Multinational corporations bypass many US taxes by exploiting loopholes that allow them to post profits in tax havens and otherwise avoid taxes. A recent estimate puts the revenue that the US lost from such profit shifting prior to the Trump tax law of 2017 at $ 100 billion per year. Trump’s tax changes only made this worse because they actually encouraged multinational corporations to move not just profits but actual jobs overseas.
The Biden administration tabled a reform proposal in March that would undo the Trump changes and add other significant improvements. Now Senator Ron Wyden of Oregon, the chairman of the Senate Finance Committee, has come up with a much weaker proposal than the government’s.
Last April I wrote about Wyden’s first proposal on these pages. Last week, Wyden revealed more details of his plan. This time he hired Sens. Sherrod Brown from Ohio and Mark Warner from Virginia as co-sponsors. Unfortunately, it is clear that between April and August, Corporate America lobbyists managed to make Wyden’s proposal worse.
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The biggest difference between the government’s proposal and Wyden’s is that the government is ditching most of the 2017 Trump tax bill. The Wyden proposal, on the other hand, retains most of Trump’s tax provisions, such as the FDII (Foreign-Derived Intangible Income) regime, which is an unjustified export subsidy for large multinational corporations, and the Base Erosion and Anti-Abuse Tax (BEAT), one entirely ineffective and incomplete provision.
Senator Wyden said these rules should be maintained as they make life easier for multinationals (“make taxpayers’ compliance and administration easier,” as his press release says). But is it the role of Democrats to make life easier for large multinationals? The Biden administration’s proposal eliminates both Trump inventions, FDII and BEAT.
Even with the main source of income derived from the Trump Tax Act, a minimum tax regime called the Global Intangible Low-Taxed Income (GILTI) rule, there are crucial differences between the administrative proposal and the Wyden proposal. GILTI is supposed to tax the offshore profits of American multinational corporations, but under the Trump Tax Act, only profits that exceed a fixed 10 percent return on real assets are taxed. This created a strong incentive to relocate factories and jobs abroad. Both the management proposal and the Wyden proposal delete this exception. But there is still one crucial difference between them.
It’s clear that Corporate America lobbyists managed to make Wyden’s proposal worse between April and August.
The administrative proposal taxes all GILTI income without exceptions at a rate of 21 percent. The Wyden proposal, on the other hand, does not provide for a tax rate, but only levies taxes if the foreign tax is below the GILTI rate. If the foreign tax is at or above the GILTI rate, the income remains tax-free even with the repatriation, just like under the Trump Tax Act.
Since the multinational group has to pay taxes either abroad or to the USA, there is basically no incentive to shift profits abroad. But with clever tax planning, a multinational corporation can manipulate where expenses and profits are booked to bypass GILTI’s 21 percent rate and pay at the lower international rate. For example, a multinational in the United States could borrow, but assign the interest expense to another country. According to Wyden’s bill, the company could end up paying all taxes owed to a foreign country at a lower rate and nothing to the US (For readers who want a more technical discussion, here are some additional details.) foreign tax rate does not matter and there are no exemptions according to GILTI.
The idea of excluding income that is subject to high foreign tax from the GILTI floor came straight from the corporate lobbyists who persuaded the Trump Treasury Department to adopt such an exclusion in 2019-2020, even though there is none in the legal text Had basis (as the Wyden proposal says). , it applies GILTI “through a high tax exclusion based on the model of the ordinances of the Ministry of Finance in the years 2019 and 2020”. The reason for this is presumably that the multinational corporations fear that the Biden Treasury Department could reverse this regulatory giveaway and are therefore trying to anchor it in tax law. But why should Democratic senators participate?
A seat on the finance committee is a major political plum because it attracts so many corporate campaign contributions. It’s a shame that in this case the contributors apparently got what they paid for. Progressive Democrats like Sens. Warren and Whitehouse, who also work in finance, should tell their chairman to go back to the Biden administration’s proposal.
September 2, 2021