Analysis of minimum tax revenues in the United States

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Correction (08/25/2021): Due to a minor error in our multinational tax model, many of the calculations in the original version of this article were incorrect. This error has now been corrected and this analysis has been updated accordingly.

The Biden administration has proposed significant changes to the tax rules that govern how much U.S. companies owe on their overseas profits while working to negotiate a global minimum tax. However, the overall minimum tax and the Biden administration’s proposals are quite different.

A recent Tax Foundation report went into more detail on the income consequences of several options to change U.S. international tax rules. Part of this analysis examines the policy outlined in the recent multilateral declaration on a global minimum tax and how current US tax laws might change to reflect this agreement.

The United States already has a minimum foreign income tax on American businesses. This is embodied in the Global Intangible Low-Taxed Income (GILTI) policy adopted in 2017. This policy requires US companies with foreign income to pay US taxes on that income based on a formula.

The GILTI formula provides for a 10 percent deduction from the value of foreign tangible assets, a 50 percent exclusion, and an 80 percent limit on credits for foreign taxes paid. This is designed to result in a tax of 10.5% to 13.125% on foreign income. GILTI applies to mixed foreign income rather than taxing foreign income at the country level. It also does not carry forward excess foreign tax credits.

Global minimum tax is significantly different from GILTI. The statement released on July 1 and signed by more than 130 countries provides an overview of this policy. The tax rate would be at least 15% and the full value of foreign tax credits could be used. The policy would be applied on a country-by-country basis, and excess foreign tax credits could be carried forward to offset future minimum tax payable. Finally, it would allow deductions for tangible fixed assets and social charges (at 7.5% initially, then 5% after five years).

If lawmakers were to change GILTI to look like the global minimum tax proposal, it could increase the tax obligations of U.S. multinationals by $ 106 billion over current law.

The modeled example does not perfectly align GILTI with the global minimum tax, as this policy would also allow loss carryforwards and is based on financial statement income (rather than taxable income). There are also other unspecified details regarding the overall minimum tax which are aimed at bridging the gap between financial income and taxable income.

Effects of Changing GILTI to Comply with the Global Minimum Tax Proposal on Federal Corporate Tax Obligations of U.S. Multinationals
Change in federal corporate tax obligations of U.S. multinationals (in billions of dollars)
Disposition 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total
15% GILTI rate 12.4 13.2 14.2 15.1 6.8 7.0 7.2 7.4 7.6 7.8 98.8
+ Remove the discount on the 80% GILTI foreign tax credit -2.8 -3.0 -3.2 -3.4 -3.6 -3.7 -3.8 -3.9 -4.0 -4.1 -35.7
+ GILTI country by country 7.2 7.7 8.3 8.9 9.2 9.5 9.8 10.1 10.3 10.6 91.7
+ Allow GILTI FTC deferrals 0.0 -2.4 -3.7 -4.7 -5.4 -6.0 -6.5 -6.9 -7.3 -7.7 -50.8
+ Use OECD QBAI / salary exemptions -0.4 -0.3 -0.3 -0.3 -0.2 0.8 0.7 0.7 0.7 0.7 2.1
Total 16.4 15.2 15.3 15.6 6.7 7.5 7.4 7.3 7.2 7.3 106.0

Note: This table shows the change in federal corporate tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of US Multinationals”, Tax Foundation, August 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

The policy increases the tax obligations of US multinationals primarily because of the higher tax rate on GILTI and because the tax would be calculated for each country where a company has foreign income. Removing the 80% limit on foreign tax credits and allowing excess credits to be used to offset future minimum taxes would reduce the tax obligations of U.S. multinationals compared to current law.

A major caveat to these results is that they ignore the possibility that other countries, especially those with low corporate tax rates, may change their policies and comply with the tax standard. global minimum.

The global minimum tax described in the July 1 agreement is optional for countries, so it is uncertain how many countries will adopt the rules that are described. The amount of additional income generated by the United States from the changes to GILTI depends on what other countries do with their tax rules.

In order for the United States to increase its tax revenue to the previously mentioned $ 106 billion estimate, American businesses would need to continue paying low effective tax rates in some foreign jurisdictions. If companies end up paying more foreign taxes due to the adoption of the minimum tax by other countries, or making more profits in higher tax jurisdictions, the US revenues resulting from the change in GILTI will decrease.

What if the foreign profits of U.S. corporations are all taxed at least as much as the minimum tax policy in each jurisdiction they operate in, and the U.S. changes GILTI to reflect the global minimum tax?

In this scenario, the United States would lose revenue because the foreign tax credits would increase more than the increase in the GILTI bond. If a US business is currently paying a low foreign rate, then it would have a small amount of foreign tax credits available to offset US tax payable under GILTI. If foreign rates rise, however, the company would be able to further offset US tax.

Thus, if the United States adopted the GILTI reforms described above and there was a worldwide adoption of a minimum effective tax rate of 15%, the US tax obligations of US multinationals would decrease by 43, $ 9 billion as tax payments to foreign governments increase. The US Treasury would bear the tax burden on low-tax countries that adopt minimum taxes and on US businesses claiming larger foreign tax credits.

This effect is not unique to GILTI being modified to reflect the minimum tax. Even if GILTI remained the same as in current law and US companies began to be subject to at least minimum tax on all their foreign income, these companies would see higher foreign tax obligations and lower obligations to the US. IRS.

If GILTI’s tax obligations were increased in accordance with President Biden’s proposals, the global adoption of the 15% minimum tax would erode $ 140.7 billion of the potential $ 1.32 trillion estimate of the increase. of the tax payable from the policy proposed by Biden.

This model is valid for the other options that were modeled in our recent article. In either option, the possibility that the policy change would increase the tax obligations of US multinationals would be weakened as other countries adopted a minimum tax of 15%. This is shown in the following table.

The magnitude of the effects varies across scenarios depending on the amount of global US corporate income subject to US taxes and the size of offsetting foreign tax credits. The sensitivity of US tax revenues to foreign tax increases depends on the share of foreign income that the United States includes in its tax base and the sensitivity of foreign tax credits to the foreign tax rate.

Effects on Federal Corporate Tax Liabilities on U.S. Multinational Corporations with Other Countries Adopting a Minimum Effective Tax of 15 percent for various U.S. policy options
Change in federal corporate tax obligations of U.S. multinationals (in billions of dollars)
Proposal Current rates 15% minimum Difference
Current law 0.0 -20.4 -20.4
Biden’s proposition 1315.9 1175.2 -140.7
Partial biden 579.5 502.3 -77.2
GILTI fix 0.0 -62.5 -62.5
Pillar 2 106.0 -43.9 -150.0

Note: This table shows the change in federal corporate tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of US Multinationals”, Tax Foundation, August 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

In the ongoing budget debate, US policymakers may choose to increase tax revenue by changing tax rules for US multinational corporations. However, the real impact of these changes on incomes will be tempered by how businesses and countries react to the recently proposed global minimum tax. If low-tax countries begin to comply with this policy, US tax revenues will be reduced.

This interaction between the U.S. proposals and those that could be enacted in foreign jurisdictions should prompt lawmakers to be cautious when assessing the revenue potential of changes to GILTI.

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