Just as the calendar turned to June, Treasury Secretary Janet Yellen announced that the U.S. and six other powerful countries that make up the Group of Seven (G-7) had reached a deal on “achieving a robust global minimum [corporate] tax at a rate of at least 15%.” Unfortunately this deal, if enacted -- and in combination with the Biden administration’s proposed 28-percent domestic corporate tax rate and 21-percent tax rate on foreign profits of U.S. multinational companies -- will put the U.S. tax system at an extraordinary disadvantage compared to peer nations around the world. This could increase the offshoring of assets and jobs by U.S. companies rather than retaining profits in (or onshoring them to) America.
The Wall Street Journal reported that the combination of proposed tax changes from the Biden administration “would increase the cost of having a U.S. headquarters,” but added that “if other countries imposed similar taxes on their companies, the benefits of escaping the U.S. would shrink.” Unfortunately, depending on other countries to impose similar taxes is a big bet for the Biden administration and Congress to make, and one that may not pay off as much as optimistic administration officials think it will.
One important caveat for stakeholders worried about this mélange of proposed tax changes in the U.S. and abroad is that a truly global deal on a global minimum tax is still far off. The G-7 agreement only covers the U.S., U.K., Canada, France, Germany, Italy, and Japan. Tax Foundation analyzes statutory corporate tax rates around the world and noted that in 2020 the G-7 average rate was 27.24 percent (or 26.95 percent if averaging rates by weighted GDP). A 15-percent minimum is almost half the G-7’s average rate, and the G-7 countries have an average statutory rate that is 14 percent (or 3.39 percentage points) higher than the global average. In other words, achieving unanimity from countries with lower rates, who are represented in both the G-20 and, especially, in the 139-member OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), is a much, much taller task for the U.S. and its G-7 peers.
Indeed, Ireland -- which has a 12.5-percent statutory corporate tax rate, among the lowest in Europe -- expressed skepticism about the G-7 deal right away. And it’s one thing to reach a global agreement in principle and another for democratic bodies around the world to implement such an agreement. Or, as Senate Finance Committee Ranking Member Mike Crapo (R-ID) noted in a letter to Secretary Yellen in May:
While Treasury has proposed a 15 percent rate floor in recognition of the unlikelihood a 21 percent rate would be agreed to by other countries, it remains to be seen whether other countries will agree to implement any minimum tax.
Let’s assume for the time being, though, that the Biden administration can clinch a global tax deal and enact its other proposed changes to corporate tax law in the U.S. Success on both fronts could raise tax burdens significantly for U.S. multinational companies and could, in turn, lead to a flight of capital from the U.S. in the years ahead.
In the same letter mentioned above, Ranking Member Crapo noted that the Biden administration’s proposed 21-percent rate on foreign profits of U.S. companies could “make the global minimum tax rules far more stringent for U.S.-based businesses.” That proposal, paired with the suggested 28-percent domestic corporate tax rate, could give U.S. multinational companies additional incentives to offshore profits, assets, and jobs, rather than incentives to retain or onshore all of the above in the U.S.
Under current U.S. law, domestic profits of U.S.-based companies are taxed at a rate of 21 percent, while foreign profits of U.S.-based companies are taxed at a minimum rate of 10.5 percent under the Global Intangible Low-Taxed Income (GILTI) regime. Because of a limitation on the use of foreign tax credits, the GILTI minimum rate is in effect up to 13.125 percent. As Ranking Member Crapo wrote in his letter to Secretary Yellen:
Not only was the United States the first to enact a global minimum tax when it enacted the global intangible low-taxed income (GILTI) regime, we continue to be the only country to date that has enacted a global minimum tax.
Further, there is no current global minimum tax, and as Tax Foundation notes, there are 20 countries that in 2020 had statutory corporate tax rates of 12.5 percent or less and 15 countries (like Bermuda and the Cayman Islands) with no general corporate income tax in 2020.
Under the Biden administration proposal, U.S. taxes on domestic profits would rise 33 percent, from 21 percent to 28 percent. U.S. taxes on foreign profits of domestic companies would double, from 10.5 percent to 21 percent. And, under the G-7 agreement, countries would agree to a 15-percent minimum corporate tax rate, up from zero today.
Note, however, that under the potential Biden tax regime, the gap between the U.S. and some competitors would widen rather than narrow. Consider Ireland. Currently, a multinational company would pay 12.5 percent on profits if headquartered in Ireland and 21 percent if headquartered in the U.S. Under the Biden plan, however, the gap will widen - a multinational company would pay 15 percent on profits if headquartered in Ireland but 28 percent if headquartered in the U.S.
The gap would narrow, though, for extremely low-tax jurisdictions like Barbados. Currently, a multinational company would pay 5.5 percent on profits if headquartered in Barbados and 21 percent if headquartered in the U.S. Under the Biden plan, a multinational company would pay 15 percent on profits if headquartered in Barbados but 28 percent if headquartered in the U.S. -- a smaller difference than under current law. This would likely reduce the incentive for multinational companies to headquarter in Barbados, and the same logic applies to no-tax jurisdictions like Bermuda and the Cayman Islands. However, there’s no guarantee these countries would assent to a 15-percent minimum tax and implement such a minimum tax once the OECD Inclusive Framework reaches an agreement. In fact, some low-tax jurisdictions such as Uzbekistan (7.5-percent rate), Turkmenistan (8-percent rate), and Cyprus (12.5-percent rate) are not even party to the current Inclusive Framework talks.
And the lack of certainty around global implementation of a 15-percent minimum tax is where the U.S. changes to the tax rates on domestic and foreign profits would further disadvantage U.S. companies and workers.
If President Biden convinces Congress to hike the corporate tax rate on domestic profits by a third, to 28 percent, and to double the GILTI rate from 10.5 percent to 21 percent, but low-tax jurisdictions like Ireland, Switzerland, and the Netherlands refuse to raise their rates, the U.S. will not only increase the gap between its corporate tax rate and the rates of its economic peers but may actually incentivize multinational companies to headquarter in lower-tax jurisdictions. Indeed, as Bloomberg Government reports (paywall), lawmakers are concerned that “[a]ny discrepancy” between the global minimum and GILTI rates proposed by the Biden administration “could mean American firms effectively paying a surtax on profits in some nations.”
The U.S. would also be moving in the opposite direction of economic peers like France, which according to Tax Foundation is reducing its corporate rate to 25.83 percent by 2022, or the Netherlands (reducing their rate from 25 percent to 21.7 percent from 2020 to 2021), and Sweden (reducing their rate from 21.4 percent to 20.6 percent from 2020 to 2021).
Unilateral U.S. changes would also further harm U.S. tax competitiveness with economic peers where U.S. multinational companies already locate high proportions of tangible assets (such as the UK, Canada, China, the Netherlands, and Singapore; data according to the nonpartisan Joint Committee on Taxation (JCT)) and hire high proportions of non-U.S. employees (such as Taiwan, China, the UK, and Canada; data according to JCT).
The changes made in the 2017 Tax Cuts and Jobs Act (TCJA), on the other hand, made the U.S. more competitive on a corporate tax basis compared to the rest of the world and compared to its European peers:
U.S. vs. World vs. Europe, Taxes Accrued, 2017 vs. 2018 (data from JCT) | ||||
Jurisdiction | Average Tax Rate on Taxes Accrued, 2017 | U.S. Compared | Average Tax Rate on Taxes Accrued, 2018 | U.S. Compared |
U.S. | 19.7% | -- | 13.1% | -- |
Worldwide Average | 16.5% | U.S. 19.4% higher | 12.1% | U.S. 7.6% higher |
EU Average | 11.2% | U.S. 43.1% higher | 9.1% | U.S. 30.5% higher |
Some critics of current tax policy claim that the qualified business asset investment (QBAI) exclusion in the GILTI rate -- which essentially allows U.S. firms to exempt a 10-percent return on tangible assets from their taxes owed on foreign profits under GILTI -- incentivizes offshoring of tangible assets like factories (and the jobs that come with it). However, Tax Foundation’s Daniel Bunn points out that these claims fail to take into account other TCJA changes that lowered the marginal effective tax rate on domestic profits for U.S. companies, such as full expensing for machinery and equipment.
A better approach for the U.S., to both global tax talks specifically and corporate taxation generally, would:
- Avoid raising the domestic corporate tax rate, as evidence shows corporate tax hikes will be borne in significant part by U.S. workers and will make the U.S. less competitive on a global scale;
- Match the U.S. corporate tax rate on domestic profits with the nation’s proposed minimum tax rate, so that U.S. companies are not paying more (or, in the case of the Biden administration’s proposal, almost double) on domestic profits than what they would pay if headquartered in lower-tax jurisdictions like Ireland;
- Avoid, to the maximum extent possible, double taxation of U.S. companies’ foreign profits with a global tax regime that recognizes U.S. multinationals have a number of legitimate business interests to place both tangible and intangible assets abroad; and
- Insist that foreign countries completely repeal punitive and discriminatory digital services taxes (DSTs) on American technology companies; these DSTs are a major impetus for OECD talks on global taxes in the first place.
As negotiations with foreign leaders continue, Congress must exercise proper scrutiny of the distinct and overlapping consequences of President Biden’s tax plans. A rubber stamp for tax hikes on American companies (and American multinational companies) would hurt U.S. workers and U.S. businesses as just the time they are seeking to recover from the devastating pandemic and economic downturn.