Andrew is a Managing Director in PwC’s Tax Policy Services practice. Mark is a Managing Director in that practice. He previously served for many years as Chief Tax Counsel to the Senate Finance Committee.
The Biden Administration and Congress are focused on responding to the COVID-19 pandemic and its economic impact, while also preparing to consider significant tax law changes impacting business and individuals. Important changes in trade policy also are likely. Foreign companies and investors will need to engage early with policymakers to educate them about the vital role they play in the US economy and about their unique concerns. Once consideration actively begins, legislation may move quickly, and it may become more difficult to participate effectively in the process.
As of this writing, the Democratic-led Congress is on the verge of passing a deficit-financed, $1.9 trillion COVID-19 relief package (‘American Rescue Plan’) proposed by President Joe Biden. Congress is expected to pivot quickly to consideration of a large-scale infrastructure package (‘Build Back Better Recovery Plan’) that may be partially offset by tax increases on corporations and upper-income individuals.
The Biden administration and Democratic Congressional leaders have made a distinction between temporary spending related to the pandemic that is deficit-financed and more permanent spending they say should be offset by revenue-raising measures. They also have said tax increases should not be considered in the midst of a pandemic and economic downturn. According to some forecasts, GDP could recover to pre-pandemic levels by the middle of 2021.
During the presidential campaign, Biden proposed a number of tax increases on corporations and upper-income individuals to pay for new federal spending on priorities such as infrastructure, clean energy, health care, education, and child care. This includes higher tax rates on corporations, individuals, and investment income, as well as changes affecting US taxation of multinationals.
Narrow Democratic majorities in both the House and Senate will affect the ability to enact the Biden tax plan. In particular, some of the proposed tax increases may face resistance from moderate-to-conservative Democrats, whose votes will be required for passage. For example, a proposed increase in the US corporate tax rate from 21% to 28% may not be achievable, and a 24% or 25% corporate tax rate may be more attainable as a political matter.
While the international tax law changes in the Biden tax plan primarily would affect US multinationals, the Congressional tax-writing committees are expected to undertake a broader review of the international tax reforms enacted as part of the 2017 tax reform law (Tax Cuts and Jobs Act, or TCJA) that affect both US and foreign multinationals. The Biden administration also is expected to review TCJA and tax regulations interpreting that law that were issued during the previous administration.
As a result of the COVID-19 pandemic, there is bipartisan interest in reducing US reliance on foreign manufacturing and supply chains, especially in certain sectors such as pharmaceuticals and semiconductors. For example, Senators John Cornyn (R-TX) and Mark Warner (D-VA) introduced the ‘CHIPS’ Act, a portion of which was enacted as part of a year-end defense authorization bill. In addition, President Biden campaigned on a ‘Made in America’ agenda that emphasizes government procurement of US goods and services, and includes tax changes designed to discourage ‘offshoring’ and encourage US manufacturing and innovation. There may be more interest and support in Congress for tax incentives than punitive tax measures.
There also is bipartisan interest in addressing temporary tax policies under the 2017 tax reform law. Beginning in 2022, currently deductible research and development expenses must be amortized (i.e., capitalized and recovered over several years). At the same time, the business interest expense limitation will become more restrictive. Full expensing of certain business investments will phase out over five years beginning in 2023.
In the current policy environment, foreign companies investing in the United States need to model the impact of potential changes in US tax and trade policy, build awareness of the US jobs, suppliers, and communities supported by their economic activity, and engage with policymakers to communicate areas of concern or support.