On 20 January, 2021, Joe Biden was inaugurated as President of the United States of America. 2020’s Presidential elections involved arguably one of the biggest media bombardments in recent history. And similar election circumstances (an election during a pandemic) hadn’t been seen since the Spanish Flu pandemic of 1918. And, after his first 100 days, the feeling is that we are facing a very busy presidency.
Measures already put in place by Biden at time of writing (May 2021) include the environment, immigration, international policy, and the massive stimulus plan to curb the COVID-19 pandemic. And we can’t forget his ambitious corporation tax reform that will have broad consequences, affecting both the American corporate world and the global business fabric. Indeed, these reforms will affect any business with cross border operations.
President Biden has commented often on his “Made in America” Tax Plan, with a clear statement of intent regarding its objectives (including the financing of the infrastructure plan already announced and protecting American industry). Politics aside, the US hasn’t seen such definitive tax reform for many years, and some will stretch far beyond US borders.
The first major point of this reform is based on US federal corporation tax. Biden aims to increase this tax rate for companies from the current 21% to 28%. (It should be noted that the previous administration reduced corporation tax from the 35% rate established during the Clinton era.)
In addition, state taxes (e.g. the State of New Jersey’s 11.8% state income taxes) and municipal taxes are further raising the tax burden, and making the U.S. a country with a fiscal policy that could be considered aggressive from a corporate point of view (although the legislation allows for a series of reductions and deductions that result in some large companies paying corporate taxes of 13%.)
The Plan continues with the intention to implement minimum tax rules worldwide, by denying deductions in the U.S. to foreign corporations based in a regime that has not implemented a strong minimum tax. Another of the measures stated in the Plan is the establishment of an effective minimum rate for large multinationals on accounting profit. According to Treasury Department data, this measure would affect some 45 companies with revenues of more than $2 billion.
In addition, the current subsidy plans for the renewable energy sector will be replaced by incentives for renewable energy production, providing an industry boost.
Ideological principles aside, and while waiting for the Plan to be adjusted as it passes through Congress, here are some of the insights we can glean from the proposals:
- Bloomberg’s data on the fiscal loss experienced by the US due to companies operating and trading in several countries is $3 trillion. This demonstrates the increasingly widespread global trend of using the tax burden as a recovery and Keynes-ish tool, especially in a post-COVID-19 context.
- The tax system itself is moving towards global harmonisation and modernisation, something that has been demanded from many fronts (especially developed countries). In a context of increasingly globalised relationships and the emergence of technology, many companies (that are less dependent on distance when providing services) escape their tax obligations by exploiting different global tax regimes.
- Although the Plan has a component of US protectionism and development of the American internal market, countries that were considered ‘unfavourable’ due to their tax system could benefit from this corporation tax proposal, and possibly boost their attractiveness to foreign capital.
- In addition to ideological conviction (the Green New Deal has been supported by the most progressive wing of Democratic party), the United States is betting on industries like the renewable energy sector to provide opportunities for the future, particularly for international growth and entry into LATAM.
While it is perhaps too early to analyse the potential impact the Plan will have on future attractiveness for foreign investment, the global corporation tax rate is being discussed by OECD member states. The OECD itself has stated they expect a signed resolution on the global corporate tax in Q4 2021.
Local Knowledge – International Coverage
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