On February 2, 2015 President Obama transmitted to Congress his fiscal year (FY) 2016 budget, containing the administration’s recommendations to Congress for spending and taxation for the fiscal year that begins on October 1, 2015.
The president proposes a six-year USD 478 billion program for transportation infrastructure, the cost of which would be offset in part by a one-time tax on the unrepatriated foreign earnings of US multinational corporations. The tax on unrepatriated earnings would be part of a transition to a proposed fundamental change in the taxation of the future foreign earnings of US corporations, which would be taxed on a current basis at a reduced rate.
The budget includes a reserve for business tax reform, but not one of sufficient magnitude for significant rate reduction. The president proposes reducing the corporate income tax rate from 35% to 28%, but the budget does not provide revenue to offset the cost of such a reduction. Instead, the budget refers only to eliminating tax expenditures, such as accelerated depreciation and “reducing the tax preference for debt financed investment.”
New business tax proposals
The FY 2016 budget includes a number of new and significant proposals. Chief among these is a fundamental reform of the system of taxation of the foreign earnings of US companies, which would raise USD 474 billion over 10 years.
In place of the current system of deferral, the budget proposal would impose a minimum tax on foreign earnings above a risk-free return on equity invested in active assets. The minimum tax, imposed on a country-by-country basis, would be set at 19% less 85% of the per-country foreign effective tax rate. The new minimum tax would be imposed on a current basis, and foreign earnings could then be repatriated without further US tax liability.
As part of the transition to the new system of taxation of foreign earnings, the budget would also impose a one-time 14% tax on earnings accumulated in CFCs that have not previously been subject to US tax. A foreign tax credit would be allowed for foreign taxes associated with those earnings, reduced in proportion to the one-time tax rate relative to the maximum corporate rate. The transition tax would be payable ratably over five years.
Other business tax revisions
Many other tax proposals in the FY 2016 budget are familiar, having been included in previous budgets, such as:
- Reforms to the international tax system
- Limiting the ability of domestic entities to expatriate
- Repeal of natural resources production preferences
- Repeal of LIFO and LCM accounting
- Taxation of carried interests in partnerships as ordinary income
- Insurance industry reforms
- Marking financial derivatives to market
- Modification of the like-kind exchange rules
- Modification of the depreciation rules for corporate aircraft
- Denying a deduction for punitive damages
- Make permanent and reform the credit for research and experimentation
- Make permanent the Subpart F exception for active financing income
- Make permanent look-through treatment of payments between related CFCs
Some previous proposals have been modified significantly.
The rate of tax on the liabilities of financial institutions with assets in excess of $50 billion would be reduced from 17 basis points to 7 basis points, but the application of the tax would be broadened to include insurance companies, savings and loan holding companies, exchanges, asset managers, broker-dealers, specialty finance corporations, and financial captives. These changes have roughly doubled the revenue relative to the proposal in the FY 2015 budget.
Comment Meijburg & Co
The proposed change in taxation of the foreign earnings of US companies, from a system of deferral into a minimum tax on a current basis, is a response to the offshore accumulation of foreign profits by major US companies. Under the proposed change, future taxation would be levied irrespective of the repatriation of profits and this could therefore also affect the role of non-US entities in US company structures.
The proposals should be regarded as a political opening bid by a Democratic administration to a Republican-controlled Senate and House of Representatives. At present it is difficult to predict what the final outcome of the upcoming political negotiations between the Republicans and Democrats in Congress will be. What is clear is that the administration faces an uphill battle to gain support for its proposals and it is unlikely that they will be adopted in their current form.
We will, of course, keep you informed of developments. If you would like more information on this matter, our tax advisors will be happy to be of assistance.