Recent discussions about a global minimum tax may lead many to believe that only a single proposal for the world is being discussed. That’s not the case.
While President Biden again led the global negotiations on minimum taxation, his own proposals for US companies differ significantly from proposals previously discussed internationally. Indeed, if other countries were to implement a policy like the one outlined last year, Biden’s proposal for US companies would be a far more burdensome policy than what other countries might adopt.
The details of the design of a global minimum tax have not yet been determined. However, it is worth comparing Biden’s proposals for taxing US corporations’ foreign profits with the recent G7 agreement on a global minimum tax of 15 percent and the previous draft of the Organization for Economic Co-operation and Development.
The table in this post summarizes some of the features of Biden’s proposals to amend the Global Intangible Low-Tax Income (GILTI), the US version of a minimum tax on US corporations’ foreign profits. These characteristics are compared with what could be included in the global minimum tax, which is based on the most recent G7 agreement and an OECD concept published last October.
*First, the tax rate is different. Applicable US law requires companies to pay taxes on GILTI; Tax rates vary based on how much foreign taxes a company owes. Rates could be as little as 10.5-13.125 percent but can be significantly higher due to U.S. tax credit and expense allocation rules.
President Biden proposes a foreign income tax rate of 21 percent, which could result in an effective tax rate of 26.25 percent or more due to foreign tax credit and expense allocation rules.
As the G7 recently agreed, the global minimum tax rate could be 15 percent.
*Second is the treatment of property, plant and equipment. Companies have foreign assets such as factories and distribution centers for a variety of reasons. Sometimes they need to manufacture their products close to their consumers or they need to be close to natural resources.
Biden proposes removing a 10 percent deduction on these property, plant and equipment, which will essentially increase the tax costs of a U.S. company potentially looking to enter a new market and reach more overseas customers. The 10 percent deduction should exclude normal interest on GILTI’s assets.
The OECD’s global minimum tax plan would provide for an exclusion from normal interest on foreign property, plant and equipment, but without specifying how much that deduction would be.
*third is the treatment of labor costs. Biden does not propose a deduction for foreign labor costs, but the OECD plan included a portion of labor costs that could be deducted. This is like the exclusion for a normal return on property, plant and equipment, but extends to labor costs.
*Fourth is the treatment of losses. It is generally good tax policy to allow companies to deduct losses from profits. This avoids a volatile income tax burden for companies and takes into account the costly start-up phase of new companies.
In its minimum tax rate, Biden does not propose any loss carryforwards. This is in contrast to the OECD concept, which provides for loss compensation.
*Fifth is the treatment of foreign taxes. Applicable US law limits foreign tax credit when calculating taxes owed on GILTI to 80 percent of their value. This means that the nominal tax rate on GILTI can be 13.125 percent or higher. Biden has not proposed changing the 80 percent limit on foreign tax credits so that the tax rate on GILTI could be 26.25 percent or more if businesses are exposed to high foreign taxes.
The current GILTI policy also prevents companies from carrying excess foreign tax credits into future years. This creates volatility in GILTI liability if a company has a high foreign tax burden in one year but cannot use additional tax credits to offset GILTI liability in future years.
The OECD concept envisaged full foreign income tax credit and the ability to use excess tax credits in future years to smooth out tax liability over time.
*The sixth The element for comparing the two approaches shows one point where there are similarities. Biden suggested calculating GILTI for each country a company operates in. This would be a major change from current GILTI policy, which allows companies to pool their overseas earnings before charging additional US tax liabilities.
However, the calculation at the country level is in line with the OECD jurisdiction approach discussed in the draft.
*A seventh The element is whether a sales threshold applies. In GILTI’s current law and Biden’s proposal, there is no revenue threshold that applies before a company may have to charge additional US tax liability. However, the OECD plan proposed using a sales threshold of 750 million euros ($ 893 million) to target the global minimum tax on the largest companies.
*A eighth A comparison of the two approaches is how they define taxable income. GILTI is part of the US Internal Revenue Code and applies to a Congressional definition of foreign income. However, the OECD concept suggests defining income on the basis of annual accounts as reported to the shareholders of public companies. This would likely be done at the group level, taking into account the global company’s financials.
The OECD recommends making several adjustments to financial gains, but the definition of income would rely heavily on accounting rules rather than statutory tax law.
|President Biden’s proposed minimum tax for US companies||Global minimum tax rate|
|rating||21% (could be 26.25% or more, depending on foreign tax exposure and distortions in deductible items).||15% (G7 agreement|
|Exclusion for a normal return on property, plant and equipment||No (would cancel an existing 10% deduction||Yes (OECD blueprint|
|Exclusion in the case of normal salary returns||No||Yes (OECD blueprint|
|Loss carryforwards||No||Yes (OECD blueprint|
|Foreign tax treatment||Credit for 80% of overseas taxes paid, no carryover for excess credits||Full credit and carry-over of the surplus to future years (OECD blueprint)|
|Jurisdiction calculation||Country by country||Country by country (OECD blueprint)|
|Sales threshold||None||€ 750 million (OECD blueprint)|
|Definition of income||Foreign taxable income as defined by the Internal Revenue Code||Financial gains, as defined by accounting standards and adjusted to be closer to taxable gains|
Sources: US Treasury Department, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, May 2021, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf; G7, “Communiqué of the G7 Finance Ministers and Central Bank Governors”, June 5, 2021, https://home.treasury.gov/news/press-releases/jy0215; OECD, “Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint”, Inclusive Framework on BEPS, October 14, 2020, https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation – report-on-pillar-two-blueprint-abb4c3d1-en.htm.
The Biden proposals to change GILTI are just as significant as the discussions about a global minimum tax. A comparison of the policy outlines shows, however, that Biden is proposing a more complex tax regime for US multinationals than was discussed by the OECD.
If the Biden approach to GILTI is adopted while the rest of the world adopts a lighter form of global minimum tax, it will have a significant impact on US companies and make them less competitive against their overseas competitors.
While policymakers discuss changes to GILTI and the design of the global minimum tax, it is important to keep these differences in mind, as well as the potential impact of policy making on cross-border investment decisions.
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