The President’s Budget Request proposes changes to the tax code that TCS has supported in the past and are worth considering. Tax reform – real reform – has eluded Congress for almost 40 years (yeah, I’m looking at you Tax Cuts and Jobs Act of 2017). Simply lowering corporate and individual rates doesn’t make the tax code more efficient or fairer, it just lowers revenues. And even though we are not holding our breath for this Congress to take up tax reform either, it is worth revisiting.
“The Budget proposes to reform the international tax system to reduce the incentives to book profits in low-tax jurisdictions, stop corporate inversions to tax havens, and raise the tax rate on U.S. multinationals’ foreign earnings from 10.5 percent to 21 percent.”
Because change is slow when it comes to the tax code, much of what we said back in 2016 in our “Reform the Tax Code” report is still true.
If you’d prefer to listen, our podcast “Budget Watchdog AF” includes an episode on international tax changes as well.
And, for a shorter version, here is what we said in May 2021, in support of a global minimum tax:
You probably remember the last big tax bill Congress enacted in 2017. Though taxpayers were initially promised deficit-neutral tax reform, by the end, it was an enormous deficit-financed tax cut. However, it did include some new provisions aimed at discouraging multinational companies from avoiding U.S. taxation by stashing money in low-tax countries like Bermuda, a practice known as profit shifting. Before the 2017 tax law, these companies did not have to pay any tax on this foreign income so long as they did not technically bring it back to the U.S. (never mind that much of it was probably sitting in U.S. banks). The new law created the Global Intangible Low-Taxed Income system, with the deliciously apropos acronym “GILTI,” as a way to finally tax these earnings.
In March [2021], the Joint Committee on Taxation (JCT), Congress’ non-partisan tax analysis arm, released an analysis of U.S. international tax policy since the enactment of 2017 tax law. It found that while the changes increased business investments in things like plants and equipment, it did little to discourage the use of offshore tax havens. In fact, according to the JCT, the average tax rate for U.S. multinational companies did not increase, it fell from 16 percent in 2017 to 7.8 percent in 2018, after the law took effect. Bermuda alone accounted for almost 10 percent of all profits reported by international companies with total revenues in excess of $850 million. Bermuda taxed these earnings at a rate of 0.4 percent.
The White House, in the form of the American Jobs Act, has proposed creating a floor for U.S. taxation on foreign earnings or a global minimum tax. The proposal would increase the rate set by the GILTI from 10.5 percent to 21 percent. So, if a company like Apple records billions in profits in Ireland because earnings are only taxed at 11 percent, the U.S. would impose an additional 10 percent to bring it up to 21 percent. The U.S. is also working with the 140-country member Organization for Economic Cooperation and Development (OECD) to adopt a global minimum standard.* Back in 2016, we issued a report which said:
“Congress should end the present deferral of tax on pre-reform foreign income of CFCs through a deemed repatriation and provide a permanent regime that eliminates future deferrals. To assure the competitiveness of U.S. based companies, the new rules should provide a special deduction or other mechanism that results in a 20 percent effective tax rate on this income (before foreign tax credits).” emphasis added
*On October 8, 2021, 136 countries and jurisdictions of the OECD agreed to a minimum 15% tax rate, effective in 2023.
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