On Tuesday, the US Treasury Department published a blog written by Treasury officials Itai Grinberg and Rebecca Kysar. Although the blog purports to defend President Biden’s proposal to increase the current minimum tax on foreign profits of U.S. corporations, its arguments rest on a very narrow interpretation of the current law and the president’s proposal. It treats exceptional results as normal and ignores the broader implications of what has been proposed.
One of the four principles that the Tax Foundation uses to evaluate tax policy is transparency. A transparent tax code is easy to understand and comply with, and the charges of a tax can be easily identified. A tax code that lacks transparency lends itself to a debate that is not on the merits of a policy or based on facts, but on the terms of whoever chooses to interpret a policy in the way he wants. interpret it.
Because foreign income tax rules are not transparent, policymakers have a responsibility to work to make the rules more understandable rather than relying on the complexity of those rules to present a simplistic case for their proposals.
A graph in the Treasury item displays the minimum tax rates available for foreign corporate profits. Under current law, the minimum tax rate available for U.S. corporations is 10.5% and the minimum rate available for other corporations is 0%. The graph compares this gap in the current law to the gap between the president’s proposed 21% minimum tax and the recently announced global minimum tax rate of 15%.
In taking the narrowest interpretation possible of the graph, there is some truth to it. This would require treating the exceptional results of companies facing these minimum rates as the norm. The authors’ argument, however, is based on a broader understanding of the law in force and of the President’s proposals. In this larger context, the graph is misleading at best.
The argument put forward is not only about companies able to shift their profits (perhaps all or most of their profits) to low or no tax jurisdictions, but rather about the competitiveness of US multinationals vis-à-vis foreign companies.
Multinational companies don’t just invest and hire abroad to take advantage of the benefits of foreign tax regimes and reduce their tax obligations. While the United States is a large country with a large economy, American businesses benefit from the ability to operate and sell their goods and services all over the world. The global footprint of local multinational companies headquartered across the United States benefits American workers and supply chains.
For US businesses to be competitive in foreign markets, it is important that US regulatory and tax policies do not create an undue burden on their competitors. Current U.S. tax rules can do just that, and even in the context of global minimum tax discussions, President Biden is proposing an even greater burden on U.S. businesses than the Treasury blog suggests.
The Biden administration’s proposals will not simply impact businesses that use tax planning to take advantage of the lowest rates available. In fact, the effects of the president’s proposals on American companies trying to reach consumers around the world may be greater than the effects on companies planning their foreign structures to avoid taxes.
Under current law, a foreign company can benefit from a portion of its profits taxed at 0%. Assuming we can ignore businesses that have losses and have no tax liability, a 0% rate on foreign profits would require a business to take a tax holiday or make profits in a jurisdiction with no tax on it. companies. The company should also be outside the scope of the network of rules that tax foreign corporate profits that many countries have enforced or adopted in recent years. This set of rules may result in some foreign income (especially that most easily transferred to low-tax countries) being taxed at domestic tax rates.
Also in current law, the United States taxes the foreign profits of American companies under a policy known as Global Intangible Low-taxed Income (GILTI). In theory, GILTI would be taxed at rates ranging from 10.5% to 13.125%. For the 10.5% rate to be the true rate, a U.S. business would have to earn its income overseas in jurisdictions where it would not be liable for corporate tax. In practice, however, the complex application of GILTI may mean that the foreign profits of US companies are subject to tax rates well above this range of 10.5 to 13.125%. This is especially true for American businesses that already pay taxes elsewhere in the world.
The Tax Foundation has published examples and simplified estimates that show rates on foreign income averaging 15.3% taking into account both foreign taxes and the GILTI obligation. This means that in many cases 10.5% is not a true minimum and that GILTI can serve as a surtax on foreign profits of US companies.
This background on the 0 percent rate and the 10.5 percent rate in the graph is necessary. If foreign companies are generally not taxed at 0%, and domestic companies generally do not see the minimum rate of 10.5, but much higher rates, then the arguments made by Treasury officials change.
The graph also displays the proposed rates of 15% and 21%. Both rates would benefit from more context. First, the 15% rate is based on an overall minimum tax proposal and would include exclusions for income that does not represent a sufficiently high return on assets or payroll. It is also a real minimum rate rather than having the surcharge problems inherent in GILTI. Finally, the agreement at the international level is more of a model that countries can choose to adopt rather than something that is transmitted by a supranational governing body.
The reality for many U.S. businesses if the (optional) 15% minimum tax is passed and Biden’s proposals are passed will be new (and bigger) incentives for shifting profits and possibly jobs out of state. United States and a much higher tax burden on foreign income from the United States. companies than those facing the foreign profits of companies based elsewhere.
Due to GILTI’s weaknesses, the 21% minimum rate quoted by the Treasury Blog is unlikely to be the case for many companies. The same issues that lead to the current legal range of 10.5-13.125% not being reflected in actual corporate tax bills will mean that the so-called “21 percent minimum rate” could easily be a problem. rate of 26.25 percent or more depending on the circumstances of a business.
The most appropriate comparison would be between an optional overall minimum rate of 15% with exemptions for certain levels of return on payroll and foreign tangible assets and a US rate of 26.25 +% applied to foreign income without exemption.
The design of GILTI and other international tax rules does not lend itself to transparent discussion and debate.
Another very recent example of how poorly transparent policy lends itself to misunderstanding is a letter from Representative Lloyd Doggett (D-TX) who (among others) misinterprets the exemption for foreign assets in the law. current US and the proposed exemption in the global minimum tax that would be available for foreign assets and labor costs. Rather than what the letter says, the two exemptions relate to foreign and non-domestic assets.
The Biden administration has proposed taking a flawed and complex minimum tax that often acts as a surtax on foreign income and doubling those flaws without making any adjustments to allow their comments on the proposal to match their actual proposal.
The US tax debate would benefit greatly from a more transparent policy that would serve as a basis for these debates. Instead, we have a convoluted policy within GILTI and administration officials who focus on narrow interpretations of their own proposals while ignoring the general implications.
As Congress prepares to rewrite some of the current international tax rules, it is hoped that they will be able to achieve a more principled approach that is not prone to confusion and misinterpretation.
Launch Resource Center: International Tax Reform in the United States
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