Fernway DiarySM

Apr 13, 2023

On March 9, the White House released the Biden administration’s Fiscal Year 2024 budget. On the same date, the Treasury released the Green Book (General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals), which describes current law, proposed changes, the policy rationale for those changes, and Treasury’s revenue projections. The tax provisions in the budget would, if enacted, increase the tax burden on corporations and make significant changes to international taxation.

While it is unlikely these tax proposals will be adopted in the near future, given the divided control of the US Congress, they do provide insight into the possible direction of future tax changes. Among the proposals potentially affecting corporations and international taxation are:

Increase in corporate income tax rate: The corporate income tax rate would increase from 21 to. If enacted as proposed, this change would be effective for tax years beginning after December 31, 2022; for tax years beginning before January 1, 2023, and ending after December 31, 2022, the increase would be prorated for the portion of the tax year occurring in 2023.

Increase in stock repurchase excise tax rate: The Inflation Reduction Act enacted an excise tax of  on stock repurchases made after December 31, 2022. The Green Book proposal would increase that rate to , retroactive to all repurchases made after the original effective date.

New restrictions on tax-free spin-offs: This proposal would subject debt-for-debt exchanges between a parent company and an independent spin-off to a tax basis limitation similar to those currently applied to liability assumptions and boot payments. It also introduces requirements that a spin-off company must be adequately capitalized and an economically viable entity after the spin-off is complete; if not satisfied, the spin-off would be fully taxable to the parent company. This would generally apply to transactions occurring after the date of enactment.

Definition of corporate control consistent with corporate affiliation test: For most corporate tax provisions, control is defined as ownership of stock possessing at least of the total combined voting power of all classes of voting stock and at least  ownership of the total number of shares of each class of outstanding nonvoting stock of the corporation. This proposal would update the definition to ownership of at least 80 of the total voting power and at least 80 of the total value of stock of a corporation.

Taxing corporate distributions as dividends: This proposal would introduce rules intended to target transactions seen as inappropriately avoiding taxable dividend treatment, including distributions of high-value stock to eliminate earnings and profits (E&P), leveraged distributions from related corporations principally meant to avoid dividend treatment, and purchases of hook stock by a subsidiary for cash or other property.

Changes to the GILTI (Global Intangible Low-Tax Income) regime: Proposed changes would modify the GILTI regime to align with the global minimum tax regime (Pillar Two) adopted by the Organization for Economic Co-operation and Development (OECD). Among the numerous provisions are included:

• Limiting the Internal Revenue Code Section 250 deduction to 25, which in conjunction with a corporate tax rate of 28 would raise the effective tax rate on GILTI to 21.
• Eliminating the 10 exemption for qualified business asset investment (QBAI).
• Requiring US shareholders to effectively calculate global minimum tax separately for each foreign jurisdiction in which their controlled foreign corporation (CFC) operates.
• Disallowing only 5 of a shareholder’s foreign tax credits (FTCs), rather than 20.
• Allowing US shareholders to carry net operating losses forward on a country-by-country basis and allowing FTCs to be carried forward 10 years on a country-by-country basis.
• Repealing the “high-tax exception” for GILTI and Subpart F.

The proposed decrease in the GILTI deduction to 25 would be effective for taxable years beginning after December 31, 2022, if enacted; all other proposed changes would take effect for taxable years beginning after December 31, 2023.

Replacing BEAT with UTPR: An Undertaxed Profits Rule (UTPR) consistent with the UTPR described in the Pillar Two model rules would replace the Base Erosion and Anti-Abuse Tax (BEAT) established by the Tax Cuts and Jobs Act (TCJA). This would disallow a portion of deductions that would be available to a domestic corporation or US branch of a foreign corporation to the extent that foreign members of a financial reporting group have low-taxed income not subject to a Pillar Two–compliant Income Inclusion Rule (IIR). The UTPR would apply only to financial reporting groups with global annual revenue of €750 million or more in at least two of the prior four years.

Repealing the foreign-derived intangible income (FDII) deduction: The deduction available to US corporations on their FDII would be repealed. While the Green Book indicates that the resulting revenue would be used to encourage research and development, no concrete proposals are outlined in the document.

Please note: This article touches on only a few of the proposals laid forth in the Green Book; potentially affected taxpayers are encouraged to review the full document here and to consult a qualified tax professional for advice specific to their situation.

While these tax provisions are still only under discussion, businesses should monitor ongoing legislative negotiations to remain current on possible changes. In addition, seeking professional tax advice can help clarify the potential impact of proposed tax law changes and inform financial and tax planning.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:
The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway SolutionsSM assumes no obligation to inform the reader of any such changes.