North America Presses On With Tax Reforms
Kitty Miv, Editor
12 December, 2019
As the UK election campaign rattles shakily on, just about remaining on the rails, this week we'll be hopping across the Atlantic to look at progress with regard to US tax reform (leaving aside the nuances of the US political situation as well, as that's a subject upon which entire libraries of books could be written!)
First of all, in early December, the United States Internal Revenue Service issued final regulations and proposed regulations on the base erosion and anti-abuse tax (BEAT) under section 59A of the tax code, which provide guidance for taxpayers affected by the tax provision.
Added to the tax code by the Tax Cuts and Jobs Act of 2017, the BEAT is designed to penalize those companies that make deductible payments to foreign affiliates to substantially reduce their exposure to US taxation. The BEAT is calculated by adding back certain deductible payments made to foreign affiliates and applying a minimum tax to a percentage of the difference between the taxpayer's modified taxable income and their regular tax liability, at a rate of five percent for 2018, 10 percent from 2019, and 12.5 percent from 2025.
The provision primarily affects corporate taxpayers with gross receipts averaging more than USD500m over a three-year period who make deductible payments to foreign related parties. When applicable, this tax is in addition to the taxpayer's regular tax liability.
According to the IRS, the regulations published on December 2 provide detailed guidance regarding which taxpayers will be subject to section 59A, the determination of a base erosion payment, and the method for calculating the base erosion minimum tax amount and from such the relevant tax liability.
On the same day, the IRS issued final regulations on the foreign tax credit following major changes to the US tax code.
According to a summary of the document, the final regulations provide guidance relating to the determination of the foreign tax credit under the Internal Revenue Code as a result of changes made to the applicable law by the 2017 Tax Cuts and Jobs Act (TCJA).
The document finalizes the proposed regulations published on December 7, 2018, and also finalizes proposed regulations on overall foreign losses that were published on June 25, 2012. Additionally, certain portions of proposed regulations published on November 7, 2007, relating to a US taxpayer's obligation to notify the IRS of a foreign tax redetermination are also finalized.
With respect to foreign tax credit rules, the TCJA changed several provisions, including repeal of section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries' cumulative pools of earnings and foreign taxes. The TCJA also added two separate limitation categories for foreign branch income and amounts includible under the Global Intangible Low-Taxed Income (GILTI) provisions.
Intended to discourage US corporations from shifting high-yielding intangible assets such as intellectual property rights to low-tax jurisdictions, GILTI is defined as the portion of the income of a controlled foreign corporation owned by US shareholders that exceeds a notional 10 percent return – a rate that is intended to reflect the normal rate of return on tangible assets. After a 50 percent deduction, GILTI is subject to an effective corporate tax rate of 10.5 percent.
Additionally, the TCJA changed how taxable income is calculated for purposes of the foreign tax credit limitation by disregarding certain expenses and repealing the use of the fair market value method for allocating interest expense.
Finally, the TCJA introduced a participation exemption through a dividends received deduction for certain dividends in section 245A.
Also on the subject of tax reform, later in the month, Senator Joe Biden, a Democratic candidate for the 2020 United States presidential elections, proposed numerous tax increases on corporations and wealthy individuals, with the intention of raising some USD3.2 trillion in additional tax revenue should he be successful in his campaign.
Among other proposals, Biden's plan reportedly included:
- Increasing the federal headline rate of corporate tax from 21 to 28 percent;
- Doubling the effective rate of tax on Global Intangible Low Tax Income from 10.5 to 21 percent;
- Introducing a 15 percent minimum tax, or "book tax," on companies with reported income in excess of USD100m, intended to ensure large companies with little or no corporate tax liabilities pay some tax; and
- Imposing sanctions on jurisdictions that are seen to facilitate corporate tax avoidance.
Biden's plan also included the following personal income tax measures:
- Increasing the top rate of personal income tax from 37 to 39.6 percent – the rate in place prior to the introduction of the 2017 Tax Cuts and Jobs Act;
- Capping the value of tax breaks for wealthy taxpayers at 28 percent; and
- Taxing capital gains as ordinary income.
Meanwhile, across the border in Canada, opening the new Parliament, Canada's Liberal minority Government promised "lower taxes for the middle class and those who need it most."
The Speech from the Throne, delivered on December 5, announced that, "as its first act, the Government will cut taxes for all but the wealthiest Canadians."
The Liberal Party's manifesto contained a pledge to ensure that people do not pay federal taxes on the first CAD15,000 (USD11,311) they earn.
The Speech also hinted at plans to pursue "tax fairness" and fight money laundering, but did not provide any further details of the Government's intentions.
Until next week!
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