Just a few months after regulations were finalized, and as taxpayers were getting comfortable with the international tax provisions implemented by the 2017 Tax Cuts and Jobs Act (TCJA), proposals from President Biden¹ and the Senate Finance Committee² to overhaul international tax have arrived. While similarities are present between the two proposals, including raising the corporate tax rate, restructuring GILTI, and virtual replacement of the current BEAT and FDII regimes, the specific rates and details vary. Highlights from the current proposals from President Biden and the Senate are below.

The Biden administration has signaled its interest in more fully supporting the OECD proposals that are currently under discussion. This is evident in the domestic tax reform proposals advanced by the White House, which largely mirror the concepts under discussion in Pillar II but notably with higher tax rates than the corresponding OECD proposals. For example, GILTI would more closely track the proposed global minimum tax (GLOBE) by applying on a country-by-country basis but Biden has proposed that the rate for both GLOBE and GILTI be set at 21%, which is significantly higher than the 12.5% under discussion within the OECD (and which corresponds to the headline rate in Ireland) and the EU. Ireland has indicated they intend to push back and see lower tax rates as a legitimate way for smaller economies to compete against larger economies that have other advantages, such as scale. It remains to be seen how such higher proposed rates will play out globally but the administration’s primary objective is to raise revenue to fund infrastructure and other domestic spending while reducing tax incentives for multinationals to set up or shift operations outside of the United States. While Biden has characterized the current environment as a “race to the bottom” on tax rates, others have responded that it also should not be a “race to the top.”

These objectives can be seen not only in the administration’s call to end the global pressure to reduce tax rates and the proposed 21% rates but also in the fact that the Biden proposal eliminates QBAI from GILTI. This is because of the belief that exempting a return on tangible assets provides a tax incentive to offshore manufacturing, particularly when compared to the fact that the corresponding return on assets that produce FDII is subject to the full corporate tax rate in the US (currently 21%). The GILTI proposal is harsher than the current OECD GLOBE proposal, which would exempt from GLOBE a QBAI-like fixed return not only with respect to tangible assets but also for payroll costs, which would cover service operations as well as manufacturing. The administration’s overall objectives are also seen in the proposal to replace FDII with a more targeted research and development incentive that conceptually may track more closely patent boxes and other similar systems around the world.

Another sign of the administration’s efforts to dovetail its proposals with the OECD proposals is the new SHIELD provision that would replace BEAT in response to OECD calls for the United States to call off BEAT if a global minimum tax is paid. SHIELD would deny a US tax deduction for payments made to related parties that are subject to a low effective rate of tax, which would be tied to the agreed global minimum rate (or in the absence of such a agreement, the GILTI rate proposed at 21%). This appears to be similar in concept to the Undertaxed Payment Rule (UTPR) included in Pillar II as a backstop to the global minimum tax. Again, however, the Biden proposal may be more stringent than the OECD proposal. The UTPR applies only if a direct or indirect parent corporation higher in the ownership chain does not apply GLOBE. The details of SHIELD are not clear but the current description suggests it may only look at the actual effective tax rate (ETR) of the recipient of the payment. Whether such ETR is intended to take into account global minimum taxes paid in higher tiers of the corporate chain is currently unanswered.

Additionally, the administration is grappling more generally with how to coordinate its international tax proposals with the multilateral efforts being led by the OECD on digital taxes. The Biden administration’s plan, shared with other G20 member countries in early April, apparently proposes to apply the OECD’s corporate tax provisions under Pillar I and II to the 100 largest companies, without regard to whether they are engaged in digital services activities, and would remove the distinct categories of services in the OECD digital tax plan. The goal of the US plan is to simplify compliance and alleviate administrative burdens. The proposal comes after the US Trade Representative concluded investigations into several unilateral digital tax proposals, finding the digital taxes of six countries to be discriminatory.

Given the narrow Democratic control of Congress, and of the Senate in particular, there is also uncertainty regarding how the administration’s call for higher taxes will play out domestically. Any final tax legislation will need to be approved by a more progressive House of Representatives that generally supports higher rates (but where the Democratic majority was reduced in the last election) and also by the Senate where Vice President Harris holds the tie breaking vote in the 50-50 chamber. Sen. Joe Machin is the self proclaimed swing vote and is generally considered the most conservative Democratic Senator (he represents the fairly conservative state of West Virginia). He has already pushed back on a headline corporate tax rate of 28% and it is not clear yet where he stands on other aspects of the Biden proposals.

Under the arcane rules of the Senate, a bill generally must receive the support of 60% of the Senators to avoid a filibuster by the Republicans, which would prevent a final vote. The alternative is to pass a bill by simple majority in a process called “budget reconciliation” that can only be used sparingly under Senate rules and is only permitted to include certain provisions. The bill must deal exclusively with raising revenue, spending or debt limits and any proposed amendments must be deficit neutral. (For example, a proposed increase in the minimum wage was struck from the most recent stimulus bill by the non-partisan Senate Parliamentarian under these rules.) Senate Manchin has publicly stated he is against changing the filibuster rules and would prefer to pass the infrastructure and tax bill without using the budget reconciliation process by garnering the support of 10 Republicans. That is uncertain given the public posture of the Republicans in the Senate, although some Republicans have indicated they might be willing to support a smaller infrastructure bill with smaller tax increases. Failing compromise, all 50 Democratic Senators must support the bill, which effectively gives Senator Manchin the final word on what can be passed.

Any potential legislation will also have to overcome individual Senate proposals to secure the necessary 50 votes under budget reconciliation. For example, the Senate’s plans for GILTI and FDII could be complicated by Sen. Kirsten E. Gillibrand’s End Outsourcing Act, which would repeal GILTI and FDII, end deductions for US companies with outsourcing expenses, and would establish a 20% tax credit for insourcing expenses, including expenses for the domestication of a business unit. A deal on international tax provisions will require compromises at least within the Democratic party, if not from both sides of the aisle.

The goal is to pass legislation before Congress’ August recess. Whether that will happen and what the final sausage will look like depends primarily on finding common ground between the progressive House leadership and Senator Manchin and possibly with Republicans if (unlike recent history) compromise prevails. Given the length of time it took the Democratic Party to come to a consensus on health care legislation in 2009 when there was a similar political dynamic in play, the answer remains up in the air.

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