2024 Green Book Expands on Tax Avoidance and Rate Hikes

On March 9th, the Biden Administration submitted its fiscal year 2024 budget recommendation to Congress, primarily recycling or tweaking previously defeated proposals to increase taxes on corporations and wealthy individuals and ensure large multinational companies pay a minimum tax in the jurisdictions in which they operate. Coupled with “new” proposals (relative to last year’s budget) to curtail tax avoidance and increase a myriad of tax rates, the Administration would raise approximately $4.7 trillion in revenue. With a divided government, tax reform legislation is unlikely, but the relevance of specific line items could escalate during negotiations for some must-pass legislation this year. Further, the proposed revenue raisers remain as potential sources for lawmakers for years to come. As Republicans prepare their response in the coming months, we thought it might be helpful to recap selected proposals detailed in Treasury’s “General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals” (the “Green Book”) and share some perspectives.

Because the revenue raisers in the Green Book include many items from prior years, our previous alerts may also be helpful, such as those discussing the Biden Administration’s fiscal year 2022 budget, its 2023 budget, and the Build Back Better Act (BBBA) as passed by the House of Representatives.

In this alert, we highlight some of the proposals in the following categories:

• Corporate Taxation
• International Taxation
• Individual, Trust, and Estate Taxation
• Other Targeted Provisions

CORPORATE TAXATION

• Increase the corporate income tax rate to 28%.
• Increase the recently enacted excise tax on share repurchases to 4%.
• Modify the tax treatment of leveraged divisive transactions (e.g., spinoffs) that otherwise might qualify for tax-free treatment.
• Tax corporate distributions as dividends for certain transactions.
• Deny loss treatment for complete liquidations within a controlled group but allow for deferral of those losses if provided for in regulations.
• Accelerate and tighten the rules limiting deductions for excess employee remuneration.

A&M Insight: Unlike last year’s Green Book, the 2024 budget includes proposals from the Obama Administration targeting transactions that reduce earnings and profits or otherwise avoid dividend treatment. Although it is uncertain whether any specific corporate tax changes might gain momentum, companies should keep an eye on the proposals and assess the potential business planning and tax implications. While increasing corporate income taxes is a nonstarter with a Republican-controlled House, it is less clear whether Republicans might entertain other changes, such as increasing the 1% tax on share repurchases, if an appropriate deal could be made. The new provision effective this year is fraught with implementation challenges, with taxpayers awaiting more guidance, but merely increasing the percentage becomes an easy way to raise revenues.

INTERNATIONAL TAXATION

• Better align the U.S. international tax regime with the 15% global minimum tax under OECD Pillar 2 rules by:
  • Modifying the global intangible low-taxed income (GILTI) regime to be on a country-by-country basis along with other changes;
  • Adopting an undertaxed profits rule (UTPR) that would primarily apply to foreign-parented multinationals; and
  • Implementing a domestic top-up tax that would apply when other jurisdictions adopt the UTPR.
• Repeal the section 250 deduction for foreign-derived intangible income (FDII).
• Adopt other reforms to ensure income is appropriately taxed and reduce incentives for tax avoidance strategies, including:
  • Disallowing losses on dispositions of stock in foreign corporations attributable to previously tax-favored income;
  • Modifying pro rata share rules for allocating subpart F income and GILTI to U.S. shareholders;
  • Limiting foreign tax credits from sales of hybrid entities;
  • Expanding the scope of the anti-inversion rules (revived from the fiscal year 2022 Green Book); and
  • Limiting net interest expense deductions for highly leveraged U.S. members of multinational groups.

A&M Insight: Migrating to the Pillar 2 rules would increase tax costs and create significant compliance burdens for multinational companies. For example, the adoption of Pillar 2, without repealing the 15% corporate alternative minimum tax enacted by the 2022 Inflation Reduction Act, would require taxpayers to navigate both rules and maintain an additional set of books. Taxpayers, however, would welcome the proposals for allowing foreign tax credit and net operating loss carryovers under the GILTI rules. While Democrats remain committed to adopting Pillar 2, the Republicans have remained skeptical on the effects on U.S. competitiveness, reducing the likelihood of new legislation in the near term. Even if the U.S. does not adopt Pillar 2, its wide-spread adoption by other countries is likely to entail substantial compliance costs for U.S.-based multinationals and foreign-based multinationals with U.S. subsidiaries. Companies should monitor Pillar 2 developments worldwide and model potential scenarios based on how the U.S. might apply its global minimum tax.

INDIVIDUAL, TRUST, AND ESTATE TAXATION

• For individuals with income over $400,000:
  • Increase the marginal tax rate to 39.6%;
  • Increase the net investment income tax rate and additional Medicare tax rate to 5.0% (unlike prior Green Books);
  • Ensure that all passthrough business income is subject to either the net investment income tax or the self-employment tax; and
  • Tax carried interest as ordinary income.
• Tax long-term capital gains and qualified dividends at ordinary rates for taxpayers’ income over $1 million.
• For taxpayers worth more than $100 million, impose a 25% minimum income tax on total income, generally including unrealized capital gains.
• Accelerate distribution requirements for taxpayers with tax-favored retirement arrangements that exceed $10 million.
• Tax the capital gain on a donor’s or decedent’s transfer of appreciated property at the time of transfer, subject to several exclusions and deferral elections.
• Minimize estate tax planning opportunities by modifying rules regarding grantor retained annuity trusts and the generation skipping transfer tax.

A&M Insight: Republicans, and some Democrats, strongly oppose tax increases on individuals and taxing unrealized capital gains, making many of the proposals unlikely, unless they might consider in a quid pro quo deal some means of raising taxes on extremely wealthy individuals. Therefore, monitoring the developments during budget negotiations remains important for high-net-worth individuals.

OTHER TARGETED PROVISIONS

• Prevent basis shifting between related parties through partnerships.
• Limit the annual deferral of gain on like-kind exchanges of real property.
• Require 100% recapture of the cumulative depreciation deductions as ordinary income on certain depreciable real property.
• Apply certain tax rules regarding securities to digital assets and expand reporting requirements.

A&M Insight: The above provisions mirror the proposals in last year’s Green Book, with the most significant revenue raiser being the prevention of abusive basis-shifting transactions, which is estimated to raise approximately $64 billion over 10 years. For real estate businesses and their investors, it will be important to keep an eye on the proposals to change depreciation recapture and like-kind exchange rules and be prepared to model scenarios and potential effects. With the heightened focus on digital assets amid the current turmoil affecting the U.S. financial system, taxpayers should expect more legislation and regulations.

A&M Tax SAYS

Significant uncertainty exists as to which tax reform proposals might advance in must-pass legislation in a divided government, with the Democrats offering tax and spend proposals while the Republicans are aiming for substantial spending cuts and to make tax cuts permanent. The revenue raisers, old and new, will also spur debate on the campaign trail, making them relevant beyond the current budget cycle. We will continuously monitor and analyze the forthcoming Republican proposals and subsequent developments, particularly proposed legislation that is more likely to advance. If you would like to discuss how different tax reform proposals could affect your business and tax planning, please reach out to Kevin M. Jacobs of our National Tax Office.