10 minute read 8 Nov 2020
Low angle view of the White House, Washington DC, USA

How Biden’s declared victory will affect tax and trade globally

By EY Global

Multidisciplinary professional services organization

10 minute read 8 Nov 2020
Related topics Tax Tax planning

As the US prepares to welcome a new president, what are the potential tax implications for the multinational entities that do business in America?

In brief
  • President-elect Joe Biden has pledged to raise revenue to offset his policy priorities. He has proposed to raise corporate tax rates and increase the global intangible low-taxed income (GILTI) tax while rewarding companies that invest in America.
  • As with all campaign proposals, his tax policy legislation will have to be negotiated with Congress.

President-elect Joe Biden, as recognized by the Associated Press,1 faces a long list of challenges, from improving access to healthcare and controlling its costs to addressing trade tensions with China, when he takes office. But the starkest, most immediate challenge will be managing the COVID-19 crisis, including its economic impact. As of election day, the US reported nearly 9.4 million total cases, and more than 232,600 total deaths.According to the Congressional Budget Office, the federal deficit will be US$3.1 trillion in FY20.3

During their respective campaigns, Biden laid out tax plans that were more defined than those of Trump during his re-election bid. Unsurprisingly, Biden has pledged to forward many policy initiatives on infrastructure and manufacturing and caregiving and pay for them by reversing some of the tax measures in the Tax Cuts and Jobs Act, which Democrats have said disproportionately benefits corporations and wealthy individuals.

The Trump campaign is contesting the results in multiple states and filing lawsuits; Trump’s lead lawyer Rudolph Giuliani said on 7 November that the president will not concede the race. If the current vote results stand and Biden is confirmed as president-elect by the Electoral College, he has said he’d restore the top personal marginal income tax rate back to 39.6% from 37%. He would also raise the top corporate income tax rate to 28% from 21%.5 He has mentioned raising the tax rate on capital gains to 40% for those with annual incomes of more than US$1 million,and setting a 15% minimum tax on the book income of big companies.7 Biden has promised not to raise taxes for anyone earning below US$400,000 a year.8

Proposed tax increases that would be imposed on wealthy individuals and corporations to “pay their fair share” are not new for the Democrats. These plans are familiar from the pre-TCJA Obama era. They may even gain more traction after a pandemic that economists have said exacerbated income inequality around the world. But the pandemic itself might hamstring Biden’s intention to pay for his policy priorities at all, as economists have warned increasing taxes at the wrong time could impede the financial recovery. As a result, Biden will face the same decisions confronting jurisdictions around the world: When does the need to provide stimulus end and the need to raise revenues to pay down deficits incurred to fight COVID-19 begin?

Biden likely will have to draw from his decades of experience as a United States senator to make progress with Congress. Democrats will retain control of the House of Representatives, but Republicans will gain seats and narrow the majority. Control of the Senate is not clear, with several Senate races still undecided and both Georgia seats headed for run-off elections to be conducted on 5 January 2021.

If Republicans retain a narrow majority, they are likely to resist efforts to dial back Trump’s tax law. Republicans are also likely to be more wary of the impact of tax increases during an economic recovery. This dynamic means that any tax proposals would need to be carefully negotiated – and reflect some Republican priorities – if they are to be adopted. If Democrats ultimately win 50 seats in the Senate, the vice president’s tie-breaker vote could create a working majority to pass legislation with less negotiation with Republicans, giving Biden more leeway to pursue his campaign proposals using the same budget procedure under which Republicans passed the Tax Cuts and Jobs Act in 2017.

Before Biden or the new Congress begin to tackle taxes, the pandemic looms. “Our work begins with getting COVID under control,” Biden said in his victory speech on 7 November.

Biden announced an “action blueprint” based on the seven-point plan his campaign developed in response to COVID-19. The proposal includes making masks mandatory, introducing more testing, producing more PPE, investing US$25 billion in making and distributing vaccines, and repairing the country’s fraught relationship with the World Health Organization.The plan would begin as soon as he is inaugurated on 20 January 2021. “That plan will be built on bedrock science,” Biden said in his victory speech. “It will be constructed out of compassion, empathy and concern. I will spare no effort, none, or any commitment to turn around this pandemic.”

To revive the economy, Biden has also called for the next government stimulus and relief package to be “a hell of a lot bigger” than US$2 trillion,10 and has pledged investments in manufacturing, supply chains, infrastructure and clean energy, as well as R&D for tech like electric vehicles, 5G and AI.

Biden has also vowed to protect and expand the Affordable Care Act, with a plan to insure more than 97% of Americans, at a cost of US$750 billion over 10 years, paying for that with revenue from his more stringent capital gains tax.11

Biden has said another key aim is to revitalize America’s middle class. He says his Made in America package will create “millions of middle-class jobs.”12 He has outlined plans to invest a combined US$700 billion in procurement and R&D, and US$2 trillion in clean energy and infrastructure investment,13 which ties in to his plan for “a clean energy revolution and environmental justice.” It is intended to spark a return to a more localized supply chain, the need for which was highlighted starkly by COVID-19 and the widespread shortages it caused.

According to Biden, he will pay for his infrastructure plan by “reversing the excesses of the Trump tax cuts for corporations; reducing incentives for tax havens, evasion, and outsourcing; ensuring corporations pay their fair share; closing other loopholes in our tax code that reward wealth, not work; and ending subsidies for fossil fuels.”

In other key anti-offshoring measures, Biden has proposed increasing the tax rate on profits earned by foreign subsidiaries of US firms, an element of TCJA known as the Global Intangible Low-Tax Income (GILTI) tax, to 21%;14 creating a Made in America tax credit to offset 10% of investments geared toward creating jobs in the US;15 and introducing a surtax on certain goods and services imported to the US.

Biden has also said he would work to restore traditional international alliances and re-engage globally on issues such as climate change and the multilateral trading system, with input from labor unions and environmental organizations. “As president, I will take immediate steps to renew U.S. democracy and alliances, protect the United States’ economic future, and once more have America lead the world,” Biden wrote in Foreign Affairs in April.

Biden has said he believes in “fair trade” and signaled a return to more rules-based, pro-free trade environment that opens markets to US goods and services, although he has said his first priority is making more investments in domestic needs like health care, infrastructure and education before focusing on trade. “We need to be able to build the very best in the United States and sell the very best around the world,” Biden wrote. “That means taking down trade barriers that penalize Americans and resisting a dangerous global slide toward protectionism.”

On China in particular, Biden strikes a different tone than Trump, although it is likely that his policy goals with respect to China would be similar to that of Trump. He was critical of the Trump administration’s tariffs on China and said repeatedly during debates that Trump “lost” the trade negotiations. But Biden has also stopped short of saying he would repeal tariffs or how his administration would extract concessions on issues such as intellectual property, subsidies, and support for state-owned industries and other issues at the heart of the dispute.

Biden also has a different approach on climate change, signaling a desire to “transition” the US away from an oil-based economy and rejoin the Paris Agreement on climate from which Trump withdrew. Before the pandemic, Biden indicated support for carbon emissions pricing but has since emphasized policies that rely on developing green energy industries that create jobs.

The view from EY

With the Democrats back in the White House, the international business community should expect a possible reversal of Trump-era policies.

“There’s a lot more change when we have change,” says Cathy Koch, EY Global Tax Policy Network and Americas Tax Policy Leader. “Climate is one of the issues where the current administration has diverged most starkly from Trump’s administration. But Biden's victory also means there’ll be more emphasis on investments in infrastructure, social justice, and a shoring up of healthcare with the restoration of Obamacare and its protections too. There will be opportunity in this change.”

Biden’s proposal to increase taxation, in the form of corporate tax hikes and the increase in GILTI, will spark a big debate, the outcome of which has major ramifications for global businesses. “Our multinational clients are now modeling what a higher tax rate would mean,” Kate Barton, EY Global Vice Chair of Tax, said in a pre-election webcast sponsored by the British American Business Association. “When Trump dropped the rate down to 21%, many other countries around the world followed suit, so a lot of our multinational clients liked that. But that wasn’t the whole story; it gets more complex.

“Multinationals want to pay their fair share of taxes, but their concern lies with getting hit with double or triple tax, as all these revenue-starved countries are looking at global minimum taxes, and controversy and enforcement is going to be at an all-time high,” Barton continued. “That’s when it becomes outrageous to try to do business in multiple countries. If you don’t have perfect credit and offset systems, that can quickly become quite expensive.”

Biden’s expected position with regards to the Organisation for Economic Cooperation and Development will be important. The OECD’s BEPS 2.0 project will drive international tax toward more multilateral agreement, developing global minimum taxes and creating the coordinated framework critical to making it work. And this is one area where Biden is likely to continue Trump’s approach.

“Across both Republican and Democratic administrations, the US has been a very active participant in all OECD tax discussions,” says Barbara Angus, EY Global Tax Policy Leader. “And BEPS 2.0 is much more fundamental than anything the OECD has done for many years. The changes Biden has proposed to the existing GILTI tax rules in the US would more closely align those rules with the international tax structure design the OECD is pursuing. One would expect a Biden administration to continue to be supportive of that part of the project, perhaps even more so than the Trump administration.”

The other aspect of BEPS 2.0 concerns digital services taxes, and the potentially disproportionate impact they have on US businesses. Again, we can expect the US opposition to continue under Biden.

“In an era where we don’t see much bipartisanship on tax issues, this issue is one where we’ve seen both political sides on the tax-writing committees join together in one voice expressing the same position,” says Angus. “That’s a strong signal that under Biden, digital services taxes will remain of real concern to the US government, and that an appropriately designed, multilateral solution based on cooperation is the better approach. The US also has a long history of strongly articulating its views to the OECD. I’d expect that to continue too, with the US having firm opinions about all the parameters of an appropriate solution.”

There are other reassurances for international business under Biden. He has said improving infrastructure will make it easier to get goods and services to market. And while the sense of looking after American interests overseas will remain in line with Trump’s, the new president can be expected to take a softer approach.  In particular, look for Biden to re-engage multilaterally and with allies including with the EU and with Asia. In developing his trade policy in Asia, Biden may potentially look to some form of the Trans-Pacific Partnership as a starting point.  China will present unique challenges with the desire to reset trade relations with that country tempered by underlying concerns with China and bipartisan pressure to take a confrontational approach.

“Biden’s goals with respect to China, IP protections and cybersecurity are similar to Trump’s,” says Koch. “But the approach will be much different – more collaborative, less confrontational, less go it alone.”

But before he’s able to jump aboard Air Force One, the new Commander-in-Chief has to face the challenge of COVID-19. The virus is still spreading, with hospitalizations and deaths increasing as the nation heads deeper into winter. The task of managing – and paying for – the nation’s economic recovery from this pandemic, which has caused unemployment to surge to levels not seen since the Great Depression, is gargantuan.

“The one specter that looms, when you want to make all this investment in the economy, is who pays for it,” says Koch. “And there’s really not a whole lot of taxpayers left out there now with the ability to do so. If we are still in a COVID-19 recession, there will probably be no tax increases, but sooner or later, we have to think about rebuilding our fiscal house.”

Summary

President-elect Joe Biden has proposed policy initiatives that he has pledged to offset with an increase in corporate tax rates. His manufacturing plan would also impose a tax on companies that manufacture overseas for sale into the US while rewarding those who invest in the United States.

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By EY Global

Multidisciplinary professional services organization

Related topics Tax Tax planning