David Rosenbloom Comments on Upcoming Tax Changes Under Biden Administration

The Deal Pipeline

Private equity profits and dealmaking may be significantly reshaped by tax changes under the Biden administration, experts tell The Deal.

While President Joe Biden has yet to propose an overhaul of Donald Trump s Tax Cuts and Jobs Act (TCJA) in 2017, the current administration likely will take a crack at updating it.

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The basic problem with the Tax Cuts and Jobs Act is that the law is not stable; it was enacted too fast, especially the international provisions, [and] they made a lot of mistakes, said H. David Rosenbloom, a Member at Caplin & Drysdale who worked in the Office of International Tax Affairs in the U.S. Treasury from 1978 to 1981 and is a visiting professor of taxation at NYU School of Law.

The rules remain hellishly complicated and very difficult to administer, Rosenbloom said. The Biden administration cannot start with a clean piece of paper, and I don t think they can simply scrap what was done in 2017. They will tinker with the rules, make them tougher on taxpayers, but it is hard to imagine that they will be made any less complicated. Any private equity firm with a foreign investment or foreign investors is going to be impacted.

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Rosenbloom agreed with Holo on this point.

The problem with two levels of taxation regardless of the rates at each level is that there is an incentive to operate on a flow-through basis to achieve a single tax, Rosenbloom said. Potential increase in the rates will increase that incentive.

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Rosenbloom agreed that the use of debt would increase but said it's important to also consider the full impact of the government s limitations on the amount of interest that's deductible. He noted Congress imposed strict limits on interest deductibility in the 2017 tax law, and while the 2020 COVID relief law known as the CARES Act of removed some of those, "I expect to see some strictness return.

Another objective of Biden s tax policies will be to provide more incentives for PE firms and corporations to invest in domestic businesses rather than shift assets overseas to avoid domestic taxes and benefit from lower wages outside of the U.S.

This so-called runaway plant concept to tax income from plants that manufacture abroad for sale into the U.S. has been kicking around at least since the 1980s, Rosenbloom said.

Something along these lines is likely to be proposed because it is a popular idea taxing income of a foreign subsidiary of a U.S. company that manufactures and sells back to the U.S. Rosenbloom said. But the concept is very hard to define and to implement. It has been proposed many times in the past and has never gone anywhere.

Another measure designed to encourage domestic investment is the Made in America tax credit, which offers a benefit for keeping manufacturing operations in the U.S.

Biden is also likely to increase the so-called GILTI tax, which stands for global intangible low-taxed income.

Currently, businesses get a 50% deduction on the 21% corporate tax rate, which amounts to a minimum tax of 10.5% on income from intangible assets shifted to jurisdictions with lower rates.

Under Biden, GILTI will be made tougher that's what the Democrats still want to do, Rosenbloom said.

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Rosenbloom agreed that under Biden, tax rules are likely to proceed in the direction of greater taxation of foreign income. But he says it's unclear whether the rules will ever equalize taxation of that income with that of income earned by the U.S. company at home. That's because there's a competing interest in encouraging exports.

Rosenbloom noted the relatively low GILTI rate incentivizes investment abroad, as does another measure on the books, the Foreign Derived Intangible Income rules. But these may be considered export subsidies in potential violation of the rules of the World Trade Organization.

"The rest of the world does not like export subsidies administered through the income tax," Rosenbloom said. "Such subsidies raise various issues under trade agreements that the United States has concluded.

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