By Doug Connolly, MNE Tax
Senate finance committee members and speakers at a March 25 hearing spoke out in favor of reforming the international tax system to better address multinational profit shifting. They also discussed raising the corporate tax rate to partially reverse the cuts made in the Tax Cut and Employment Act (TCJA) of 2017, as proposed by President Biden. Democrats and Republicans reached agreement on the need for reforms to the soil erosion and abuse tax (BEAT).
The chairman of the committee, Wyden (D-OR), plans – together with Senators Brown (D-OH) and Warner (D-VA) – to present proposals on international tax legislation in the coming days. Corporate income tax changes are expected to form part of President Biden’s infrastructure plan, which will also be released shortly.
The hearing, titled “How US International Tax Policy Affects American Workers, Jobs and Investment,” followed the publication of a Joint Tax Committee study reviewing the first post-TCJA tax data from the country-to-country Country reports were taken from multinational companies. The JCT study shows that the law has cut the US corporate tax rate in half and US multinational corporations continue to post disproportionate profits in tax havens.
Important discussion points
During the hearing, Democrats and Republicans raised a number of recurring topics.
Democrats claimed that the TCJA’s corporate tax cut was part of a global “race to the bottom” in which countries around the world are undermining their tax base by lowering corporate taxes to stay competitive. They also raised concerns that, contrary to their intent, the TCJA’s international tax rules actually reward companies for investing overseas rather than in the United States.
For their part, Republicans claimed that corporate inversions, which had been a significant non-partisan concern, stalled after the adoption of the TCJA. They also argued that lowering the corporate tax rate increases US competitiveness and investment, and that the TCJA’s global minimum tax has become a model for the OECD and other countries.
Shifting profits and GILTI
Representing the US Treasury Department and the Biden Administration, Kimberly Clausing, assistant assistant secretary for tax analysis, said the shifting of profits to tax havens has continued steadily despite the TCJA’s curb regulations.
She argued that the Global Minimum Tax on Low Intangible Tax Income (GILTI) and BEAT actually encouraged profit shifting by exempting the first 10% return on foreign assets from US taxation and taxing foreign profits at lower rates than US profits.
Clausing stated that GILTI gives companies greater tax exemption if they have more property, plant and equipment offshore. She said this is an incentive for companies to move more assets offshore to increase this exemption. Foreign Intangible Income (FDII) deduction essentially doubles because of this incentive, she claimed
Clausing stated that GILTI gives companies greater tax exemption if they have more property, plant and equipment offshore. She said this is an incentive for companies to move more assets offshore to increase this exemption. The overseas immaterial income withholding essentially doubles that incentive, she claimed.
Chye-Ching Huang, executive director of the Tax Law Center at New York University School of Law, said the international tax system is flawed but could be bailed out and strengthened. She argued that a minimum tax on foreign profits like GILTI could be a powerful tool to prevent the shifting of profits and investments overseas, but that in practice the GILTI minimum tax is not robust enough to reach its end.
James Hines, professor of economics and law at the University of Michigan, argued that data on foreign operations and profits are largely misinterpreted by US multinationals. He said that the “productivity effect” of US multinationals’ overseas operations (the extent to which overseas operations increase productivity and demand for US labor) likely the “substitution effect” (the extent to which overseas operations increase US operations replace).
Hines went on to claim that the statistics on the size of profits in tax havens were misleading. Such profits can be attributed to holding companies in the tax havens, although the underlying operating company may be taxed on the same income in a country with higher taxes.
Corporate tax rate
President Biden has proposed raising the corporate tax rate to 28%. The TCJA lowered the rate from 35% to 21%.
Clausing spoke out in favor of increasing the rate. She said corporate tax cuts had weighed on federal revenues, with corporate tax revenues falling from 2% to 1% of GDP after the TCJA went into effect.
She also argued that corporate taxes are a relatively efficient form of taxation (one that does not create significant economic distortions) and that a majority of voters in both parties are in favor of higher corporate tax rates.
Pam Olson, former US Secretary of the Treasury for Tax Policy under President George W. Bush, argued that the TCJA’s lowering of the corporate tax rate was the strongest move in legislation to prevent grassroots erosion and encourage US investment.
In addition, Ms. Olson claimed that the TCJA’s attempted rate cut was not as dramatic as the Democrats assumed, and noted that the combined US tax rate (including state taxes) under the TCJA is about average among OECD countries.
Against the competitive arguments against increasing the corporate tax rate, Ms. Clausing made several points: The tax rates that US multinational corporations actually pay are lower than the statutory tax rate, which is based on an international consensus on a minimum tax, can allay competition concerns, and that Competitiveness is about more than just tax rates.
Olson claimed that increasing the federal corporate tax rate to 28% combined with state and local taxes would once again make the US combined tax rate one of the highest in the OECD.
Senator Tom Carper (D-DE) offered the BEAT – in contrast to GILTI and the corporate tax rate – as an area for a bipartisan agreement, at least with regard to its reform needs. For his part, he complained that the BEAT appeared to be inadvertently interfering with the use of Congress-approved clean energy credits. Additionally, he noted that the JCT report showed that the BEAT increased revenue well below expectations.
Clausing agreed that the BEAT failed to curb foreign profit shifting as intended and caused other problems, such as the impact on clean energy incentives. She added that the Biden government is aware of all the problems with BEAT, but has not yet taken a position on the direction of the reforms.
Clausing agreed that the BEAT failed to curb foreign profit shifting as intended and caused other problems, such as the impact on clean energy incentives. She added that the Biden government is aware of all problems with BEAT, but has not yet taken a position on the direction of the reforms.
Olson also agreed that BEAT has some “strange effects” and “room for improvement”.
Huang thought the BEAT was “messy” and “bizarre”. In her opening report, she claimed BEAT was aiming at a serious problem – shifting profits from the US to overseas subsidiaries – but in practice it often misses its mark and catches some payments that it didn’t want to catch.
Hines answered Senator Carper’s question: “Should the BEAT go on?” with a simple “no”
Doug Connolly is the Legal Editor, International Tax, at MNE Tax. He has more than 10 years of experience in tax law developments and previously worked for both a Big Four law firm and a leading legal publisher. He holds a law degree from the American University’s Washington College of Law.