President Biden has introduced the American Jobs Plan, representing an almost $2 trillion investment in infrastructure with goals of tackling aging physical infrastructure (roads, bridges, and rail), upgrading digital infrastructure (expanded broadband access and electrical grids), and revitalization of manufacturing through investments in research and development and job training. The plan is undoubtedly ambitious and attempts to address long-term concerns about the nation’s infrastructure. However, the price tag is hefty, especially in light of the American Rescue Plan Act’s cost. To address payment, the Administration simultaneously released the Made In America Tax Plan (MATP), which will raise taxes. The plan proposes an increase in the corporate tax rate, creating a new 15% minimum tax on global income, increasing the minimum GILTI rate, and increasing tax enforcement activities. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key provisions below.
Key Proposed MATP Changes:
- Corporate Tax Rate Increase – The MATP proposes partially undoing the corporate tax rate cut/reduction passed during the Trump administration by increasing it from 21% to 28%. This change will impact every business, regardless of size.
- Global Intangible Low-Tax Income (GILTI) -There would be an increase in the GILTI, typically assessed on multi-national corporations, from the existing 10.5% to 21%. In addition, the exemption for 10% on qualified business and asset investments would be removed. This will help to pay for the infrastructure improvements and act as a deterrent to companies offshoring operations.
- Offshoring Jobs – Changes will also be made to ensure companies can no longer write off expenses associated with offshoring positions. The MATP will also incentivize onshoring by creating a tax credit for those that bring jobs to the U.S.
- Minimum Tax on Book Income – There will be a minimum 15% tax assessed on the income corporations use to report profits to investors (book income). This change will only impact the very largest of companies.
- Fossil Fuel Tax Preferences – There will be a comprehensive review and elimination of the significant subsidies, loopholes, and special foreign tax credits currently available to the fossil fuel industry. In addition, there is a proposal to restore payments from polluting companies to the Superfund Trust used to cover environmental cleanup expenses.
- Stricter Inversion Rules – There will also be changes to make it more difficult for U.S. companies to merge with a foreign business to avoid taxes by claiming to be a foreign company, despite maintaining leadership and operations domestically (known as inversion). By tightening regulations, it will become more difficult for these companies to avoid paying taxes.
- Enhanced Enforcement – There will be a significant investment in enforcement activities to ensure taxes are properly calculated and paid. The funding is intended to increase funding. (Ten years ago, almost all large corporations were subject to an annual IRS audit, but the rate has dropped below 50% in recent years.)
What about the insurance industry? It is important to note that under the Tax Cuts and Jobs Act (TCJA) enacted in 2017, the reduction in the corporate tax rate was partially offset by the elimination of certain corporate deductions and preference items. At this time, Biden’s tax proposal does not indicate whether any of the corporate tax deductions that were limited or modified under the TCJA will be reversed. For insurance companies, such TCJA changes were related to the increase in the tax discount rates for unpaid loss reserves, and the increase of the proration percentage of tax-exempt interest and DRD from 15% to 25%.
With respect to the proposal to impose a minimum tax on book income, companies with tax-favorable permanent differences, which reduce taxable income and do not reverse over time, could be most adversely impacted by this provision. For insurance companies, one such permanent difference is the interest income from tax-exempt bonds.