The Biden Build Back Better Tax Plan: What International Taxpayers Need to Know

November 4, 2021

U.S. Taxes on foreign-sourced income could be going up soon, if the Biden Administration gets its way. Last March, the Biden Administration released a factsheet for the “Made in America Tax Plan,” a sweeping set of tax changes designed to raise revenue for the $1.75 trillion Build Back Better plan. In late October, House Democrats released some draft legislation, significantly fleshing out the plan.

The Biden Administration will need to raise quite a bit of revenue to pay for its proposed spending measures: In addition to the Build Back Better proposal, the President is also pushing for passage of the $1.90 trillion American Rescue Plan (signed into law last March), and a $1.2 trillion infrastructure bill. The ambitious spending programs, if passed unaltered, would add up to $4.85 trillion in spending over the next decade.

The President and his allies in Congress are looking to raise much of that money from corporations, foreign taxpayers, and wealthier Americans.

‘Build Back Better’ Major Tax Provisions

Among the plan’s most significant provisions:

  • The U.S. federal corporate income tax rate would increase from 21% to 26.5%, starting at $5 million of income.
  • The top individual income tax rate would increase from 37% to 39.6% – same as it was before President Trump signed the Tax Cuts and Jobs Act, and the highest in the OECD.
  • Increase the top capital gains rate from 20% to 25%.
  • Add a 3% tax surcharge on individual MAGI above $5 million.
  • Expansion of the 3.8% Net Investment Income Tax (NIIT). The proposed legislation would apply a threshold of $500,000, without regard to the type of investment activity. This would affect active shareholders of S corporations, limited partners, and members of LLCs.
  • Restricting Roth IRA conversions for those with incomes above $400,000 ($450,000 for joint filers).
  • Reduce the estate tax exemption to $6,020,000 beginning in 2022 (it’s currently set to sunset in 2026).
  • Limit the maximum value of the Section 199A passthrough deduction to $500,000 for joint filers and $400,000 for single filers.
  • Eliminate deductions for expenses arising from sending U.S. jobs overseas. However, the plan would provide tax credits for moving jobs from overseas to the U.S.
  • Establish a 15% minimum tax on “large, profitable corporations” based on “book income.” This would be a tax on financial profits, rather than on taxable income, and apply to firms with revenues over $100 million.
  • Eliminate all subsidies, loopholes, and special foreign tax credits currently available to the fossil fuel industry. That would amount to an estimated $86.2 billion over the next ten years.
  • Restrict foreign source dividend deductions
  • Increase IRS staff for the purposes of auditing corporations.

Tax Concerns for Foreign Taxpayers and Corporations

Some of the most onerous tax measures of the Biden/Congressional Democrats’ proposal will fall on owners of foreign corporations with operations within the United States, and corporations with overseas-sourced income. These measures aren’t well covered in U.S. mass media reports. But any taxpayer with significant overseas interests or international business ownership should be aware of them.

The Biden Administration has proposed the following measures concerning international corporations:

  • A strengthening of “anti-inversion” rules. These make it more difficult for U.S. based companies to reduce U.S. federal income tax by merging with a foreign corporation, while retaining management and operations within U.S. borders. The plan would make it more difficult for U.S. corporations to avoid U.S. federal income taxes by shifting profits from high-tax jurisdictions (the U.S. itself) to lower-tax ones.
  • A tax rate increase on corporate offshore income. Currently, the effective U.S. tax rate on foreign-source income of U.S. multinationals is 10.5%, equal to 50% of the domestic tax rate. Congressional Democrats are proposing that the GILTI deduction be reduced to 37.5%, effectively resulting in a tax rate of 16.5%.
  • This would effectively make the U.S. combined federal, state, and local taxes the highest in the Organization for Economic Cooperation and Development (OECD).
  • The President has already laid the groundwork for this tax by winning the OECD’s support for a 15% global minimum tax.
  • Reduce or eliminate the current 10% deduction of qualified business asset investment (QBAI) from Global Intangible Low-Taxed Income. This would effectively cause the first dollar of controlled foreign corporations’ “active” income to become subject to GILTI tax.
  • Increase the tax rate on foreign-derived intangible income. This favorable tax rate would increase from the current 13.5% to 20.7%.

Outlook

At press time (November 2nd, 2021) the outlook for the legislation is uncertain. The plan has failed to garner the support of two key Senate Democrats, Senators Manchin (WV) and Sinema (AZ), who are needed to provide a clear majority in the Senate.

However, it seems clear that when if a deal is made, International taxpayers may have some significant tax rate increases to contend with. Now is the time for International taxpayers to familiarize themselves with these proposed tax changes, and to work with subject matter experts on strategies to prepare for them, and mitigate their effects.

As of this writing, the situation in Congress is still fluid, and much could change as factions within Congress hammer out a potential deal.

About Abit0s

AbitOs specializes in the unique accounting needs of high net-worth individuals, entrepreneurs, and business owners with international lifestyles as well as for entities doing business in LATAM and across the globe. Our full-service tax, accounting, and legal team has particular expertise in international taxation. We work every day with foreign business owners and corporations to lower their tax bills, maximize after-tax cash flows, or both.

If you would like to benefit from our expertise in these areas, or if you have further questions on this Alert, we encourage you to contact us.