CFOs of recently de-SPAC’ed* and newly public companies face significant challenges. High on the list is the recently released Made in America Tax Plan, through which the Biden administration proposed significant changes to the US corporate tax system. More details on President Biden’s proposed tax changes are expected at the end of May.
There are five things your CFO should know:
1. The Made in America Tax Plan proposes increasing the US corporate tax rate from 21% to 28%, but the more likely increase may be around 25%. The 2017 Tax Cuts and Jobs Act reduced the corporate rate from 35% to 21%, and President Biden’s proposal is to roll back half of that reduction by bringing the corporate rate up to 28%. Due to the close margins in Congress, it may be difficult for such a large increase to pass although some increase may be likely, given that key Democrats have publicly expressed support for increasing the rate to 25%.
2. Not all of the Made in America Tax Plan proposals are likely to be enacted, but it is likely that some of them will be. In addition to the rate increase, the Made in America Tax Plan proposed a number of additional changes to corporate taxes to raise revenue. These changes include three modifications to strengthen the global intangible low-taxed income (GILTI) regime:
- Doubling the tax rate from 10.5% to 21%
- Removing the exemption for a 10% return on qualified business asset investment (QBAI)
- Calculating GILTI income and foreign tax credits on a country-by-country basis
The changes also include repealing the deduction for foreign derived intangible income (FDII) (which provides an effective 13.125% tax rate) and replacing it with an unspecified R&D/innovation incentive; imposing a 15% minimum tax on highly profitable companies with book income of $2 billion or more; and replacing the base erosion and anti-abuse tax (BEAT) with a provision disallowing US deductions for cross-border related-party payments that are subject to a low rate of foreign tax. Though it may be challenging to enact all of these changes, it is likely that some of the changes may occur in some form, given the desire to raise revenue to fund the infrastructure and other investments proposed in President Biden’s American Jobs Plan.
3. The impact of different proposals varies significantly across companies, even within the same industry. For example, companies that own significant amounts of tangible property offshore, such as real estate, machinery, or hardware, may be significantly impacted by the proposal to remove the GILTI exemption for QBAI, while other companies within the same industry, such as ones that instead lease property abroad, may not be affected at all. Modeling the potential impacts of alternative scenarios is essential to evaluating the potential impact of the various proposals on your company.
4. Now is a good time to build coalitions and raise your voice. After you’ve understood the anticipated impact of potential tax changes on your company, it may be worthwhile connecting with other companies both inside and outside of your industry to identify companies that are similarly situated and willing to proactively work with congressional members on key design features of the plan. It may be helpful to communicate to legislators and the Treasury Department the impact that various tax proposals would have on your company, and provide recommendations on how tax changes could be implemented in a way that achieves both policy and revenue objectives.
5. Specifics of the Made in America Tax Plan have not yet been released, but certain tax planning actions can be undertaken now. More details on the Made in America Tax Plan will be contained in the Biden administration’s Green Book to be released at the end of May. In the meantime, in anticipation of a prospective rate increase and the possible repeal of FDII, companies are exploring ways to accelerate income into this year and defer deductions into next year. It may be prudent to consider various tax planning ideas and make plans now, but wait until legislation has passed (or proposed effective dates are known), or at least until there is more certainty about what changes will be enacted, to execute these plans.
* De-SPACs are companies that become public as the result of a merger with a special purpose acquisition company (SPAC).