Tax rate increase

As anticipated, the Treasury Green Book confirmed the increased corporate tax rate from 21% to 28%. The Treasury Green Book also confirmed an increase in the capital gains rate to 40.8%, assuming a taxpayer’s household adjusted gross income exceeds $1 million.

Changes with cross-border impacts

The Treasury Green Book proposes the repeal of the FDII deduction to domestic corporations regarding their tangible income earned from serving foreign markets. The deduction intends to be replaced with additional research and development credits. The repeal of the FDII deduction is proposed to apply to tax years beginning after Dec. 31, 2021.

The Treasury Green Book proposes the replacement of base erosion anti-abuse tax (BEAT) with a new rule for “stopping harmful inversions and ending low-tax developments” (SHIELD). The SHIELD rule would deny US tax deductions for payments to foreign-related parties that are subject to a low effective tax rate. The replacement of BEAT with SHIELD is proposed to be effective for the tax years effective Dec. 31, 2022.

Other changes related to onshore production incentives

The Treasury Green Book confirms the creation of a new business credit equal to 10% of certain eligible expenses incurred in connection with an onshoring trade or business. The book defines “onshoring” as moving business to be conducted within the United States in cases where it had previously been conducted outside the country.

Timing of tax changes

What the proposed changes mean for private equity

There are several likely impacts of the Treasury Green Book causing changes to businesses relying on private equity. More scrutiny may surround decisions related to capital gains occurs after the impacts of the April 2021 announcement, some companies may take advantage of incentives to move production onshore, and the new SHIELD rule will likely curb deductions where foreign parties are involved.

Individuals and private equity firms should continue to monitor the potential retroactive application of the capital gains rate increase as this could impact decisions to buy and sell businesses; specifically, this may impact gross up payments paid to sellers. The Treasury Green Book has provided clarity on a number of additional tax matters which may have implications relevant for individual scenarios, and parties should work with qualified tax advisors to understand the pertinent guidance and recommended actions.