In April, President Joe Biden unveiled his proposed Made in America Tax Plan. One of the areas of the plan increases taxes on offshore earnings to bankroll U.S. infrastructure spending, resulting in automatic tax increases that have the potential to burden state tax collectors. Notably, President Biden’s proposal to alter the tax treatment of global intangible low-taxed income (GILTI) would increase taxes for U.S. companies on both a state and federal level. The plan would also eliminate the deduction for domestic income earned through international sales and connected with intangible assets in the U.S., or foreign-derived intangible income (FDII). Doeren Mayhew’s dedicated tax advisors evaluate the newly proposed tax plan and offer insights on the potential tax implications on GILTI and FDII.

Proposed Effects

President Biden’s plan would revamp much of the Tax Cuts and Jobs Act (TCJA)’s international provisions. Currently, the GILTI rate is 10.5% – the plan would increase the GILTI tax to 21% and remove exemptions for tangible property, applying the tax on a country-by-country basis for each country. Essentially, transforming the tax into a direct global minimum tax. Additionally, the plan would eliminate the 10% exemption for deemed returns to qualified business asset investment (QBAI). If President Biden’s proposed federal GILTI updates are adopted, many more U.S. businesses will be exposed to GILTI taxes and more income will be taxed as GILTI by both states and the federal government.

Currently, 22 states conform to the federal deduction for FDII, which is proposed to be eliminated. The FDII rate stands at 13.125% before the elimination.

States’ Treatment of GILTI

Most states have not yet issued guidance on the tax treatment of GILTI. The ones that have, however, risk automatic tax increases if they do not enact legislation to exempt GILTI from their tax base. States with rolling conformity would see tax changes automatically, as they are tied to federal tax changes unless they decouple. Fixed conformity states (those adopting federal tax changes on certain dates) may be motivated by President Biden’s proposed changes to enact their own legislation while they still have time, as some states are still navigating their way through the changes created by the TCJA four years later.

Some states already conform to the U.S. tax system and have adopted the federal treatment of GILTI and FDII, expanding the tax base at a state level. Since states historically have not imposed rates on foreign-sourced income, it may be complicated to navigate this change with their existing tax codes. One challenge of taxing GILTI at a state level is it may raise concerns regarding the dormant commerce clause, which prevents states from implementing legislation discriminating against interstate and international transactions. States choosing to impose higher GILTI tax rates could also stray from the foreign commerce clause which allows Congress to pass legislation focusing on international commerce.

Making Sense of the Changes

If enacted, the proposed changes to GILTI and FDII are sure to raise many questions – don’t try to navigate them alone. Doeren Mayhew’s tax advisors stand ready to help you make sense of President Biden’s new tax plan; contact us today to get started.