2016 U.S. Budget Proposed

5 February 2015

U.S. President Obama on 2 February released a budget blueprint for fiscal year 2016 that mirrors policy proposals from his 2012 corporate tax reform framework to use revenue from a one-time deemed repatriation tax to pay for infrastructure spending and adds new detail around proposals he outlined in his most recent State of the Union message to increase taxes on upper-income individuals and highly leveraged financial institutions to offset the cost of tax relief and spending targeted to the middle class.

Many of the revenue provisions repeat common Obama administration rhetoric and proposals, with some exceptions. Notable new provisions include the following:

International Tax

The FY 2016 budget proposal includes two related, large revenue raisers directed at multinational corporations:

  • Minimum tax – The first would impose a per-country 19 percent minimum tax on the foreign income of domestic companies and their controlled foreign corporations. The 19 percent tax would be reduced by 85 percent of the foreign effective tax rate in each country where the income is earned. Thus, income already taxed where earned at a rate at least as high as the proposed minimum tax rate would generally not be subject to any further tax in the U.S. when repatriated. The administration estimates this proposal would raise almost $206 billion over 10 years.
  • Repatriation – The second, as part of the transition to the 19 percent minimum tax, would impose a one-time 14 percent tax on previously untaxed foreign earnings. The tax would be payable ratably over five years. The proposal does not appear to make any distinction between earnings held as cash or other assets. A foreign tax credit (calculated using a ratio of the 14 percent rate to the top U.S. statutory corporate rate) would be allowed, and no further tax would be due on any earnings that are repatriated. The administration says this proposal would raise $268 billion over 10 years, of which $238 billion would be set aside to fund infrastructure spending with the remaining $30 billion used for deficit reduction.

"Extenders"

The budget package includes provisions that would renew or make permanent a number of the so-called tax extenders, including permanently extending the subpart F exception for active financing income and the so-called "(c)(6)" lookthrough treatment of payments between related controlled foreign corporations.

Don't hold your breath...

Most observers, including Align's Congressional Observation Team in Washington, believe that the budget has minimal, if any, chance of gaining traction. Many provisions are strongly opposed by the Republican Party and are unlikely to be even receive "floor" debate. Congressional Republican leaders rejected key elements of the middle-class economics agenda that the president previewed in the days leading up to his State of the Union message, and the tone on Capitol Hill has not changed with the release of the full budget blueprint.

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With offices in Research Triangle Park and Silicon Valley, Align Global Consulting is a globalization consulting and advisory firm that represents clients expanding globally or improving existing operations by providing creative legal and tax solutions to address commercial, trade, investment and regulatory matters. Align's comprehensive list of services includes global structuring, global business transactions, cross-border M&A transactions, and international tax planning for outbound and inbound investment. Align assists companies in all stages of growth, from emerging growth companies to the Fortune 100. With "big firm" credentials and experience, Align handles matters traditionally entrusted to larger firms, while maintaining a commitment to the lost art of one-on-one client service.

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