The Biden administration is expected to raise both the U.S. corporate tax rate and the tax on foreign‑source income that U.S. shareholders must report under the Global Intangible Low‑Tax Income (GILTI) regime. The changes could make operating a U.S.‑owned foreign subsidiary considerably more expensive for American businesses and individuals.
Background on GILTI
- The 2017 Tax Cuts and Jobs Act introduced GILTI to prevent U.S. companies from deferring tax on intangible income earned abroad.
- Under current law, GILTI is taxed at 10.5 %, which is half of the statutory corporate rate of 21 %.
- The tax applies to most foreign earnings, except for income derived from tangible assets (e.g., manufacturing facilities).
- If a foreign subsidiary pays a sufficient foreign tax rate—roughly the same as the U.S. corporate rate—the GILTI liability can be offset. For example, an Irish subsidiary taxed at 12.5 % generally incurs no GILTI, while a subsidiary in a jurisdiction with a 19 % foreign tax rate also avoids the charge.
Proposed Corporate Tax Increase
- Biden’s budget proposal would raise the statutory corporate tax rate from 21 % to 28 %.
- The proposal suggests applying the full corporate rate to GILTI, rather than the current half‑rate.
- If the corporate rate is set at 28 %, the GILTI tax could rise to 21 % (28 % × 0.75), effectively eliminating the discount that currently exists.
Interaction with Foreign Tax Credits
- Presently, U.S. shareholders can claim a credit for up to 80 % of foreign taxes paid against the GILTI liability.
- Raising the corporate rate and applying the full rate to GILTI would reduce the benefit of this credit, especially for companies that already pay modest foreign taxes.
- The net effect would be a higher overall tax burden on foreign earnings, even when those earnings are subject to local taxes.
Potential Impact on U.S. Businesses
- Companies with foreign subsidiaries that rely on low‑tax jurisdictions (e.g., Ireland, the Netherlands) could see their effective tax rate double or more.
- The increased cost may erode the competitive advantage of U.S. firms that previously used offshore structures to defer or reduce taxes.
- Higher taxes could incentivize relocation of operations, intellectual property, or entire businesses to non‑U.S. jurisdictions.
Rising Interest in Renouncing U.S. Citizenship
- Anecdotal evidence shows a surge in inquiries about renouncing U.S. citizenship and obtaining new passports.
- The prospect of higher taxes and reduced benefits from offshore planning appears to be a driver for this trend.
Planning Considerations
- Forward‑looking tax planning: Focus on the tax environment for the next fiscal year rather than the current one, assuming a corporate rate of 28 % and a potentially higher GILTI rate.
- Geographic diversification: Evaluate moving operations to jurisdictions with genuinely low effective tax rates that can still offset GILTI, or consider establishing entities in countries with robust tax treaties.
- Advanced structures: Sophisticated trust arrangements or other international planning tools may mitigate exposure, but they add complexity and cost.
- Cost‑benefit analysis: Weigh the administrative and compliance expenses of restructuring against the projected tax increase.
Bottom Line
If the Biden proposals are enacted, the United States will become less attractive for businesses that rely on offshore subsidiaries to manage tax liabilities. Companies and individuals should anticipate a higher corporate tax rate (potentially 28 %) and a significant rise in the GILTI tax, and they may need to consider relocation, restructuring, or advanced tax‑planning strategies to preserve profitability.
