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Biden Tax Priorities May Fuel Shifts in Corporate Capital Structure

By February 16, 2021No Comments

The effects of raising the corporate income tax rate and setting a global minimum tax on book income.
 
Treasury and tax teams trying to plan for potential changes to US corporate tax policy will be looking for more clarity when President Biden addresses a joint session of Congress in one week, on Feb. 23.

  • For a look at what corporates should have on the radar screen, NeuGroup Insights reached out to Justin Weiss, a partner in KPMG’s Washington national tax financial institutions and products group.

Big picture. Democrats want to pass a rescue package to aid people struggling during the pandemic, using the filibuster-proof budget reconciliation process if necessary, and follow that with a recovery package to reignite the economy.

  • Next week, the president may expand on several tax-related proposals that would provide revenue to fund infrastructure and other initiatives.
  • The administration could push for such changes to become effective by Jan. 1, 2022, and Democrats could potentially use budget reconciliation a second time in 2021 should Republicans remain opposed, Mr. Weiss said.

The big gun. The Tax Cuts & Jobs Act (TCJA) of 2017 slashed the corporate tax rate to 21% from 35%, reducing the interest rate deduction benefit that encourages issuing debt over equity. President Biden says he intends to increase the rate to 28%.

  • That would increase debt’s luster in corporate capital structures, but a rule stemming from TCJA that limits interest deductions for tax purposes gets further restricted on Jan. 1, 2022.
  • “There’s been some talk about whether to postpone or eliminate changes that are scheduled to go into effect in 2022, given the economy,” Mr. Weiss said. So watch out for this in upcoming legislation.

A global minimum alternative. More complex would be a 15% global minimum tax on the book income of certain multinationals—technology and pharmaceuticals may be the target—that record significant profits in their financial statements but pay relatively little US tax.

  • A US company paying taxes abroad but recognizing that income in the US must already consider differences between US and local tax laws to efficiently avoid double taxation, especially after the TJCA eliminated multi-year tax credit pools, Mr. Weiss explained.
  • So a US multinational executing a hedge in a treasury center in the Netherlands would have to look at the US and Dutch tax treatment of such a derivative, and it could lose the US tax credit if they’re misaligned in a given year, Mr. Weiss said. He added that a minimum tax on booked earnings would add yet another layer of complexity.  
  • “That could be a real challenge when a company has a high volume of complicated financial transactions,” he said.

GILTI changes and centralizing treasury. The TJCA’s global intangible low-taxed income (GILTI) provision now effectively taxes overseas income at 10.5% and President Biden has said he wants to raise it to 21%. He has also floated a proposal to shift from calculating the GILTI tax on a pooled basis, where income and losses across the countries in which a company operates are netted, to a country-by-country calculation.

  • This could dramatically impact intercompany lending and hedging transactions, Mr. Weiss said, adding that income/gain on one side of a transaction could be taxable, but expense/loss on the other side may provide no benefit.

More to look out for. Besides the big ticket legislative items President Biden has mentioned, there are many regulatory projects that are likely to impact treasury functions.

  • Examples include pending regulations directly related to the taxation of intercompany treasury centers and the transition away from Libor.
  • “While the major legislative proposals get a lot of the attention, it’s important to also plan for a number of other upcoming changes, from the finalization of important regulations [in the US], to the evolving OECD guidance on financial transactions,” Mr. Weiss said. He added that in recent years taxing authorities have renewed their focus on the “unique aspects of treasury transactions.”  
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Justin Jones

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