the distributing partnership that is related to the distributee-partner from benefitting from the partnership’s basis step-up until the distributee-partner disposes of the distributed property in a fully taxable transaction.

Individual tax proposals

• Impose a minimum tax on high earners.
  • Touted as a “billionaire’s tax,” a minimum tax of 20% on total income, generally inclusive of unrealized capital gains, is proposed for all taxpayers with wealth of an amount greater than $100 million.
  • A taxpayer’s minimum tax liability would equal 20% times the sum of taxable income and unrealized gains (including on ordinary assets) of the taxpayer, less the sum of the taxpayer’s unrefunded, uncredited prepayments and regular tax.
• Increase top marginal tax rate for high earners.
  • Effective January 1, 2023, the top marginal tax rate would be increased to 39.6%. The top marginal tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for head of household filers, and $225,000 for married individuals filing a separate return.
• Effective on and after the date of enactment of the applicable legislation, elimination of the capital gains preference for high-earners.
  • Long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million ($500,000 for married filing separately) would be taxed at ordinary rates.

Other tax proposals

• Increase in the IRS Budget
  • $14.1 billion allocated to the IRS, representing an 18% increase over the IRS’s 2022 budget.

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