Biden Green Book Tax Proposals’ Impact on Publicly Traded Companies

By Stuart E. Leblang, Michael J. Kliegman,  and Amy S. Elliott

On May 28, the Treasury Department released the so-called green book (General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals),^[1]containing new details about exactly how President Biden plans to raise taxes on corporations and high-income individuals.

Businesses operating in certain industries could be hit with much higher taxes if these proposals become law, while other industries stand to benefit from Biden’s proposed expansions of existing tax credits and new incentives designed to prioritize clean energy.  This report focuses on the green book proposals that would result in higher taxes on businesses.  In a separate, future report, we will analyze the various business tax preferences Biden wants to enact, which fall within three general categories:  housing, infrastructure and renewables.

If you look past the obvious headlines—raising the corporate income tax, reducing incentives for U.S. companies to offshore, eliminating fossil fuel tax preferences—the green book contains some novel and unexpected tax increases on businesses.  And even though many of the proposals are largely repeats from Obama administration green books, this time around they should be viewed not simply as aspirational, but as serious threats given that a Democratic- controlled Congress (focused on building a “fairer economy” and “combatting the climate crisis”^[2]) has a real chance (as real as it has been in years) of getting transformative legislation enacted.  As for the prospects of some of the new, wonky proposals in the international tax space, the added political momentum created by negotiations among members of the Organisation for Economic Co-operation and Development (OECD) should not be discounted.

Before we dive into the details, we would like to draw your attention to the following five broad changes that stand to inflict outsized harm on certain industries (we will address a few others, along with giving our predictions on what is most likely to be enacted, later on in the report):

1. GILTI Plus: Revising the global intangible low-taxed income (GILTI) rules of Section 951A as was previously expected,^[3]disallowing deductions associated with tax-free or low-tax income under an expanded Section 265 (this is new) and tightening the anti-inversion rules of Section 7874 as was proposed by Obama ($530 billion/10yrs)

• There are actually 12 different tax increases embedded in what we are calling the GILTI Plus proposal. We expect they would have the greatest impact on U.S. multinationals operating in low-tax jurisdictions, including in particular those in the services industry, the computer and electronic manufacturing industry and the chemical products manufacturing (including pharmaceuticals) industry.^[4]

1. Fossil Fuel Taxation—The End of the MLP? Repealing 13 different oil, gas and coal tax preferences as was proposed by Obama, repealing the exemption from GILTI for foreign oil and gas extraction income (FOGEI, which would be expanded to include income derived from shale oil and tar sands), modifying the tax rule for dual capacity taxpayers (U.S. oil companies that claim certain foreign tax credits (FTCs)), reinstating Superfund excise taxes and modifying the Oil Spill Liability Trust Fund ($150 billion/10yrs)

• Under current law, energy master limited partnerships (MLPs) with qualifying income and gains from activities relating to fossil fuels are able to avoid corporate-level tax by taking advantage of the publicly traded partnership (PTP) rules under Section 7704. The Biden proposal would repeal that tax advantage.  As for the proposed change to the dual capacity regulations,^[5] according to one senator, the so-called Big 5 oil companies (BP p.l.c. (NYSE:  BP), Exxon Mobil Corporation (NYSE:  XOM), Royal Dutch Shell plc (NYSE:  A), Chevron Corporation (NYSE:  CVX) and ConocoPhillips (NYSE:  COP)) currently benefit from these rules.^[6]

1. Replacing the BEAT with the SHIELD: Replacing the base erosion and anti-abuse tax (BEAT) with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) rule, disallowing deductions to certain domestic corporations or branches if the payments giving rise to the deductions were made to related entities with low-taxed income (excepting investment and pension funds, among others) ($390 billion/10yrs)

• The BEAT was intended to target, among other things, certain deductible payments (e.g., royalties or other payments for intangibles) made to foreign affiliates that erode the U.S. tax base. However, payments for cost of goods sold (COGS) were generally not subject to the BEAT limitations.  This meant that taxpayers were freely able to economically embed royalty payments into the price of goods, transforming them into capitalizable COGS, effectively excluding them from the BEAT.  The SHIELD rule, among other things, closes this “royalty payment COGS exception.” While many companies did not see a material impact to their financial position due to the BEAT, we expect the impact from the SHIELD rule could be significant, especially for firms in the pharmaceutical industry.

1. FDII Repeal: Repealing the deduction for Foreign-Derived Intangible Income (FDII) so as to redeploy the revenue spent on the deduction to incentivize domestic research and development in more direct, effective ways (according to Treasury) ($120 billion/10yrs)

• According to the green book, Treasury believes that FDII, which was enacted to encourage U.S. companies to keep intangible investments in the United States, created a perverse incentive for businesses to reduce their tangible investments in the United States. But firms benefitting from FDII today—including, according to the Wall Street Journal,^[7]Alphabet Inc. (NASDAQ:  GOOGL), Archer Daniels Midland Co. (NYSE:  ADM), Boeing Co. (NYSE:  BA), Intel Corp. (NASDAQ:  INTC), Lockheed Martin Co. (NYSE:  LMT), Nike Inc. (NYSE:  NKE) and Qualcomm Inc. (NASDAQ:  QCOM)—should expect their effective tax rates to increase (and their stock prices to take a hit) if FDII repeal is enacted (generally effective in 2023).

1. Minimum Book Tax: Imposing a new minimum tax (the corporate alternative minimum tax (AMT) was repealed as part of the 2017 Tax Cuts and Jobs Act (TCJA)) of 15 percent on the worldwide book income of U.S. corporations with such income over $2 billion ($150 billion/10yrs)

• The green book describes this as “a targeted approach to ensure that . . . highly profitable multinational corporations would no longer be able to report significant profits to shareholders while avoiding federal income taxation entirely.” The green book stated that about 120 companies per year fall above the $2 billion threshold, and Treasury previously estimated that around 45 of those had such low tax liability in recent years that they would be subject to the new minimum book tax (with an average increased minimum tax liability of about $300 million per year) (generally effective in 2022).^[8]

#1 GILTI Plus—Could Foreign Direct Investment Go Down?

The 12 different tax increases embedded in the GILTI Plus proposal (pages 7 and 8 of the green book) are arguably motivated by one goal:  Ending the race to the bottom on tax rates.  Kimberly Clausing, Treasury deputy assistant secretary for tax analysis, has characterized GILTI as “a weak minimum tax.”^[9] The green book proposes to strengthen it by getting rid of what Clausing views as its “perverse incentive to increase real investments abroad”^[10] (namely, eliminating the deduction for qualified business asset investment (QBAI)).

Other changes contemplated to GILTI (the rules under Section 951A) include increasing the rate from 10.5 percent to 21 percent (by reducing the section 250 deduction from 50 percent to 25 percent) and calculating GILTI (and, surprisingly, a U.S. taxpayer’s foreign branch income) on a country-by-country (or jurisdiction-by-jurisdiction) basis, requiring a separate FTC limitation for each jurisdiction.  On the GILTI rate—Clausing confirmed^[11]that the 20 percent FTC haircut (only 80 percent of FTCs are allowed when calculating GILTI) would remain part of the GILTI regime, meaning that the effective rate could actually be closer to 26.25 percent.^[12] The GILTI changes are generally effective in 2022.

According to the green book, Biden’s Treasury wants a 21 percent headline GILTI rate (setting aside the FTC haircut).  Why then did Treasury propose on May 20^[13]that the global minimum tax rate being negotiated by OECD members under so-called Pillar 2 should be only 15 percent (down from the 21 percent it had suggested earlier)?  While Treasury presented the 15 percent rate as a floor, it was immediately rejected by Ireland, which has a corporate tax rate of only 12.5 percent.^[14] We do not yet know whether consensus will be reached and the United States could decide to set its GILTI rate at the level agreed to by OECD members, or whether some variety across countries’ minimum tax rates might be accommodated.^[15]

The green book would also repeal the subpart F high-tax exception and its cross-reference in the section 951A rules (which currently allows taxpayers to exclude from GILTI amounts that have been subject to foreign tax at rates greater than 90 percent of the U.S. rate).  Some have questioned whether former President Trump’s Treasury even had the authority to provide for a high-tax exclusion in the GILTI regulations.^[16] These changes would also be effective in 2022.

One of the brand new proposals in the green book may have been the result of a March 2021 paper by Stephen Shay of Boston College^[17](a former Treasury deputy assistant secretary for international tax affairs).  The potentially radical idea in the paper is that Section 265^[18]could play an important role in shoring up the GILTI minimum tax regime by disallowing deductions for expenses allocable to low-taxed foreign profits.  Shay thinks such a strategy would do away with what he views as subsidy for foreign investment.

It remains to be seen whether Congress will be willing to—as the green book put it—“expand the application of section 265” to bolster GILTI by going after income taxed at preferential rates.  But a footnote in the green book indicates that Treasury thinks Section 265 could potentially apply to disallow such deductions today even without a statutory change in scope, as it states that “this proposal is not intended to create any inferences regarding current law, including whether section 265 currently applies to this income.” The Section 265 change would be generally effective in 2022.

The green book also proposes a significant tightening of the anti-inversion rules of Section 7874 to get rid of the 60-percent threshold and make it so that if the pre-merger U.S. company shareholders end up owning 50 percent or more (current law is 80 percent or more) of the post- merger foreign company, then the post-merger foreign company would be treated and taxed as if it is a U.S. corporation.

This is largely the same proposal that President Obama made in his last three green books (FY2015, FY2016, FY2017).^[19] However, we should highlight that Biden is proposing to make the inversion changes generally effective for transactions completed after the date of enactment (which is different than Obama’s retroactive proposal^[20]).  This means that transactions entered into, or pursuant to a binding commitment that was in effect, well before the date of enactment could get swept up in this change (even inadvertently, if the transaction was structured to fall outside the scope of the anti-inversion rule, but market values changed such that the amount of stock ending up in the hands of U.S. company shareholders ended up higher than expected).  As for the larger impacts of such a change, prior efforts to curtail inversions have resulted in reductions in foreign direct investment.^[21]

#2 Fossil Fuel Taxation—The End of the MLP?

We knew that tax preferences for fossil fuels would be a Biden target—one that has historically faced dim prospects given the politics,^[22] but nevertheless a target.  But could Biden really end the use of the MLP structure for oil and gas businesses by simply reviving an Obama-era proposal (from FY2016 and FY2017)?^[23]

For context, publicly traded partnerships (PTPs) are often referred to as MLPs when the underlying business is involved in oil and gas or, more generally, the production of energy from certain (largely nonrenewable) natural resources.  PTPs and MLPs are, from a tax standpoint, the same thing—an exception to the general rule in the tax code that partnerships that are publicly traded should be taxed as corporations.  The exception (found in Section 7704(c) and tied to whether 90 percent of the entity’s income is “qualifying”) has enabled a whole class of businesses to avoid entity-level tax while still being able to access the public equities markets.

According to the Energy Infrastructure Council (EIC)—the trade association for PTPs/MLPs (formerly called the MLP Association and, before that, the National Association of PTPs)—there were 68 PTPs trading on U.S. exchanges as of May 30, 2021.  Of those, the majority (80 percent) were in the oil and gas sector (including midstream, downstream, upstream, oilfield services and propane) or involve coal or other fossil fuels such that they presumably would be disqualified under Biden’s proposal.

To be clear—this proposal presents an existential threat to 80 percent of the PTPs in existence today, although Biden is proposing a five-year delayed effective date (so that, beginning after December 31, 2026, the MLP structure would no longer be available for fossil fuel businesses).

What is somewhat ironic is that the Section 7704(c) exception, which has been in the tax code since 1987, was put in place for the oil and gas industry, whose businesses traditionally operated in partnership form.  In more recent years, businesses in the financial space (including investment funds and private equity firms) have found ways to structure their operations so that they could satisfy the qualifying income rule and fit within the exception—something that certain lawmakers took issue with and proposed to carve back.^[24] At one time, there were more than a dozen such financial firms structured as PTPs (now there are only five).

In recent years, many financials PTPs have voluntarily abandoned the structure, motivated in part by the lower corporate tax rate brought about by TCJA and also because they thought their equity would trade at higher prices if it could be included in certain mainstream indices.^[25]

Meanwhile, other lawmakers have repeatedly introduced bills seeking to expand access to the PTP/MLP structure for renewable energy firms by adding new types of qualifying income to Section 7704(d).  For example, starting in 2012, Senator Christopher A. Coons, D-Del., has been a sponsor of such a bill (once called the MLP Parity Act and now referred to as the Financing Our Energy Future Act).  There is nothing in Biden’s green book about such an expansion.

#3 Replacing the BEAT with the SHIELD

As we explained in the teaser, replacing the BEAT with the SHIELD rule would, among other things, close the BEAT’s “royalty payment COGS exception.” At a high level, the BEAT targets both U.S. and foreign multinationals that set up U.S. subsidiaries and had them make deductible base erosion payments to foreign affiliates to reduce their U.S. tax bills.  The BEAT effectively added those deductible payments back in and taxed them separately by way of an alternative tax regime.  The BEAT did not apply to partnerships.

The SHIELD rule, on the other hand, is not an alternative tax regime.  The SHIELD rule would potentially disallow deductible payments made by U.S. companies and branches (and, possibly, partnerships) to both related and unrelated foreign parties if certain payments are made (or deemed made) to low-tax affiliates.

How exactly?  Otherwise deductible payments made by a U.S. entity to related parties would be disallowed in their entirety if the related party constitutes a low-tax member of the group (i.e., if that member’s income is subject to an effective tax rate below the rate determined by an OECD agreement under Pillar 2 or, in the meantime, an effective rate of tax below 21 percent).  If the related party receiving the payment is not a low-tax member of the group, but there are low-tax members of the group, then a portion of the payment would be deemed paid to such low-tax members and the SHIELD rule would apply to disallow a portion of the deduction (even if it is actually made to a high-tax member).

As mentioned, otherwise deductible payments to third parties could also potentially be impacted by the SHIELD rule.  This is how Treasury plans to close the “royalty payment COGS exception.” Assume a multinational makes trucks.  It has a U.S. subsidiary that makes a payment to a related foreign member in a low-tax country to acquire an axel that it imported to incorporate into one of its trucks.  The payment for the axel is a COGS payment.  Under general tax rules, COGS is not deductible but is a potentially capitalizable reduction in gross income.  So there is no deduction to disallow in this case.  However, under the SHIELD rule, the green book provides that other deductions (including deductions for separate payments the U.S. subsidiary made to unrelated third party suppliers) could be disallowed to account for the COGS payment made to the related foreign low-taxed member.

Note the breadth of this rule.  It seems to provide that other deductions could be disallowed to account for the entire COGS payment—not just any royalty or interest component of the COGS amount.  According to a June 1 article in Tax Notes, there is already speculation that the effective disallowance of COGS could be unconstitutional.^[26] Such a broad-based disallowance would certainly wreak havoc on supply chains.

While the SHIELD rule would generally apply more broadly than the BEAT, certain payments are excluded from the rule, including payments to investment funds, pension funds, international organizations or non-profit entities.  It has a similar $500 million threshold to the BEAT (technically, the SHIELD rule applies to financial reporting groups with greater than $500 million in global annual revenues).  But unlike many of the other proposals in the green book, the SHIELD rule has a somewhat delayed effective date, generally effective in 2023.  Maybe that is because Treasury wants to give foreign countries a bit more time to come to an agreement over and enact into their respective laws a global minimum tax rate (Pillar 2)?

The answer to this question may also have something to do with the revenue score associated with repealing the BEAT and replacing it with the SHIELD rule—a revenue score that is relatively high (about $390 billion over 10 years).  According to press reports, the revenue score is expected to decline as more countries enact tax rates at or above 21 percent (or the Pillar 2 rate, once it is determined).^[27] We know (and scorekeepers are supposed to anticipate) that taxpayers will adjust their arrangements in order to avoid imposition of provisions like the BEAT and the SHIELD.  These rules are designed to be punitive so as to encourage companies not to structure in ways that erode the tax base.  Low revenue in this case arguably could be a sign of success and not (as the green book seems to imply in the case of the BEAT) a sign of failure.^[28]

#4 FDII Repeal

FDII is a deduction that has the potential to give certain U.S. corporations a discounted tax rate (effectively 13.125 percent, which increases to 16.406 percent in 2026) on a portion of their U.S. income theoretically associated with intellectual property (IP) connected to foreign country exports.^[29] While FDII should incentivize U.S. corporations to locate their IP in the United States, the deduction is tied to IP only theoretically.

In practice, the deduction is calculated using a formula keyed off of a percentage of the corporation’s depreciable tangible property located in the United States along with a percentage of the corporation’s income that is derived from exports.  This means that some combination of increasing exports and decreasing U.S. tangible property would help to maximize the FDII deduction (effectively providing a subsidy to certain large U.S. exporters).  In any case, it is not clear that any taxpayers have dramatically increased their domestic investment as a result of the tax incentive, and Treasury has apparently decided that the revenue spent on FDII could be better utilized elsewhere.

The impact that FDII has had on U.S. companies has varied (we mentioned some companies that have reportedly benefitted in the teaser).  According to securities filings for the third quarter of 2018 (which was when many companies were finally ready to detail the impact that TCJA had on their operations), semiconductor manufacturer Intel Corporation (NASDAQ:  INTC) realized a 4 percentage point reduction in its effective tax rate as a result of FDII.^[30]  Professional services firm Navigant Consulting, Inc. (NYSE:  NCI) also realized a 4 percentage point reduction in its effective tax rate due to FDII.^[31] As a general matter, profitable companies whose income stems largely from exports (many industries are implicated here, but—to give an example—the U.S. aerospace and defense industry) have likely benefitted from FDII.

The green book’s revenue estimate clearly shows that Treasury would rather spend all of the FDII money on “additional support for research and experimentation expenditures,” but it has left unstated exactly how it would encourage R&D (although one Treasury official suggested pushing back the planned end-of-year expiration of R&D expensing, eliminating the 2022 requirement to amortize such expenses over five years^[32]).  This decision to repeal FDII arguably reflects a political bias against successful multinational companies that have already developed significant IP.  From the standpoint of where companies put their IP, except for the tax rate differential between the regular corporate tax rate and the GILTI rate, U.S. companies would be pretty neutral about where they do spend R&D money and locate their IP.

#5 Minimum Tax on Book Earnings

Although it is not one of the largest revenue raisers in the green book, the 15 percent minimum tax on the book earnings of large corporations is not small either, estimated to generate about $150 billion over 10 years (for perspective, that is more than the estimated $130 billion over 10 years that would be raised by an increase in the top marginal income tax rate—from 37 percent to 39.6 percent—for high earners^[33]).

While this proposal may be easy for Biden to sell—we can hear him saying that America should tax businesses that are extremely profitable but that pay little or no federal income tax (such as Amazon.com, Inc. (NASDAQ:  AMZN))—it also faces some serious administrability concerns, not to mention the unintended consequences of such a radical proposal.  And, unfortunately, the green book’s sparse one-paragraph description of the proposal does not give us confidence that Treasury and the IRS are any closer to addressing these issues.  (Just one example of the complexity—as pointed out by a recent press report^[34]—is that reporting as a consolidated group for purposes of book and tax are very different, meaning that certain corporations would be forced to recalculate their book income for this purpose.)

We already knew the minimum tax would be imposed at a rate of 15 percent.  We already knew that Biden had significantly limited the scope (so that, instead of applying to companies that report net U.S. income of more than $100 million and pay little to no tax, it would only apply to such companies with worldwide book net income—so after taking into account book net operating losses—in excess of $2 billion).^[35] We already knew that the only allowable offsets would be FTCs and general business tax credits (including R&D tax credits).  Utilization of R&D tax credits under Section 41 is one of the ways in which Amazon was able to reduce its federal tax liability.  Amazon also took advantage of bonus depreciation under Section 168(k), which is scheduled to be phased out beginning in 2023.^[36] While, as we have previously reported, we think the reinstatement of a corporate minimum tax in some form is likely, we do not think a minimum tax on book income as simply described above is in the cards.

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At this point in the report, we will touch on a few of the smaller but still notable revenue raisers in the green book before turning our attention to what is most likely to be enacted and offering a few comments regarding effective dates.

Repeal Like-Kind Exchanges

The green book is proposing to cap deferral on Section 1031 real property like-kind exchanges at $500,000 per individual (or corporation) per year ($1 million for married individuals filing a joint return per year), meaning that any gain above those amounts would have to be recognized and taxed upon exchange.  To level-set, Section 1031 provides temporary deferral for realized gains in real estate as long as you reinvest in real estate of a like-kind.  The provision used to apply more broadly than real estate, but was carved back in TCJA.  Before like-kind exchanges were confined to real estate, President Obama also proposed in his administration’s green books to limit the provision, but his cap was twice that of Biden’s ($1 million per taxpayer per year).^[37]

Deferral on Section 1031 like-kind_exchangesis considered a major tax expenditure (although it is more widely utilized by individuals than by corporations).^[38] Capping its benefit at $500,000 per taxpayer per year would mean that many businesses would no longer utilize the provision, resulting in a lock-in effect and higher cost of capital.  Businesses such as public real estate investment trusts (REITs) may be at a particular disadvantage as many would use Section 1031 to swap real estate without triggering gain.  Although the revenue estimate on this new cap is relatively small (only about $20 billion over 10 years), we expect the ripple effects of this to be significant in certain circles.  The proposal would be generally effective in 2022.

New Interest Expense Limit

Although it is also another small revenue raiser (less than $20 billion over 10 years), the “new” (it is a repeat from Obama^[39]) interest expense limit proposed in Biden’s green book is worth noting as Treasury likely views it as a critical part of its multi-pronged effort to shore up the arguably porous U.S. corporate tax base.  The new limit is intended to bring an end to the practice used by some multinationals to reduce their U.S. taxes by disproportionately levering up the U.S. entities in their group (by way of intracompany debt) so that those entities can take interest expense deductions.  The new limit may also help to reduce the current tax code’s bias in favor of debt over equity.

The new limit (which applies in addition to the existing interest expense limit under Section 163(j)) could impact both U.S. multinationals and foreign-parented multinationals whose borrowing is disproportionately in the United States (with exceptions for financial services entities and groups that report less than $5 million of net interest expense on their U.S. income tax returns per year).  Multinational groups with disproportionate U.S. leverage in their capital structures—which is common in the case of inverted corporations^[40]—would be most impacted.  It is also expected that foreign investment funds (including hedge funds and private equity firms) with blocker structures used for earnings stripping might be adversely impacted.

The new limit is applied by reference to a financial reporting group (groups that report on a consolidated basis for accounting/book purposes, not for tax purposes).  There are two ways to calculate the limit.  Under the proportionate share approach, if the U.S. entity’s proportionate share of the group’s net interest expense is outsized (in relation to the entity’s share of the group’s earnings before interest, taxes, depreciation and amortization (EBITDA)), then the excess interest expense would be disallowed as a deduction for U.S. tax purposes.  Under the 10-percent alternative, the entity’s interest expense deduction is limited to its interest income plus 10 percent of its adjusted taxable income (defined under Section 163(j)—an amount similar to EBIT starting in 2022, so EBITDA but without adding back in depreciation and amortization).  Any disallowed interest expense (or excess limitation, if the entity’s leverage is less than expected based on its share of earnings) can be carried forward.  The proposal would be generally effective in 2022.

Prospects?  The Devil Is in the Details

As we have stressed in our prior reports on Biden’s planned tax reforms, just because he is proposing these tax hikes does not mean that Congress will likely pass them into law.^[41] We continue to believe that even if Biden is successful in getting lawmakers to agree to some of his infrastructure spending—most likely by utilizing the partisan fast-track procedure of budget reconciliation, given how challenging bipartisan infrastructure negotiations have been in recent weeks—the legislation will necessarily be paired back, both on the spending asks and on the taxing pay-fors.  In order to secure the necessary support of moderate Democrats such as West Virginia Senator Joe Manchin, we think Biden will have to make compromises.

At this stage, we would like to flag our best guesses on the most likely compromises for three critical revenue raisers in the green book:

1. The Corporate Rate: The corporate income tax rate may only go as high as 25 percent (which, as compared to the 28 percent proposal, could generate about $360 billion less revenue over 10 years^[42]).
2. GILTI Plus: The GILTI tax rate may only go as high as 18.75 percent and some of the GILTI base broadeners (including, possibly, the QBAI and country-by-country changes but maybe not including repeal of the high-tax exception) may pass.  The 80-percent inversion threshold could go lower, although down to 50 percent seems like it may be a stretch.
3. Changing the Tax Treatment of Capital Income: Biden’s Treasury wants to raise the top tax rate on long-term capital gains from 20 percent to 37 percent (and, beginning in 2022, 39.6 percent, not including the 3.8 percent tax on net investment income imposed by Section 1411).  The change would generally be effective for gains recognized after the date of announcement, which is believed to be April 28, 2021 (see “Effective Date Considerations”).  The rate hike would generally apply to married individuals filing joint returns with income over $1 million (where the $1 million threshold takes into account both labor income and income from capital gains^[43]).

Biden also wants to repeal stepped-up basis and trigger gain recognition at gift or death—generally effective in 2022—so that inherited appreciated assets with unrealized capital gains, with some exclusions, are treated as sold for fair market value and taxed, assuming carryover basis (the exclusions on gain recognition include transfers to charities and to spouses, although both would still get carryover basis).

Biden would allow for a new $1 million per-person general capital gains exclusion,^[44]a 15-year fixed-rate payment plan for those who need more time to pay the tax on illiquid assets and, for certain family-owned and -operated businesses, the tax would not be due until the interest in the business is sold or is no longer family-owned and operated.  In addition, starting in 2030, all unrealized appreciation on assets held by a trust, partnership or other non-corporate entity that has avoided recognition within the prior 90 years would be taxed.  Combined, these proposals would generate about $320 billion over 10 years.

As we have previously indicated, we think a more likely increase to the top rate on capital gains would be to around 28 percent.  We do not expect Congress will make any changes to the rules regarding stepped-up basis at death.

Effective Date Considerations

The green book contains only one potentially retroactive tax change—raising the top rate on long-term capital gains (which the green book would make effective “for gains required to be recognized after the date of announcement”—a date that we believe to be April 28, 2021,^[45]although given that Treasury declined to specify such date, some are of the view that it may be some other date).  All other tax changes, including raising the tax rates on corporate and individual income and changing the tax treatment of so-called carried interest,^[46]are prospective (for example, the carried interest change would generally be effective in 2022, which could cause a rush in year-end dispositions if it is looking like the change will become law).

As we have previously reported, retroactive tax changes are more common in abusive situations or when the change results in a benefit to taxpayers (for example, expensing).  Outside of those two situations, there is precedent for retroactive tax increases tied to the start of the calendar year.  For example, the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), which became law August 10, 1993, increased the top estate and gift tax rate from 50 percent back to 55 percent effective for “decedents dying and gifts made after December 31, 1992.” It also increased the corporate tax rate from 34 percent to 35 percent (and, in some cases, 38 percent), effective for taxable years beginning on or after January 1, 1993.  And the Tax Reform Act of 1986 (P.L. 99-514), which became law October 22, 1986, repealed the investment tax credit effective January 1, 1986, with some transition rules.^[47]

We know of no example in recent history where a taxpayer-adverse tax change—not tied to abuse—was made retroactive back to the date of announcement or even made retroactive back to the date of first committee action.  According to a Treasury official, the proposed increase in the long-term capital gains tax rate is tied to the date of announcement “to prevent acceleration of gains during a temporarily low tax rate,” but the official added that “Treasury will work with Congress to determine the appropriate effective date.”^[48] We suspect there is a decent chance it will get pushed into the future, if such a tax increase even makes it into law.

Tax Changes that Are Notably Absent

 There are a number of tax changes that observers thought might have shown up in Biden’s first green book but that did not.  These include limiting the benefit of itemized deductions for those making over $400,000 to 28 percent and repealing (in whole or in part) the $10,000 limitation on deducting state and local taxes (the SALT deduction).  They also include imposing a 12.4 percent social security payroll tax on income in excess of $400,000 and phasing out the pass-through deduction (Section 199A) for taxable incomes over $400,000 (viewed as benefiting small businesses).  Even if these provisions had made an appearance in the green book, their potential enactment likely would not have had an outsized impact on the capital markets.

Another tax provision that did not make it into the green book but that could have had an impact on public companies if enacted is the offshoring penalty surtax.  Although the green book proposes to “remove tax deductions for shipping jobs overseas” (by disallowing deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business), at one time Biden wanted to establish a new 10 percent offshoring penalty surtax that would be “specifically aimed at those who offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.”^[49]  The surtax would apply “on profits of any production by a United States company overseas for sales back to the United States” and would “also apply to call centers or services by an American company located overseas but serving the United States, where jobs could have been located in the United States.^”[50]

Since then, no further details have been provided, and the penalty/surtax was not included in Treasury’s April release of The Made in America Tax Plan.^[51] We suspect its absence from the green book means that the Biden administration has abandoned this attempt to get at round- tripping by U.S.-parented multinationals.

^{[1] General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf).  The green book outlines 47 tax proposals (generating a total of $1.67 trillion over 10 years) as part of Biden’s American Jobs Plan (a more-than-$2-trillion package that invests in so-called hard infrastructure such as roads and bridges—along with domestic manufacturing, home caregiving, clean energy and broadband—and is paid for by increasing taxes on corporations).  It also outlines 24 tax proposals (generating a total of $720 billion over 10 years) as part of Biden’s American Families Plan (a $1.8 trillion package that invests in so-called soft infrastructure—supporting families and education—and is paid for by increasing taxes on the wealthy).}

^{[2] 2020 Democratic Party Platform (https://democrats.org/where-we-stand/party-platform/).}

^{[3] See “Tax Policy Implications of Democrats’ Narrow Margins” (Jan. 15, 2021), in which we wrote that Biden planned to double the GILTI rate from 10.5 percent to 21 percent, disallow QBAI and calculate GILTI on a country-by-country basis.}

^{[4] See Tables 3 and 4, Brandon Pizzola, Robert Carroll and James Mackie, Analyzing the revenue effects for businesses and key industries under the Tax Cuts and Jobs Act, EY (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwj0mNCp1u_wAhWvGFkFHUvWBs4QFjA DegQIBBAD&url=https%3A%2F%2Fassets.ey.com%2Fcontent%2Fdam%2Fey-sites%2Fey-com%2Fen_us%2Ftopics%2Ftax%2Fey- tax-reforms-effects-on-businesses-and-key-industries.pdf%3Fdownload&usg=AOvVaw2QG5_zdW8eimGBae7Z4cXh)}

^{[5] Namely, the safe harbor in Treas. Reg. § 1.901-2A(d)(4).}

^{[6] See summary of the Close Big Oil Tax Loopholes Act (S. 1710), introduced Aug. 2, 2017 by Senate Finance Committee member Robert Menendez (D-N.J.), available here:  https://www.menendez.senate.gov/imo/media/doc/Close-Big-Oil-Tax-Loopholes- Summary-2017.pdf.  A similar but more recent proposal—The End Polluter Welfare Act of 2020 (H.R. 7781; S. 4887)—was introduced by Rep. Ilhan Omar (D-Minn.) and Sen. Bernie Sanders (I-Vt.) together with Sen. Merkley (D-Ore.), Sen. Markey (D- Mass.) and Rep. Barragan (D-Calif.) (https://omar.house.gov/sites/omar.house.gov/files/EPWA%20-%20Section%20by%20Section%20.pdf) and the End Oil and Gas Tax Subsidies Act of 2020 (H.R. 8411) introduced by House Ways and Means Committee member Earl Blumenauer (D-Ore.) (https://blumenauer.house.gov/sites/blumenauer.house.gov/files/BLUMEN_143_xml.pdf).}

^{[7] Richard Rubin, Biden Tax Plan Takes Aim at Trump-Era Investment Incentive, Wall St. J., May 7, 2021 (https://www.wsj.com/articles/biden-tax-plan-takes-aim-at-trump-era-investment-incentive-11620385200) and Richard Rubin, New Treasury Rules Shape Corporate Tax Break, Wall St. J., March 4, 2019 (https://www.wsj.com/articles/new-treasury-rules- shape-corporate-tax-break-11551734451).}

^{[8] Treasury’s Made in America Tax Plan, April 2021 (https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf).}

^{[9] Kimberly A. Clausing, 5 Lessons on Profit Shifting From U.S. Country-by-Country Data, Tax Notes, Nov. 24, 2020 (subscription required).}

^{[10] Kimberly A. Clausing, Profit Shifting Before and After the Tax Cuts and Jobs Act (June 3, 2020) 73(4) National Tax Journal 1233- 1266 (2020), UCLA School of Law, Law-Econ Research Paper No. 20-10 (available at SSRN:  https://ssrn.com/abstract=3274827).}

^{[11] Andrew Velarde, SHIELD Details, GILTI Changes Headline Green Book Proposals, Tax Notes, June 1, 2021 (subscription required).}

^{[12] Cody Kallen, Effects of Proposed International Tax Changes on U.S. Multinationals, Tax Foundation, April 28, 2021 (https://taxfoundation.org/biden-international-tax-proposals).}

^{[13] Press Release, Treasury, READOUT:  U.S. Department of the Treasury’s Office of Tax Policy Meetings, May 20, 2021 (https://home.treasury.gov/news/press-releases/jy0189).}

^{[14] Ed Conway, Ireland rejects President Biden’s global corporate tax plans and will keep 12.5% rate, finance minister tells Sky News, Sky News, May 26, 2021 (https://news.sky.com/story/ireland-rejects-president-bidens-global-corporate-tax-plans-and- will-keep-12-5-rate-finance-minister-tells-sky-news-12316753)}

^{[15] Divya Chowdhury, G20 could agree to around 15% global minimum corporate tax rate, tax expert says, Reuters, April 15, 2021 (https://www.reuters.com/article/global-economy-tax-gmf/g20-could-agree-to-around-15-global-minimum-corporate-tax-rate- tax-expert-says-idINL4N2M83E2).}

^{[16] “The Treasury Department then went well beyond its legal authority to create the multinationals’ desired tax break.  The regulations propose an elective exemption from paying any GILTI taxes on certain income, if companies pay at least an 18.9 percent effective tax rate on that income,” from Press Release, Wyden, Brown Introduce Bill to Block Latest Trump Administration Corporate Giveaway, U.S. Senate Committee on Finance (Feb. 12, 2020) (https://www.finance.senate.gov/ranking-members-news/-wyden-brown-introduce-bill-to-block-latest-trump-administration- corporate-giveaway).}

^{[17] Shay, Applying Section 265 to Address an Opaque Foreign Income Subsidy, DRAFT (March 31, 2021) (https://taxprof.typepad.com/taxprof_blog/2021/04/shay-presents-applying-section-265-to-address-an-opaque-foreign- income-subsidy-virtually-today-at-bo.html).}

^{[18] Section 265 was recently in the news in connection with a very different tax issue—pandemic relief.  Congress provided that certain COVID-related grants (for example, forgivable Paycheck Protection Program (PPP) loans) were not included in gross income (the grant amounts—technically cancelled indebtedness in the case of PPP—were not taxable).  But Section 265 generally provides that no deduction is allowed for tax-exempt amounts used to pay for otherwise deductible expenses.  In December 2020, lawmakers ultimately decided to override Section 265 in this context to provide that forgiven CARES Act loan amounts can also be deductible.}

^{[19] See General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals (https://home.treasury.gov/system/files/131/General-Explanations-FY2017.pdf), General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals, Treasury (https://home.treasury.gov/system/files/131/General-Explanations-FY2016.pdf) and General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (https://home.treasury.gov/system/files/131/General-Explanations-FY2015.pdf).}

^{[20] Obama’s FY2017 green book, which was released in February 2016, proposed to make the inversion changes “effective for transactions that are completed after December 31, 2016.” In addition, Obama’s FY2017 green book went further, providing “the IRS with authority to share tax return information with Federal agencies . . . to assist them in identifying companies that were involved in an inversion transaction.”}

^{[21] Andrew Velarde and Zoe Sagalow, As Inversions Dried Up, Foreign Direct Investment Fell in 2016, Tax Notes Federal, July 24, 2017 (subscription required).}

^{[22] “Obama also wanted to ditch tax breaks for fossil fuels to send a signal to the world that the United States was serious about speeding a transition away from fossil fuels to tackle climate change.  But even with a commanding Democratic majority in the Senate in Obama’s first six years in office, he was unable to kill the subsidies,” as reported by Timothy Gardner, Biden plan to end U.S. fossil fuel subsidies faces big challenges, Reuters, Dec. 1, 2020 (https://www.reuters.com/article/us-usa-biden-fossilfuel-subsidies/biden-plan-to-end-u-s-fossil-fuel-subsidies-faces-big-challenges-idUSKBN28B4T2).}

^{[23] According to General Explanations of the Administration’s Fiscal Year 2016 (and 2017) Revenue Proposals, Treasury (https://home.treasury.gov/system/files/131/General-Explanations-FY2016.pdf and https://home.treasury.gov/system/files/131/General-Explanations-FY2017.pdf), Obama would have taxed “fossil fuel publicly traded partnerships as C corporations”—but given about five years of transition as the FY 2016 proposal (which was published in Feb. 2015) would only go into effect after December 31, 2020.  Further, the proposal was scored as raising $1.8 billion over 10 years.}

^{[24] Including back in 2014, when then-House Ways and Means Committee Chair Dave Camp, R-Mich., proposed to end the use of PTPs by financial firms.}

^{[25] See our prior report, “KKR to Convert to C Corporation—First Major Financial PTP to Change Legal Structure, Not Just Check- the-Box” (May 11, 2018).}

^{[26] Andrew Velarde, SHIELD Details, GILTI Changes Headline Green Book Proposals, Tax Notes Today International, June 1, 2021 (subscription required).}

^{[27] “The official said the SHIELD revenue estimate was a difficult one to make because it depended on the actions of other countries.  Traditionally, scorekeepers have not made presumptions about foreign actions, the official added, but the score accounts for behavioral responses, including companies rerouting payments to unrelated companies.  SHIELD’s success would lead to a revenue decline for the provision as countries made moves to avoid being caught in the regime’s denial of deductions, the official said,” as reported by Andrew Velarde, SHIELD Details, GILTI Changes Headline Green Book Proposals, Tax Notes Today Federal, June 1, 2021 (subscription required).}

^{[28] According to a footnote in the Made in American Tax Plan, the “IRS Statistics of Income reports direct BEAT revenues of $1.8 billion in 2018, and Treasury expects revenues of $7 billion for the two years of 2019 and 2020.  JCT had forecast more than twice that revenue as the law was being enacted.” Yet the same report asserts, without citation, that the “BEAT has been largely ineffective at curtailing profit shifting by multinational corporations.” (https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf)}

^{[29] That is, income derived from products sold to foreigners for a foreign use or from services provided outside the United States.  For FDII, income from transactions with related foreign parties is generally presumed to be U.S.-derived.}

^{[30] Intel Corporation, Form 10-Q, filed Oct. 26, 2018 (https://www.sec.gov/Archives/edgar/data/50863/000005086318000029/a0929201810qdocument.htm).}

^{[31] Navigant Consulting, Inc., Form 10-Q, filed Nov. 9, 2018 (https://www.sec.gov/Archives/edgar/data/1019737/000156459018028976/nci-10q_20180930.htm).}

^{[32] “A Treasury official admitted in a conference call with reporters Friday that the administration hadn’t been specific on the matter, and said it wants to work with Congress on developing new research tax incentives.  The official floated a couple of ideas, including eliminating a change in how companies record their R&D costs that’s scheduled to take effect next year and would cost companies more in taxes,” as reported by Michael Rapoport, Treasury Wants New R&D Tax Breaks, Still Unsure What They’ll Be, Daily Tax Report, June 1, 2021 (subscription required).}

^{[33] The green book also includes details of the new bracket thresholds for the 39.6% rate starting in 2022.  It states:  “In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals (other than surviving spouses), $481,000 for head of household filers, and $254,650 for married individuals filing a separate return.”}

^{[34] Emily L. Foster, White House Proposal on Book Income Minimum Tax Evokes Angst, Tax Notes Today Federal, June 1, 2021 (subscription required).}

^{[35] Treasury’s Made in America Tax Plan, April 2021 (https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf).}

^{[36] “Tax benefits relating to . . . accelerated depreciation deductions are reducing our U.S. taxable income, and all remaining federal tax credits, which were primarily related to the U.S. federal research and development credit, reduced our federal tax liability in 2020,” according to Amazon’s Form 10-K filed Feb. 3, 2021 (https://www.sec.gov/ix?doc=/Archives/edgar/data/1018724/000101872421000004/amzn-20201231.htm).}

^{[37] See General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals (https://home.treasury.gov/system/files/131/General-Explanations-FY2017.pdf.}

^{[38] According to the Joint Committee on Taxation, between 2020 and 2024, deferral of gain on like-kind exchange will cost the fisc $41.4 billion (only $12 billion of which is tied to corporations).  (JCX-23-20, https://www.jct.gov/publications/2020/jcx-23-20/)}

^{[39] See pages 2-4 of General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals (https://home.treasury.gov/system/files/131/General-Explanations-FY2017.pdf).}

^{[40] Report to Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties, Department of the Treasury, Nov. 2007 (https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Earnings-Stripping-Transfer-Pricing-2007.pdf).}

^{[41] See our prior reports “Uncertainties Associated with Biden’s Capital Gains Tax Proposal Likely to Weigh on Markets” (April 24, 2021) and “Tax Policy Implications of Democrats’ Narrow Margins” (Jan. 15, 2021).}

^{[42] According to estimates by the Tax Foundation (see Table 4 as compared to Table 5, on a conventional basis) in a Feb. 24, 2021 analysis authored by Garrett Watson and William McBride, Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income (https://taxfoundation.org/biden-corporate-income-tax-rate/).}

^{[43] The example of this as provided by the green book (page 62) is as follows:  A taxpayer with $900,000 in labor income and $200,000 in preferential capital income would have $100,000 of capital income taxed at the current preferential tax rate and $100,000 taxed at ordinary income tax rates.}

^{[44] The $1 million per-person exclusion would be portable to the decedent’s surviving spouse.  Combined with the $250,000 per- person exclusion under current law for capital gain on a principal residence (which the green book proposes to apply to all residences and which would also be portable), the exclusion could effectively be as high as $2.5 million per couple.}

^{[45] “President Biden’s expected $6 trillion budget assumes that his proposed capital-gains tax rate increase took effect in late April, meaning that it would already be too late for high-income investors to realize gains at the lower tax rates if Congress agrees, according to two people familiar with the proposal. . . . The effective date for the capital-gains tax rate increase would be tied to Mr. Biden’s announcement of the tax increase as part of his American Families Plan, which includes an expanded child tax credit and funding for preschool and community college.  He detailed the plan April 28,” as reported by Richard Rubin, Biden Budget Said to Assume Capital-Gains Tax Rate Increase Started in Late April, Wall St. J., May 27, 2021 (https://www.wsj.com/articles/biden-budget-said-to-assume-capital-gains-tax-rate-increase-started-in-late-april- 11622127432).}

^{[46] The preferential tax treatment of carried interest allows certain investment managers (among others) to arguably convert what some view as compensation in exchange for services that should be taxed at ordinary rates into investment income taxed at what is now lower capital gains rates.  While Biden is proposing to effectively tax capital gains at the same rate as ordinary income for the wealthy, he is also proposing, according to the green book (page 82), to “tax as ordinary income a partner’s share of income on an ‘investment services partnership interest’ (ISPI) in an investment partnership, regardless of the character of the income at the partnership level, if the partner’s taxable income (from all sources) exceeds $400,000.”}

^{[47] Technically, the American Taxpayer Relief Act of 2012 (P.L. 112-240) raised individual income tax rates retroactively, but the period of retroactivity was so small (only two days—it became law on Jan. 2, 2013 and was effective for tax years beginning after 2012), that we decided not to highlight it for this purpose.}

^{[48] Allyson Versprille, Michael Rapoport and Laura Davison, Biden Tax Plan Forecast to Bring in $3.6 Trillion in Decade (3), Daily Tax Report, May 28, 2021 (subscription required).}

^{[49] https://joebiden.com/wp-content/uploads/2020/09/Buy-America-fact-sheet.pdf}

^{[50] Id.}

^{[51] Treasury’s Made in America Tax Plan, April 2021 (https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf).}