The GOP’s sweeping tax overhaul still has a lot of unanswered questions, none more so than in the international tax space. And one proposal could impact some of the world’s biggest companies.
GOP officials unveiled an ambitious framework to revamp the tax code last week, proposing cuts to individual and corporate tax rates. But the plan also calls for a new tax on foreign profits designed to discourage companies from moving earnings or operations offshore.
The framework didn’t establish a rate or a formula by which the new tax would be calculated, only saying the plan includes “rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.” That’s not much detail, but similar proposals have required that no matter where a company’s earnings are held, U.S. companies would owe some tax, albeit at a lower rate than what they would pay domestically.
It’s called a minimum foreign tax. For example, if a U.S. company’s average worldwide-tax burden was 5 percent because it stored profits in a low-tax country, and the new global minimum tax was 15 percent, the company would be liable for the difference. In theory, that would disincentivize companies from stashing income in tax havens in the first place.
A minimum foreign tax is meant to work in tandem with the framework’s proposal to move to a territorial tax system, in which only U.S.-earned income is taxed at the corporate rate. Critics say that a territorial system alone would encourage more companies to move their income and operations overseas, known as base erosion. A minimum foreign tax is meant to offer a guardrail against that. Still, it’s essentially a new tax, and the idea has gotten a lukewarm response from some key lawmakers.
“I think we’re more focused on getting into territorial, getting to a lower rate, and maybe a more traditional tax structure than to imposing any type of minimum tax,” Rep. Tom Reed, a member of the tax-writing Ways and Means Committee, told reporters.
In the Senate, some members of the Finance Committee said a global minimum tax was an option, but didn’t wholeheartedly back the idea, either.
“There are a number of policy options that you could look at and consider that would help prevent base erosion, that was one suggestion,” Sen. John Thune told reporters.
Amid pushback from some lawmakers and exporters, GOP officials working on the overhaul framework abandoned another proposed tax earlier this year, the border-adjustment tax, which would have imposed a 20 percent levy on imports but not exports.
The minimum foreign tax proposal could have multibillion-dollar implications for tech and pharmaceutical companies who move their intellectual property or profits to overseas subsidiaries, avoiding the 35 percent U.S. corporate tax rate.
The U.S. applies its corporate tax on companies’ foreign earnings, a rarity among other developed countries. Companies, however, often defer that tax by not repatriating that money into the United States. That’s created an offshore stash of about $2.6 trillion in earnings, according to most estimates.
A similar proposal to the foreign-minimum tax appeared in former Ways and Means Chairman Dave Camp’s 2014 tax-overhaul draft, which staffers on the tax-writing committees have been combing for ideas over the past months. That plan differed in that it would have calculated the tax on a country-by-country approach, rather than globally.
Some experts say the “global” approach in the current framework’s proposal is flawed. Stephen Shay, a senior lecturer at Harvard Law School, said during a Senate Finance Committee hearing on international tax that the average rate of taxes paid on all foreign subsidiaries is about 12 percent.
“So if the minimum tax is anywhere below that then you almost certainly haven’t accomplished a lot,” Shay said.
But without the country-by-country approach taken in the Camp draft, Shay said the provision would be “relatively toothless.”
That’s because companies can take advantage of their average worldwide-tax burden and avoid paying the new minimum tax. For example, if the minimum tax is rate is 15 percent, and a country has profits stored in both a zero-tax country such as Bermuda and tax in a higher-tax jurisdiction such as Australia, where the rate is 30 percent, they would have an average global rate of 15 percent. That would avoid having their foreign income captured by the minimum tax.
Under a country-by-country regime, where the minimum tax is calculated in each jurisdiction, that country would owe the minimum 15 percent rate on the Bermuda-held profits.
Still, without more details, it’s hard to predict the impact of the framework’s language, Shay said.
Speaking to reporters, House Ways and Means Chairman Kevin Brady put distance between his committee and the idea of a global minimum tax, but said the plan would address erosion in the tax base.
“I wouldn’t describe the discussions we’re having on international tax as a global minimum tax,” Brady said. “What I can say, because the committee is still developing and refining this, is that we’ve made really good progress both on removing the incentives for companies to move their profits and revenue offshore and the best design for ensuring that there is a level playing field for U.S. and foreign companies.”
But that likely won’t include the country-by-country approach seen in Camp’s 2014 draft.
“I think we’ve moved to a lot of refinements since those original Camp drafts,” Brady said.