As Congress and the White House look to make a deal on infrastructure by this summer, negotiations regarding changes in the tax law continue. Since our prior alert, while progress has been made regarding a bipartisan infrastructure deal and a minimum global tax, the details of most corporate tax proposals have yet to be decided.
Of course, the most pressing question remains - What will Sen. Joe Manchin do? As the “swing vote” in the 50-50 split Senate, Democrats need all members on board to pass any legislation through the reconciliation process, which will by necessity be less ambitious than the more progressive proposals desired by the Democratic Caucus in the House of Representatives. While a bipartisan infrastructure bill looks more likely as discussed below, major corporate tax reform will likely have to be passed through the reconciliation process.
Below are updates on the key corporate tax provisions being negotiated as part of the larger negotiations.
- Corporate Income Tax: President Biden’s 28% corporate tax rate and the Senate’s 25% rate have yet to make a compromise. Republicans are reluctant to raise taxes, but many Democrats see a corporate tax rate increase as an important pay-for in the larger package.
- Minimum Book Income Tax: The proposed 15% minimum book income tax remains at the forefront of Biden’s agenda. With many Republicans hesitant to walk back TCJA tax provisions, such as BEAT and FDII, the book income tax could be an avenue for compromise.
- GILTI and the Global Minimum Tax: President Biden’s original plan was to align GILTI with the OECD’s Pillar Two global minimum tax. On July 1, over 130 OECD member countries, including the US, agreed to a global minimum corporate tax with a rate of at least 15%, in line with the high level agreement reached earlier at the G7 Summit. The Biden administration intends that GILTI will qualify as the minimum tax, but it remains unclear if the OECD will accept GILTI. However, skepticism remains in Congress with Senator Ron Wyden (D-Oregon), Senate Finance Committee Chair, expecting heavy lifting domestically in reaching a global minimum tax as Congressional Republicans have made it clear that they are unlikely to support a global minimum tax agreement. Senator Mike Crapo (R-Idaho), Ranking Member of the Senate Finance Committee, and US Representative Kevin Brady (R-Texas), House Ways and Means Committee ranking member, released a statement saying that the G7 deal could adversely impact and ultimately harm American workers and businesses.
- FDII: Both the Senate and President Biden would make substantial changes to FDII. While Biden would eliminate and replace FDII with research and development incentives to encourage companies to invest onshore, the Senate plan would replace the FDII with an amount of income equal to US research and development expenses, worker training expenses, and HQ expenses. FDII remains largely up in the air and it is unclear how any of the “new” FDII proposals would coordinate with the proposed global minimum tax.
- BEAT: Biden’s BEAT replacement, SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments), would deny multinational corporations US tax deductions by reference to payments made to related parties that are subject individually or collectively to a low effective rate of tax, including amounts determined by reference to cost of goods sold. As proposed, SHIELD is much broader than the corresponding OECD Pillar II proposal. Biden previously proposed that SHIELD’s rate would be tied to a multilateral agreement, likely the OECD’s current Pillar II work. The OECD’s final rate will likely fall near the G7’s 15% minimum tax rate.
Eversheds Sutherland Observation: While Republicans remain reluctant to roll back TCJA-tax provisions, such as the corporate tax rate, FDII and BEAT, Sen. Joe Manchin noted that he supports efforts to roll back such provisions through reconciliation. It is likely that Democrats have the support they need to make changes to international tax and energy-tax related provisions, but the question remains whether there is enough support for an increased corporate tax rate and book income tax.
The Likely Path Forward
On June 23-24, the White House and 21 senators, 11 Republicans and 10 Democrats, including Senators Susan Collins (R-ME), Joe Manchin (D-WV), Mitt Romney (R-UT), and Kyrsten Sinema (D-AZ) agreed to a $1.2 trillion infrastructure package. A proposed $579 billion would go towards investment in roads, bridges, airports, passenger and freight rail, elective vehicle infrastructure, and water and broadband infrastructure. Proposed pay-fors include reducing the tax gap, redirection of unused COVID relief funds, reinstatement of Superfund fees for chemicals, and the extension of expiring customs user fees. However, the details of the largest pay-fors, such as a book income tax and corporate rate increase, have yet to be agreed upon. Bipartisan support means that the $1.2 trillion infrastructure package could be passed under typical Senate rules without the constraints of budget reconciliation. Congress hopes to pass infrastructure legislation before the Surface Transportation Act and government funding expire on September 30.
The bipartisan group did not agree on Biden’s American Family Plan, which provides support for childcare, education, the caring economy, clean energy, and tax cuts for lower to middle class families. The Biden Administration and Democrats will likely try to pass the American Family Plan through budget reconciliation. Budget reconciliation is complicated by the fact that certain Democrats, including House Speaker Nancy Pelosi (D-CA), want a reconciliation bill to move in tandem with an infrastructure package. Following the announcement of the bipartisan infrastructure package, President Biden agreed that the infrastructure bill must move with a reconciliation bill which would address, in addition to the American Family Plan, climate change, and tax rate increases on corporations and high-income individuals as pay-fors. This Biden statement was met with immediate Republican push back for undercutting the bipartisan agreement and Biden softened his stance on the two bills moving in tandem.
With the Senate in recess until July 12, major reconciliation discussions are expected to ramp up mid-July with potential votes on both the infrastructure bill and the fiscal year 2022 budget resolution in July, according to Senate Majority Leader Chuck Schumer (D-NY). The Senate must approve the budget resolution to begin the reconciliation process. However, the Senate must also deal with the reinstated federal debt limit scheduled for August 1.
Eversheds Sutherland Observation: While Democrats want a budget reconciliation bill to move alongside an infrastructure package, Republicans are not so keen on the idea. It remains to be seen whether Republicans would pull support from an infrastructure bill to prevent the passage of a reconciliation bill. And, of course, without the support of Joe Manchin, the Democratic reconciliation measure is going nowhere.