According recent news reports, congressional Democrats are considering watered down versions of two measures from last year Building back better. The alternative minimum tax on aggregate book income of large corporations would allow a deduction for current capital expenditures, and the Global Low Intangible Income Reform (GILTI) would continue to allow pooling of foreign income and credits between countries. of tax.
The levying of a single global minimum tax in accordance with the OECD/G-20 Pillar 2 Model would be simpler and raise revenue more efficiently than imposing two lower global minimum taxes. And, by fully aligning GILTI with Pillar 2, the United States would play a leading role in preventing the “race to the bottom” of global corporate taxation.
Differences in accounting tax income
The minimum global accounting income tax, which would only apply to large public corporations, addresses public concerns about corporations reporting substantial profits for shareholders but little or no taxable income. But most of the differences between the books and taxation stem from companies’ response to tax incentives enacted for specific policy purposes.
The largest difference between book income and tax income is cost recovery – the rate at which companies deduct the cost of capital expenditure – which in 2019 totaled $217 billion. Financial accounting requires companies to deduct investment costs based on the decline in productivity of assets. But tax rules generally allow accelerated deduction of certain capital expenditures to encourage investment. The current US policy of “100% bonus depreciation” generously allows all assets with a tax life of up to 20 years to be written off.
Accounting and tax depreciation differences are temporary— sooner or later, all investment costs are deducted from accounting or tax income.
But accelerated depreciation provides a real benefit in terms of present value. Estimates of the joint committee on taxation that the Build Back Better Act alternative minimum tax would raise an estimated $320 billion in its first decade. Maintaining the capital expenditure deduction would significantly reduce this income, especially at the outset.
In addition, the planned elimination of capital expenditures will reduce accounting and tax revenue differentials without the need for a new alternative minimum tax. From next year, the bonus depreciation will begin to gradually decrease by 20% per year until it is eliminated in 2027.
The two biggest permanent the differences between book income and tax income are stock-based compensation and tax-exempt interest. The taxation of stock-based compensation would likely be very progressive, but its current tax treatment is reasonable. At the same time, the re-taxation of tax-exempt state and local government bond interest would hurt the effectiveness of this subsidy.
Reforms of the GILTI regime
Another common method used by multinational corporations to reduce their tax liability is to shift their income to foreign low-tax jurisdictions. The “country by country” provision of the OECD/G-20 Pillar 2 Model would prevent this by ensuring that companies pay an effective rate of at least 15% in each country in which they operate.
Allowing cross-country pooling of foreign income and tax credits allows companies to use excess tax credits generated in high-tax countries to shield income reported in low-tax countries from taxation American. This “last state in the United States” policy benefits investments in high- and low-tax foreign jurisdictions and reduces US revenue.
Prior revenue estimates for the Build Back Better Act show that limiting foreign income pooling and tax credits would yield about $70 billion over 10 years. This figure assumes an increase in the GILTI rate to 15% and a reduction of the 10% exclusion on foreign tangible property to 5%, in line with the Pillar 2 model. It also assumes the elimination of tax preferences for oil income foreigners – a sensible move to cut profit tax breaks for the oil industry.
If the United States wants to ease the tax burden on foreign income, it could adopt the Pillar 2 provision excluding 5% of foreign payroll from the overall minimum tax. This would support investments in low-tax jurisdictions with significant real activity, such as Ireland and Switzerland.
Under Pillar 2, if the United States does not adequately tax the foreign income of its multinationals, it risks other countries applying a “top-up tax” on that income. If that happened, US multinationals would still bear a 15% tax burden on their foreign income, but the income would go to foreign countries.
The United States is currently the only country in the world with a global minimum tax, and its GILTI regime inspired the Pillar 2 plan. Pillar 2 now calls for tougher restrictions to stop the global “race to the bottom” . Aligning GILTI with Pillar 2 would keep the United States at the forefront of international tax innovation and help end the downward trend in corporate taxation.
