International Tax Reform Proposals in President Biden’s Fiscal Year 2023 Budget
On March 28, 2022, the Biden Administration released its Budget for fiscal year 2023.
The tax proposals are described in the General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals¹—the “Green Book”—and provide more detail on Biden’s tax priorities including information on effective dates, revenue estimates, and design choices.
Set forth below is a summary of the key international tax proposals that could impact your business in 2022 and beyond.
- Repealing the Base Erosion Anti-Abuse Tax (“BEAT”) and adopt the Undertaxed Profits Rule (“UTPR”) agreed to in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on Pillar II.
- The UTPR operates by denying deductions or requiring an equivalent adjustment to ensure that income in a jurisdiction is subject to a minimum tax.
- This applies to financial reporting groups that have global revenue of $850 million or more in at least two of the last four years.
- Effective for tax years beginning after December 31, 2023.
- Providing tax incentives for locating jobs and business activity in the United States.
- The proposal creates a new general business tax credit equal to 10% of the eligible expenses paid or incurred (such expenses can be incurred by a foreign affiliate) in connection with onshoring a U.S. trade or business.
- Onshoring a U.S. trade or business means reducing or eliminating a trade or business, or line of business currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business within the United States provided such action results in an increase in U.S. jobs.
- Denying certain deductions related to offshoring jobs.
- This would apply situations that reduce or eliminate a trade or business, or line of business currently conducted inside the U.S. or starting up, expanding, or otherwise moving the same trade or business to a location outside the United States, to the extent that this action results in a loss of U.S. jobs.
- Expanding the definition of ‘foreign business entity’ to treat any taxable unit in a foreign jurisdiction as a “foreign business entity” for purposes of applying section 6038.
- Currently, section 6038 of the Code requires a U.S. person who controls a foreign business entity (a foreign corporation or foreign partnership) to report certain information with respect to such entity.
- The proposal would apply to taxable years of a controlling U.S. person that begin after December 31, 2022.
- Requiring reporting with respect to any foreign account that holds digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider (a “foreign digital asset account”).
- A foreign digital asset account would be defined based on where the exchange or service provider is organized or established. The proposal would be effective for returns required to be filed after December 31, 2022.
In addition to international tax matters, the Budget includes proposals that reform corporate taxation, expanding housing and urban development and supporting opportunities for families and students, strengthening the taxation of high-income taxpayers, closing loopholes, and improving tax administration and compliance.
How Can We Help?
If the tax proposals outlined above are enacted, tax policies and the international landscape will change significantly for U.S. businesses. Time is of the essence as these proposals could be enacted by September 30, 2021. Taxpayers should be prepared to model out the tax implications of these changes to determine what changes, if any, need to be made in their operational structure to minimize the tax impact before December 31, 2021.
For assistance or questions regarding these proposed changes and the impact it can have on your business, please contact your Cherry Bekaert advisor or a member of the International Tax Services practice. You can also check out our latest podcast on the President’s proposed budget for fiscal year 2023 and Treasury’s Greenbook.
¹U.S. Department of Treasury website – https://home.treasury.gov/