Sub Part F of the Green Book Budget

GENERAL BACKGROUND

Given the global pandemic and the economic stress experienced by governments due to the pandemic, I don’t think it came as a surprise when President Biden’s administration released their $ 6-trillion budget proposal (budget) for the fiscal year, including $ 3.6 trillion of tax increases over 10 years. 

The Treasury Department explains the tax-related aspects of the Budget in its accompanying ‘Green Book.’ 

In the background of many of the proposed international tax changes, the administration has indicated to the OECD negotiators its support of a worldwide minimum tax rate of 15%. The Budget includes a host of provisions affecting international structures that are intended to discourage moving U.S. jobs, intellectual property, and economic activity offshore, while narrowing tax deferral and increasing taxes on both offshore and onshore operations. Incentives to bring operations onshore and disincentives to move operations offshore would be expanded. Taxes would be increased across a broad array of economic activity, and incentives for investment in clean (renewable) energy would be expanded. 

For purposes of this article, we will discuss the proposed changes regarding allowable deductions with onshoring and offshoring corporations.

INTRODUCTION: WHAT IS THE GREEN BOOK?

The Green Book, offers new details on the various proposals included in the President’s ‘Made in America’ tax plan.

The significant international tax proposals include:

  • Increased tax rates and other changes to the regime for global intangible low-taxed income (GILTI);
  • Country-by-country limitations on foreign tax credits;
  • Repeal of the deduction for foreign-derived intangible income (FDII);
  • Replacement of the base erosion and anti-abuse tax (BEAT) with a newly proposed “SHIELD” (Stopping Harmful Inversions and Ending Low-tax Developments);
  • Expanded rules targeting inversions;
  • A new minimum tax on book income;
  • Limits on interest deductions for disproportionate borrowing in the US; and
  • Treatment of dispositions of ‘specified hybrid entities’ as stock sales for certain purposes.

Most of the proposals would be effective for tax years beginning after 31 December 2021, though several are proposed to be effective for transactions completed after the date of enactment. The proposal to repeal BEAT and introduce SHIELD would be effective for tax years beginning after 31 December 2022.

PROPOSED CHANGES TO ONSHORING AND OFFSHORING CORPORATIONS

The Green Book isn’t all doom and gloom, and the Biden administration has provided certain tax incentives to try and stimulate the economy post the pandemic. Most notably is the incentive proposed for onshoring corporations which leads to job creation in the US.  

Currently, there are limited tax incentives for US employers to bring offshore jobs and investments into the US. In addition to this, the costs incurred by employers to offshore US jobs are generally deductible for US income tax purposes. 

The administration has therefore proposed a new general business credit equal to 10 percent of the eligible expenses paid or incurred in connection with onshoring a US trade or business. For purposes of this incentive, onshoring a US trade or business means reducing or eliminating a trade or business (or line of business) currently conducted outside the US and starting up, expanding, or otherwise moving the same trade or business to a location within the US, to the extent that this action results in an increase in US jobs. 

In addition, and contrary to the above incentive, it is proposed to reduce the tax benefits associated with US companies moving jobs outside of the US. It is proposed that expenses paid or incurred in connection with offshoring a US trade or business are disallowed as a deduction for federal income tax.  For this purpose, offshoring a US trade or business means reducing or eliminating a trade or business or line of business currently conducted inside the US and starting up, expanding, or otherwise moving the same trade or business to a location outside the US, to the extent that this action results in a loss of US. jobs. 

In determining the income of a US shareholder of a controlled foreign corporation (CFC) on its global minimum tax inclusion or Subpart F income, no deduction would be allowed in determining such amounts for any expenses paid or incurred in connection with moving a US trade or business outside the United States.

For purposes of the proposal, expenses paid or incurred in connection with onshoring or offshoring a US trade or business are limited solely to expenses associated with the relocation of the trade or business and do not include capital expenditures or costs for severance pay and other assistance to displaced workers. 

THERE ARE ALWAYS TWO SIDES TO EVERY STORY

Majority of the times, articles or opinion pieces only focusses on one side of the story. For instance, the new tax incentive for onshoring corporations. However, it’s always best to delve a bit deeper to see what the downside is. In this instance, it’s the disallowance of deductions for offshoring corporations. There are always two sides to every story.

It is best to have a three-prong approach when interpreting proposed tax changes and understanding is a three-edged sword. Your side, their side, and the truth in the middle. Get all the facts before you jump to conclusions with your international structure. 

At Asena Advisors we make sure that your specific needs are catered for and ensure that you make informed decisions based on the proposed tax changes, instead of decisions based on an article written regarding the changes. 

Shaun Eastman