Kamala Harris and the Future of U.S. International Tax Reform: Navigating Changes Ahead
As the race for the 2024 presidential election heats up, the prospect of Vice President Kamala Harris assuming the presidency brings with it a renewed focus on U.S. international tax reforms. Harris has publicly confirmed her general support for the revenue-raising measures included in President Joe Biden’s fiscal year 2025 budget. This budget, published annually in the form of the "Green Book," outlines a series of reforms aimed at modernizing the international tax landscape, equitable revenue generation, and addressing challenges posed by multinational corporations.
Understanding the Proposed Reforms
The Biden administration has consistently articulated its international tax reform agenda for the last three years, seeking to enhance the taxation of foreign earnings, curb tax incentives that facilitate profit shifting offshore, and eliminate perceived loopholes. If Vice President Harris gains the presidency and the Democratic Party secures control of Congress in the upcoming general election, these proposed changes could soon be on the legislative docket.
Here, we will explore key aspects of the Biden administration’s proposed reforms, particularly those that Harris supports or has indicated general backing for. Given the significant shifts these reforms could bring, multinational businesses should closely examine their potential tax implications, preparing for changes that could affect their financial landscapes.
Key Proposals in International Tax Reform
1. Revise the Global Minimum Tax Regime
One of the cornerstone proposals is to align the Global Intangible Low-Taxed Income (GILTI) tax regime with the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two Model Rules. Here are some noteworthy changes on the table:
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Eliminate QBAI (Qualified Business Asset Investment): The QBAI deduction currently allows a U.S. shareholder to reduce GILTI inclusions by 10% of a controlled foreign corporation’s QBAI. The Harris campaign explicitly supports eliminating QBAI, which could result in a higher classification of GILTI income, subsequently broaden taxable income for U.S. multinationals.
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Reduce Section 250 Deduction to 25%: This significant reduction from the current 50% deduction on GILTI is anticipated to raise the effective tax rate on GILTI income to align it more closely with the U.S. corporate income tax rate, further discouraging profit-shifting behaviors.
- Jurisdiction-by-Jurisdiction GILTI Calculations: Changing the calculation methodology to assess GILTI inclusions and Foreign Tax Credits separately for each foreign jurisdiction aligns closer with the OECD’s guidelines, aiming to discourage U.S. companies from shifting profits to low-tax jurisdictions.
2. Restrict Dividend Received Deductions from Non-Controlled Foreign Corporations
The Biden administration has proposed to limit dividend received deductions (DRD) under Section 245A to Controlled Foreign Corporations (CFCs), reducing the tax benefit available to U.S. shareholders of non-CFCs. This shift aims to align U.S. taxation with income sourcing rules, potentially prompting U.S. investors to reevaluate their foreign investments and corporate structures.
3. Expand the Disallowance of Deductions Allocable to Exempt Foreign Income
The administration’s proposal to disallow expenses that are allocable to income that is exempt from U.S. tax reflects a movement towards minimizing tax subsidies for outbound investment. By repealing Section 904(b)(4) and extending Section 265 to foreign dividends and GILTI income, U.S. corporations may face additional tax burdens.
Legislative Landscape and Implementation
While the Biden administration’s proposed international tax reforms indicate a strong policy direction, it is essential to recognize that these reforms face the unpredictability of the legislative process. If Harris were to ascend to the presidency with substantial congressional backing, the likelihood of these proposals becoming reality increases. However, political negotiations will be vital as diverse interests within Congress navigate the intricacies of tax law amendments.
Preparing for a Shifting Tax Environment
As these reforms loom on the horizon, multinational corporations are urged to engage proactively with their tax advisors to analyze and navigate various scenarios that may arise. With the complexity of U.S. international tax regulations and the promise of substantial reforms, early assessments can greatly aid businesses in adapting their structures, compliance efforts, and overall strategies in anticipation of legislative changes.
Conclusion: Looking Ahead to 2025 and Beyond
The potential of Kamala Harris’s administration igniting a wave of international tax reforms reshapes the landscape for multinational businesses, heightening the urgency for readiness in a shifting environment. The forthcoming election results will undoubtedly dictate the course of U.S. tax policy in 2025; thus, staying informed and prepared will be crucial for any entity operating on a global scale. By approaching these changes with diligence and foresight, corporations can better position themselves for success in an evolving financial framework.
