U.S. companies should prepare for a renewed push for range of new or higher corporate taxes from President Biden’s administration based on the $5.8 trillion fiscal year 2023 budget proposed this week, tax experts say.
The budget “furthers a fairer, more efficient tax code,” according to a statement from Treasury Secretary Janet L. Yellen in a Treasury release that also described the plan as being “more than fully paid for through tax code reforms requiring corporations and the wealthiest Americans to pay their fair share, closing loopholes, and improving tax administration.” A document, or Green Book, detailing the revenue proposals included in the budget, was released Monday.
It comes as the $2 trillion Build Back Better Act passed by the House in November is stalled in the Senate, having failed to gain the unanimous support from Democratic lawmakers needed for passage. That legislation was a scaled-back version of Biden’s original plan to pour money into fighting climate change and help families with paid leave and affordable health care. If passed it would raise numerous business taxes and yield more complicated tax compliance, especially for businesses that operate globally.
Another call for higher corporate tax rate
There are no major surprises for the businesses that have been following tax issues closely in the Green Book, experts say, though it includes the new so-called “billionaire tax,” a 20% minimum tax for certain high-income individuals. Still, the Green Book assumes that Build Back Better legislation as approved by the House —aside from the SALT cap provision — will be enacted as the baseline and goes on to propose some new ideas as well, according to Greg Engel, Vice-Chair–Tax at KPMG LLP.
“This approach may have been chosen to avoid weighing in on delicate congressional negotiations on what may or may not be included if a version of BBBA moves forward this year,” Engel wrote in an email.
The Green Book is also taking some tax proposals further, Ken Kuykendall, PwC U.S. Tax Leader, said in an interview. For example, the revenue plan proposes to raise the headline corporate tax rate to 28% from 21%, a move that was not included in the House’s BBBA legislation though Biden talked about it early in his presidency. The new proposal would partly retract the 2017 Tax Cut and Jobs Act (TCJA)’s reduction in the rate to 21% from 35%.
For companies with global operations, the budget proposes to raise the global intangible low-taxed income provision's (GILTI)’s effective rate to 20%, above the 15% in BBBA. The plan also calls for adopting a new mechanism called the “under-taxed profits rule” as part of its framework for complying with the 15% global corporate minimum tax.
“The advice we’re giving people is to watch what the Build Back Better morphs into in 2022 and see if there’s momentum to push through those tax changes,” Kuykendall said, adding that it’s somewhat unlikely but still possible for a reconciliation bill to be passed that includes some or all of the tax increases that were in the House bill.
“Related to everything in the Green Book, if you look at Build Back Better, the administration and Congress could not previously get comfortable with increases to the overall corporate rate or to increasing the GILTI rate to 21% … so I will say there is some skepticism as to the ability to enact any of the new provisions,” he said.
Political fault lines
Corporate taxes have been a flashpoint in Congress that often but not always divides along party lines. The 15% minimum global tax and the administration’s focus on a so-called Pillar 2 multilateral agreement with other countries to set a floor on global corporation taxation drew criticism last month from Senate Republicans. But Democrats also may have a tough time drawing enough votes from their own party — particularly Sens. Kyrsten Sinema of Arizona and Joe Manchin of West Virginia — to raise the statutory corporate tax rate.
“At this point it’s unclear to what extent any tax reform will be able to pass,” Kevin M. Jacobs, a managing director and national tax office practice leader with Alvarez & Marsal Taxand, stated in an email, adding that the higher corporate income tax rate would need backing from Sinema, who has previously stated that she would not support tax rate increases, and Manchin, who recently stated that certain non-business aspects of the Green Book are not supportable. “Therefore, the potential increase in corporate tax rates is uncertain at best.”
The political uncertainties also complicates how companies should interpret this year’s Green Book, he said. That's in part because it does not explicitly state that some BBBA proposals, such as the 15% tax on book income and the 1% excise tax on stock repurchases by publicly traded companies, are included in the plan. The presumption is the Green Book is re-proposing the provisions but it’s not fully transparent, Jacobs said.
With all the unknowns and the increased complexity of tax compliance looming, businesses are being advised to prepare. “At KPMG we have been – and continue to – strongly encourage our corporate clients to model these various proposals so that they can be prepared should they become law,” Engel said. “Chief Financial and Chief Tax Officers will best navigate any of these proposed tax changes if they plan ahead.”
Some may be slow to heed the warnings. Last year a KPMG survey of 300 C-suite executives found that 45% were not currently using their organization’s tax data for scenario planning around tax policy, Engel said.