President Biden’s Made in America Tax Plan

The new Biden administration has unveiled a wide-ranging set of tax measures for US companies and companies doing business in the US as part of its US$2 trillion infrastructure package.

Under the “Made in America Tax Plan”, announced by US Treasury Secretary Janet Yellen:

• The US company tax rate will rise from 21% to 28% and a minimum tax rate of 21% will apply to US multinationals’ foreign sourced profits (up from 10.5%). This rate will apply to profits on a country-by-country basis. As a further backstop, a 15% minimum tax rate will apply on the accounting profit reported to shareholders.
• The US will seek agreement on a global minimum tax through multilateral negotiations to end the “race to bottom” on company tax rates. This will include limiting US deductions for foreign companies that look to transfer their US profits to countries that don’t apply an appropriate global minimum tax.
• US companies will be encouraged to move jobs onshore though a new tax credit and disincentivised from “offshoring” jobs through denial of deductions.
• It will be harder for US companies to lose US tax residence by merging with, or being taken over by, a foreign company (if their place of management and operations remain in the US).
• Tax preferences and subsides for fossil fuel industries will be repealed as part of the Biden administration’s path to net-zero emissions by 2025.
• The US Internal Revenue Service will receive additional resourcing for enforcement and audit activity against corporations.

Separately, the US’s concern with unilateral Digital Services Taxes (“DSTs”) continues. Very recently, the US Trade Representative opened an investigation into the United Kingdom’s DST implementation. This follows similar investigations of France’s DST, under the previous US administration. Potential responses include US tariffs on exports.

Observations from afar

The measures adjust the previous administration’s tax policies with a continuing focus on using the US tax code to explicitly incentivise domestic business activity by US multinationals. What appears to be more nuanced is the US approach to global taxation.

The proposed multilateral approach parallels the work the OECD is doing to address tax challenges arising from the digitalisation of the economy. One of the OECD’s workstreams (“Pillar Two”) involves consideration of a global minimum tax framework for multinationals.

The Biden tax plan suggests a potential recalibration and dovetailing into the OECD’s efforts to develop consensus on a new international tax framework. 

Impact for NZ business

So, what do these US tax announcements mean for New Zealand and New Zealand companies operating in, or exporting to, the US? A couple of observations:

The New Zealand Government has previously signalled its willingness to implement a DST depending on progress (or lack of progress) by the OECD on a multilateral solution. The US administration’s commitment to engaging on a global tax solution and trade action against countries implementing unilateral tax measures is potentially instructive for New Zealand.

For exporters and NZ businesses with US operations, the detail of the Made in America Tax Plan (particularly around any US profit repatriation tax measures or denial of deductions for non-US activities) will be critical. With a company tax rate of 28%, New Zealand cannot be said to be a low tax jurisdiction. However, the devil will inevitably be in the detail. This is unlikely to become clearer until legislation is brought before the US Congress.

It is also a good opportunity to reflect on New Zealand’s participation in the OECD process to date and where this may ultimately lead. The other OECD workstream, “Pillar One”, focuses on global profit allocation drivers for tax. That looks at which countries should be able to tax a multinational’s global profits and how much of the profits. There are differing views on profit allocation and drivers depending on whether a country is a market for, or the home country of, a multinational.

For New Zealand, and New Zealand companies operating globally, Pillar One is likely to be of greater interest than global minimum tax proposals. The scope of affected businesses is not clear at this stage. However, it is unlikely to be limited to highly digitalised businesses only (particularly with the US involved in the process).

This means NZ business will need to consider not just the immediate impact of the US tax proposals but the potential wider impact from the ongoing OECD work.