November 30, 2020 | 5 minute read
With the Presidential election decided, the House retained by the Democrats, and control of the Senate still up in the air, many questions remain. Where should companies look for guidance regarding supply chain proposals? And what should they analyze? If Biden’s tax increase proposals are the ‘sticks’ that likely can be passed only if Democrats control both the House and Senate, then which proposals are the ‘carrots’ that might gain support from both Democrats and Republicans?
The outcome of the two Georgia Senate runoffs in early January, which will determine party control of the Senate, remains a key variable for assessing the lay of the land for action on Biden’s tax proposals. With Republicans currently set to hold 50 seats in the next Senate and Democrats now set to hold 48 seats, Democrats need to win both of the Georgia Senate races to secure majority control in a 50-50 split Senate with the tie-breaking vote of Vice President-elect Harris.
The Biden proposal that received the most focus in the runup to the election is his proposed increase in the top-line corporate rate to 28%. This seems extremely unlikely (if not impossible) to pass through a Republican-controlled Senate. Enacting a 28% corporate rate still could face strong resistance in a 50-50 Senate controlled by Democrats. Such an increase would require strict party-line voting from even the most ‘conservative’ Democrats, and at least one Senate Democrat, Sen. Joe Manchin (WV), recently expressed concern over raising the corporate rate higher than 25%.
In addition, President-elect Biden has proposed amendments to various GILTI provisions—most importantly, doubling the GILTI rate to 21%—but also proposing to eliminate the exemption for QBAI (return on foreign assets would not be exempt); impose a per-country test for GILTI; and impose a 15% alternative minimum tax on book income.
President-elect Biden has also proposed a 10% “offshoring penalty” surtax on profits from any production by a US company overseas for sales back to the United States. The surtax would also be applied to call centers or services by a US company located overseas but serving the US if the jobs could have been located in the US.
In addition, President-elect Biden has proposed to deny all deductions and expensing write-offs for offshoring jobs or production that could plausibly have been offered to US workers or done in the United States.
Again, the key for all of these proposals is that they must pass the Senate, where Democratic or Republican control remains unknown. Nevertheless, thinking about these proposals should not be put on the back shelf, because the midterm elections in 2022 could return them to front-and-center.
There are also some incentives that President-elect Biden has proposed on the campaign trail.
First, he has proposed to establish new incentives for companies to make critical products in the United States. One example of this is his proposed ‘Manufacturing Tax Credit to Retool and Revitalize,’ which would promote revitalizing, renovating and modernizing existing–or recently closed down–facilities.
President-elect Biden has also proposed a ‘Clean Energy component’ of his jobs and recovery plan, proposing to expand and extend tax credits that will “turbo-charge growth in American manufacturing.”
Finally, President-elect Biden has proposed to pursue tax code changes that may affect some specific industries, including bio-pharma and semiconductors, more than others.
Again, the key will be to watch negotiations in the Senate to see which (if any) of these proposals could be enacted into law. There will be more of a natural lean towards bipartisanship for tax incentive proposals, as Republicans also have indicated that they are in favor of measures to encourage investment in the US and the creation of US jobs.
The most potentially impactful international developments concern the OECD’s BEPS 2.0 project. The difficulty therein lies in tension between high-tax countries trying to protect against capital flight and smaller countries trying to attract inbound capital by creating an attractive tax environment. The OECD is tasked with balancing these competing forces in order to create a fair and equitable global tax environment.
Companies need to consider the developing international landscape before seriously contemplating any large-scale supply chain restructuring. The future of the trade landscape, while not expected to undergo wholesale change early in the Biden Administration, is also an important hotspot that will be a driving factor in supply chain-related decisions. In addition, international developments over digital taxes, the shift toward transparency, and the regulation of international data should also remain a priority for companies
Tax leaders should be proactive and engage the C-suite on key areas regarding supply chain planning as the new Biden administration takes charge in 2021, with potential opportunities and challenges on both the international and domestic front. Failure to plan ahead could cause companies to miss opportunities to align their approaches to tax compliance and strategy with their business strategy, resulting in increased tax risk and suboptimal results. Sustainable and agile solutions for supply chains will be the key to success.
For a more in-depth discussion on supply chain proposals from President-elect Biden, be sure to listen to PwC’s recently released podcast, Tap into Tax: US Supply chains in the new world order, featuring Pat Brown and David Lewis.