Rationale
After the corporate tax cuts under Trump’s Tax Cuts and Jobs Act (TCJA), the share of corporate taxes collected as a share of GDP fell from 2% to 1% of US GDP, compared with around 3% on average in the OECD and in Israel in 2019. The United States accounts for 24% of world GDP but is collecting less tax from its corporations than many other countries. All told, the US Treasury claims the proposals below would bring well over $2 trillion in profits (not taxes) over the next decade back into the US corporate tax base.
First, they have to be enacted.
Basic elements
Briefly, elements of the Made in America Tax Plan include:
• Raising the US federal corporate income tax rate to 28%;
• Increasing the global minimum tax for US multinational corporations to 21%;
• Reducing incentives for non-US jurisdictions to maintain ultra-low corporate tax rates by encouraging global adoption of minimum tax rate – apparently 21%;
• Enacting a 15% minimum tax on book income of large US companies that report high profits, but have little taxable income;
• More generous incentives for new research and development in the US;
• Replacing fossil fuel subsidies with incentives for clean energy production; and
• Ramping up enforcement to address corporate tax avoidance.
On the international front
As mentioned, the plan would also increase the GILTI global minimum tax to 21%.
The Made in America Tax Plan would also eliminate the incentive to invest in tangible assets outside the US by ending the tax exemption for the first 10 percent return on foreign assets (e.g. in Israel).
It would also calculate the GILTI minimum US tax on a country-by-country basis, ending the ability of multinationals to shield income in tax havens from US taxes with taxes paid to higher tax countries.
In addition, the plan would disallow deductions for the off-shoring of production and prevent against corporate inversions (migrating on paper from the US). How? By taxing corporations managed and controlled in the US, using an old UK tax principle applied in Israel, Canada, South Africa and Australia for many decades.
Offer to the OECD
The OECD is working on its own international tax reform proposals known as Pillar 1 and Pillar 2. Pillar 1 proposes to divert some of the global profit of major multinationals selling from the Internet cloud (taxable nowhere) to the market countries where customers or consumers are located. Pillar 2 proposes a home country minimum tax, perhaps 12.5%. The US is reportedly leaning on the OECD to focus not only on US multinationals under Pillar 1. In return, the 139 countries aligned with the OECD (including Israel) would be encouraged to implement a minimum home country tax rate of 21% instead of 12.5%. This would help finance COVID-19 financial assistance and vaccine purchases.
All this should be finalized later this year.
What could this mean for Israel?
US immigrants with an Israeli company would need to check the impact of the new GILTI and foreign tax credit rules.
What will be the combined Israeli-US tax hit? Don’t forget, the Israeli “wallet company” rules sometimes force company owners to take a taxable salary bonus or dividend.
Also, will investors in Israeli industry and tech may see tax breaks for preferred enterprises disappear? Will the reduced company tax rates of 7.5% in a preferred area or 16% elsewhere in Israel be replaced by a 21% minimum tax rate? If so, should Israel consider switching to R&D tax credits? In the UK, for example, expenditure of £100 on R&D may result in a deductible expense of £230 against UK corporate tax (19% at present but scheduled to increase in 2023 to 25%).
And Israeli companies engaged in e-commerce over the Internet from Israel may soon start paying income tax in market countries, on top of sales tax in the US or VAT in many other countries.
Even if the Pillar 1 & 2 measures are restricted to larger multinationals (revenues over €750 million per the OECD or net income $2 billion per the US plan), earlier OECD measures against base erosion and profit shifting (“BEPS”) target groups of all sizes, even tiny start-ups.
Early advice on what to do is recommended.
As always, consult experienced tax advisers in each country at an early stage in specific cases.The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com