In March of 2022, President Biden's Administration released its FY 2023 Tax "Green Book." The Green Book explains the administration's tax proposals. The document contains numerous proposals. We highlight a few of the proposals below.

Corporate Income Tax Rate Change

Perhaps the most significant proposal is raising the federal corporate income tax rate to 28%. Currently, the federal corporate income tax rate is 21%. However, corporations may also be subject to state income taxes. While some states do not levy corporate income taxes, most states levy corporate income taxes, and there is an extensive range of state corporate income tax rates. If the federal corporate income tax rate increases to 28%, many corporations may be subject to an effective tax rate well over 30% on their income.

Base Erosion Anti-Abuse Tax ("BEAT") / Undertaxed Profits Rule ("UTPR")

The BEAT tax currently operates similarly to a minimum tax and applies to certain corporate taxpayers. The Green Book proposes to repeal the BEAT tax rules and replace them with the Undertaxed Profits Rule. This change intends to align the U.S. minimum tax rules to be consistent with the model rules of Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. The Pillar Two rules include (1) an Income Inclusion Rule that imposes a top-up tax on the parent entity related to low-taxed income of a member of the financial reporting group, and (2) an UTPR that denies deductions or requires an equivalent adjustment to tax liability to the extent that the low-taxed income of the group member is not subject to the Income Inclusion Rule.

Importantly, UTPR would only apply to financial reporting groups that have global annual revenue of USD $850 million dollars in at least two of the prior 4 years with several de minimus exclusions. Under UTPR, U.S. tax deductions may be disallowed for certain U.S. corporations part of a non-U.S.-parented multinational group and U.S. branches of non-U.S. corporations. U.S. group members would be disallowed U.S. tax deductions to the extent necessary to collect the hypothetical amount of top-up tax required for the financial reporting group to pay an effective tax rate of at least 15 percent in each non-U.S. jurisdiction where the group has profits. 

The proposed rules also include a minimum top-up tax when another jurisdiction adopts the UTPR.

Onshoring Business Tax Credit of 10%

To provide a tax incentive to bring jobs and investments back into the U.S., the Biden Administration proposes a general business credit of 10% of eligible expenses paid or incurred concerning the onshoring of U.S. trade or business. Onshoring a U.S. trade or business refers to reduction or removal of a non-U.S. trade or business and a start-up or expansion of a U.S. trade or business, provided there is an increase in U.S. jobs. The proposal contains rules for certain U.S. territories. The proposal would be effective after the date of enactment of the tax legislation.

Tax Deduction Denial for Offshoring Expenses

The Green Book contains a proposal to limit the deductibility of certain expenses associated with the offshoring of U.S. jobs. Offshoring a U.S. trade or business implies reducing or removing a U.S. trade or business and the start-up or expansion of a non-U.S. trade or business, provided there is a decrease in U.S. jobs. The proposal would be effective after the date of enactment of the tax legislation.

Increase in the Highest Tax Bracket for Highest U.S. Income Earners

The proposals include increasing the top marginal tax rate from the current 37% rate 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 individuals, and $225,000 for married individuals filing separate returns. These thresholds would be indexed for inflation. This would apply for tax years beginning after December 31, 2022.

Increase in Capital Gains Tax Rates for High-Income Earners

For taxpayers with more than $1 million taxable income, the proposal would tax long-term capital gains and qualified dividend income at ordinary tax rates. The $1 million threshold would be indexed for inflation.

Deemed Exchange of Assets Upon Death

Currently, when an heir receives inherited property, the tax basis in the asset is generally adjusted to the property's fair market value at the date of the decedent's death. This typically results in no U.S. federal income taxation on the appreciation of the property transferred from the decedent's estate.

The Biden Administration is proposing to treat the decedent's assets as exchanged on the date of the decedent's death. The amount of gain would be the property's fair market value as of the date of death, less the decedent's tax basis on the property. The fair market value would be valued at the value used for gift and estate tax purposes with modifications for partially-transferred property and certain transactions with trusts. The gain would be taxable income to the decedent and reflected on the federal gift or estate tax return or a separate capital gains tax return.

Transfers of property to a U.S. spouse or charity would not be subjected to the deemed exchange of assets upon death. The U.S. spouse or charity would receive carry-over basis on the property.

The proposal would be effective after December 31, 2022.

Do you have questions regarding outbound tax planning and structuring? Contact International Capital Associates, LLC to discuss.