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A Close Look at Pres. Biden’s Proposed Changes on GILTI Tax Policies

Under Biden’s administration, locating businesses overseas will no longer be advantageous as the new U.S. president wants everything 100% locally produced or developed. Part of Pres. Biden’s tax plan is to double the 10.50% tax applicable to businesses categorized as Global Intangible Low-Taxed Income (GILTI), as well as penalize offshore or outsourced manufacturing. Starting at 21%, the GILTI tax rate will increase gradually, to reach 26.5% by the year 2026.

Moreover, GILTIs would be declared or reported on a per country basis, while offshore income earned from non-movable assets like foreig-located factories, will no longer be tax exempt.

What Exactly is GILTI

GILTI is an income category that was introduced under the Trump administration by way of the 2017 Tax Cuts and Jobs Act (TCJA). It represents income earned offshore by US Majority-owned multinational corporations, also known as Controlled Foreign Corporations (CFCs) to which the TCJA granted special tax treatment. Rather than impose the regular corporate tax, which the TCJA had slashed down from 35% to 21%, CFCs were granted a special tax rate of 10.5% (half of the revised regular 21% tax rate.

The rationale behind the granting of the special tax treatment is to discourage CFCs from transferring profits earned from movable intangible assets like patents on intellectual property (IPs) to countries that have low tax rates. As it is, multinationals are in effect paying taxes on revenues earned offshore at a global tax rate that is less than 13.125%.

The proposed new policy that requires multinational to report foreign income on a per country to country basis is meant to prevent multinationals from combining the taxes paid in tax havens with that of taxes paid in high-tax jurisdictions — that in effect produced a global rate of 13.125% used as basis is granting the 10.5% special tax treatment. Nonetheless, the new GILTI tax rate will still be lower as the Trump-era corporate tax rate of 21% will apply, instead of the 28% new corporate tax that the Biden administration intends to impose.

Multinationals Voicing Concerns Over Biden’s Proposed GILTI Policy Changes

At a recent Bloomberg Tax Event, the global tax executives of several multinationals voiced their issue against the GILTI legislative changes that the Biden government will impose on multinationals

Several corporate tax executives with operations across the globe flagged Biden’s GILTI proposal as a major concern during a Bloomberg Tax event Thursday. IBM’s Director of Global Tax Policy, Linda Evans commented that enacting Biden’s GILTI policy changes by doubling the tax is tantamount to penalizing companies with offshore operations. IBM has numerous foreign-located subsidiaries like Bermuda, Luxembourg, Philippines, Switzerland and The Netherlands, which is just to mention a few. Ms. Evan believes that it is not a good thing to raise taxes on companies as they are still struggling from the economic downturn caused by the pandemic.

Denise Bee, the Tax Executive at Slack Technologies seemed to have accepted that the changes will transpire whether they like it or not, Ms. Bee expressed hopes that the Biden administration will give them time to implement the changes. Stack Technologies has subsidiaries located in Asia, Australia, Canada and in countries across Western Europe.

Presumably, the changes Ms. Bee refers to is in relation to their tax plans for the current taxable year, since they will no longer be able to claim the foreign tax credits made available to them by the 2017 Tax Cuts and Jobs Act. The possibility that the changes will transpire will pose as challenges to wealth management firms like Pillar WM (https://pillarwm.com/ultra-high-net-worth-wealth-management-firms/), in developing tax plans and in strategizing on how to protect the foreign investments of their ultra high net worth clients.