Explaining President Biden’s Offshoring Tax Penalty

by Lauren Soucy
offshoring tax

The Biden administration has been clear about bringing jobs back to the United States and boosting the country’s manufacturing sector. 

The President did this by implementing an offshoring tax as part of the Made in America plan. Under this tax penalty, businesses would face a global minimum tax and a higher corporate income tax than they did under President Trump. 

In this article, we’ll explore all the facets of the Made in America plan, including details about the offshoring tax penalty and how another piece of legislature fits into this plan. 

If your business brings back manufacturing jobs to the US, you could be eligible for a tax credit, and we’ll also explain what you can use it for. 

This Article Contains: 

(Click on the links to jump to a specific section)

Let’s get started.  

What is the Offshoring Tax Penalty by President Biden?

President Biden has signed an executive order for the Made in America plan to increase American-made products, bolster the manufacturing industry, and bring back jobs to the States by removing any loopholes left by President Trump’s tax policies. 

Made in America focuses on increasing American jobs by disincentivizing offshoring and incentivizing domestic production. 

The Biden administration is doing this by: 

  • Raising the corporate income tax from 21% to 28%. 
  • Strengthening the global minimum tax for all US multinational companies. 
  • Reducing incentives for foreign countries to reduce their tax rates by implementing a standard international tax. 
  • Closing loopholes and replacing offshoring incentives with those that reward onshoring. 
  • Enacting a 15% minimum tax on book income. 
  • Using the available fund for domestic research and development. 

Let’s explore all of these in more detail. 

1. Set the Corporate Tax Rate at 28%

President Biden’s plan has increased the corporate tax rate from 21% to 28%. This is a 7% increase from President Trump’s tax rate on corporate profits. 

The increased corporate tax will help fund urgent fiscal responsibilities and ensure that all capital income is taxed at least once. 

However, the Biden tax plan recognizes the importance of corporate investment. So, the funds gathered through these tax increases will go towards public investment in the areas of: 

  • Technology. 
  • Research and development. 
  • Infrastructure. 
  • Green industries. 

All of this will aid job creation in the United States, helping American workers thrive in a robust economy. 

2. Discourage Offshoring by Strengthening the Global Minimum Tax for US Multinational Companies

Republican President Trump’s Tax Cuts and Jobs Act (TCJA) incentivized US multinational companies to shift their jobs and profits overseas as they received a tax exemption on the first 10% of returned foreign assets. 

The rest were taxed at half the domestic tax rate. 

Additionally, this tax policy allowed companies to use their paid foreign taxes in high-income countries to shield income from tax havens. It also encouraged job outsourcing to foreign countries like India and the Philippines.  

On the other hand, the current tax plan will increase the minimum tax on US multinational corporations to 21% and calculate it per country so companies can’t shield their tax haven profit. This will also eliminate the zero income tax on the first 10% return of foreign assets. 

These tax increases will incentivize US companies to relocate their production and service offering back to the United States, boosting the economy. 

Wondering how outsourcing is different from offshoring?

Read about the key differences between Offshoring vs. Outsourcing.

3. End the Race to the Bottom Around the World

Corporate tax rates have been falling in many places worldwide over the last two decades. 

Why

So these foreign countries can attract multinational companies from larger economies, such as the US and the European Union, and get around the high taxes at their home countries. 

As a result, US corporations often invert (incorporate abroad) and switch their headquarters outside the United States jurisdiction to avoid paying US taxes. 

To counteract this, President Joe Biden is encouraging other countries to enact a similar effective tax rate. This will help ensure that a foreign corporation isn’t advantaged through inversion, and the foreign country themselves can’t gain an edge by becoming a tax haven. 

This minimum international tax on all foreign earnings will level the playing field across countries by removing their ability to cut their corporate tax rate to lure a multinational firm. 

4. Prevent US Companies from Inverting or Claiming Offshore Tax Havens as Their Residence

Companies can further enact profit shifting strategies by acquiring or merging with a foreign company, thus claiming to be a foreign company themselves and evading US federal taxes. 

President Biden has enabled SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments) to make this more difficult. The SHIELD proposal authorizes strong penalties for companies participating in these strategies. 

It also strengthens the anti-inversion rules by lowering the company ownership threshold to 50% for any US company. As a result, any US company with an equal ownership stake applies to US taxes, circumventing earlier policies where a minority stake could make you exempt. 

Doing this will remove any incentive for companies to invert and reverse any other policies which may do so. The US Treasury Department and the Joint Committee on Taxation estimate this tax reform could end profit shifting. 

5. Deny American Companies Expense Deductions for Offshoring Jobs and Credit Expenses for Onshoring

Under President Donald Trump, companies that manufactured products in the US had to pay all the required taxes, but one that offshored the same could virtually avoid those taxes. 

It also gave corporations further federal tax cuts and contracts to companies that offshored jobs and production. For instance, General Electric received $2.6 billion in contracts from President Trump while offshoring over 2000 jobs from Virginia to India

The Made in America plan has reversed these tax-based incentive programs for moving production offshore. It has primarily changed the Global Intangible Low-taxed Income (GILTI). 

What is GILTI? 

GILTI calculates a US company’s foreign earnings to ensure it pays a minimum tax, regardless of jurisdiction. 

Earlier, GILTI was exempt from any taxes for the first 10% of all foreign profit, but President Biden has ended these exemptions under the current law. As a result, it has reduced the temptation for corporations to offshore tangible assets. 

His plan has also increased the overall GILTI tax rate to 21% from the previous 13.125%, leading to more tax revenue.  

6. Eliminate a Loophole for Intellectual Property that Encourages Offshoring Jobs and Invest in Effective R&D Incentives

President Bident’s tax code reform includes removing all Foreign Derived Intangible Income (FDII) incentives and redirecting those funds to encourage research and development (R&D). 

What is FDII? 

FDII is a category of earning resulting from the sale of products related to a company’s intellectual property. For example, if a US company holds a patent and sells to foreign customers, the profits gained from those sales are subject to a lower tax rate. 

The TCJA lowered the tax rate for FDII to 13.125% instead of the regular 21%. This was done to encourage companies to export their goods and services while retaining the same intellectual property in the United States. 

However, there are two issues: 

  • FDII is ineffective in encouraging R&D as it doesn’t incentivize new domestic investment. It simply provides larger tax breaks to companies with prior innovation profit. 
  • Since firms only receive the FDII benefit above a 10% tax return of their tangible assets, they can meet this burden easily and move other assets overseas. 

So, companies preferred offshoring since they can receive the benefit under FDII and even reap the tax-exempt benefits of a tax haven. 

President Biden has repealed the FDII to raise significant tax revenue and fund domestic R&D. 

He has also ensured that his offshoring tax penalty will give a tax credit to manufacturing companies creating jobs in the US. 

7. Enact A Minimum Tax on Book Income of Large Corporations

Due to loopholes in the previous tax code, a US company reporting billions in capital gain to shareholders could get away with paying no federal income tax. 

These gaps and other offshoring incentives provided companies with many ways to reduce their tax liability. This is in sharp contrast to their employees, who are responsible for paying their taxes to the IRS. 

This situation happened because companies report two incomes: tax and book reporting. 

So, they report profit to shareholders while claiming their actual income is so low they should be freed from any tax obligations. 

President Biden’s plan instituted a minimum 15% tax of the book income that companies use to inform their shareholders and investors of earned profit. 

This will help the government spend that money towards social services and clean energy, another important consideration in the Made in America plan. 

But how will the IRS know about all this taxable income? 

Well, that’s where the Disclosure of Tax Havens and Offshoring Act comes in. 

Where Does the Disclosure of Tax Havens and Offshoring Act Fit In?

The Made in America tax plan puts a minimum tax on foreign income, disincentivizing companies to move investments and jobs overseas. 

To complement that, Democratic Senator Chris Van Hollen and Representative Cindy Axne’s brought their legislation, called the Disclosure of Tax Havens and Offshoring Act, to the 117th Congress. 

This would further require the US Securities and Exchanges Commission (SEC) to mandate large firms disclose their country-by-country financial reports. These reports should contain information about each subsidiary, including taxes, profits, employees, and other tangible assets. 

Through these reports, the government and the American public can see: 

  • How corporations take advantage of the existing tax law.
  • The number of jobs being offshored.
  • How the current tax system rewards such tax evasive behavior. 

It will also spotlight corporate tax avoidance and profit shifting strategies. 

Currently, any corporation whose annual revenue exceeds $850 million is required to submit all this information to the Internal Revenue Service (IRS). However, these reports are not part of the public record, which the above legislation seeks to rectify. 

Let’s now look at how your company can benefit from the Made in America tax credit you may receive for creating jobs for American workers. 

What Can You Use the Made in America Tax Credit For?

The Biden administration provides a 10% tax credit for companies that create American jobs for American workers, especially in the manufacturing sector. 

You can use this tax credit for:

1. Revitalizing Existing Closed or Closing Facilities

Companies that invest in revitalizing any closed or closing American facility with an intention to reopen it and create manufacturing jobs are eligible for this tax credit. 

2. Retooling Any Facility to Advance Manufacturing Competitiveness and Employment

The following companies can qualify for the proposed credit: 

  • Any company retooling (equipping with new or adapted tools) their existing factory with the intent of producing next-generation electronics. 
  • One that’s investing in new equipment and machinery that meets the Buy America standards.
  • A multinational corporation looking to improve export competitiveness while maintaining its US wage base. 

3. Reshoring Job-Creating Production to the United States

Companies that need investment for expenses related to bringing service jobs, including call center jobs, from overseas back to the United States. 

This includes costs of shipping, moving, and training new employees. 

4. Expanding or Broadening US Facilities to Grow Employment in the US

Any corporation looking to invest in expanding existing US production facilities is eligible for the credit. 

However, those who intend to simply relocate, even within the States, are ineligible. 

5. Expanding Manufacturing Payroll

The credit will apply to any manufacturing company’s wage increment, above their pre-Covid baseline, for jobs paying up to $100,000. 

Wrapping Up 

President Biden’s offshoring penalty is part of the Made in America plan. 

The plan aims to bring back lost tax revenue by closing tax law loopholes that allow corporations to evade paying US taxes and taxing their book income. 

While the penalty might hit some businesses, you could receive a substantial tax credit if your business focuses on bringing manufacturing and service jobs back to the United States.

 
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