Welcome

Multinationals Wary of Democrats’ Planned Offshore Tax Hike

Feb. 4, 2021, 6:42 PM

A proposed overhaul of the 2017 tax law’s international regime has multinational companies nervous that they could see a tax hike on top of the pandemic-induced economic downturn.

President Joe Biden campaigned on effectively doubling a tax on global intangible low-taxed income (GILTI), a category of U.S. multinationals’ earnings introduced in the 2017 tax law, as well as a penalty for offshoring. Biden’s tax plans got a boost when Democrats swept January’s Georgia Senate runoffs, giving them control of both chambers of Congress.

Several corporate tax executives with operations across the globe flagged Biden’s GILTI proposal as a major concern during a Bloomberg Tax event Thursday.

Linda Evans, director of global tax policy at IBM Corp., described doubling the rate on GILTI income as “penalizing companies that have been operating overseas for years.” IBM has dozens of reported foreign subsidiaries, including operations in Switzerland, the Netherlands, Luxembourg, Ireland, and Bermuda.

“We would look forward to working with the Biden administration to find alternative revenue sources for the programs they want to do,” said Evans, who lobbied Congress, the IRS, and Treasury on various international tax issues over the past year. “But I don’t think it’s a good thing to raise taxes on companies as we continue to struggle through the economic downturn from the pandemic.”

Democrats expect to walk a political tightrope in arguing for the need to raise taxes on companies and the wealthy in the midst of a pandemic-shackled economy, but plan to do so in order to offset much of the cost of proposed new spending in health care and infrastructure.

Biden’s Proposal

So far, the Biden administration has focused so far on advancing a $1.9 trillion pandemic relief plan that includes more aid for small businesses and more generous tax credits for families.

But Senate Finance Committee Chair Ron Wyden (D-Ore.) has vowed to rewrite provisions that tax the income U.S. companies’ foreign affiliates get from intangible assets such as trademarks and patents.

Current law “still makes it more attractive to do business overseas than in the United States,” Wyden said Wednesday during an interview at the Bloomberg Tax event.

That tax on global intangible low-taxed income, set at 10.5%, was meant to hit companies that were paying a global tax rate of less than 13.125% on income earned from their offshore operations. Critics say companies are able to essentially shelter income in low-tax jurisdictions by combining rates in those areas with taxes on income earned in high-tax jurisdictions—artificially pushing them above the 13.125% threshold.

Under Biden’s plan, global intangible low-taxed income would instead be calculated on a country-by-country basis. The changes would also do away with an exemption on offshore income earned from assets like factories.

A Populist Argument

George Callas, who helped craft the international section of the 2017 tax law as a former senior tax counsel to then-House Speaker Paul Ryan (R-Wis.), said he expected congressional Democrats to propose GILTI changes in the next major legislative package after another round of economic relief.

“I think that they’re going to look at this stuff as among their top-tier prospects for getting some revenue-raisers,” Callas, now a managing director at Steptoe & Johnson LLP, said. “It’s high on the list of stuff they can message in a populist way.”

The Biden campaign included the GILTI proposal as part of a “Made in America” plan to bolster domestic manufacturing.

Callas added that Democrats would still have to navigate political and policy hurdles, like thin majorities in the House and Senate and what to do with the foreign-derived intangible income deduction created to be a carrot to GILTI’s stick.

Denise Bee, the head of tax at Slack Technologies, said she hopes the Biden administration will provide more time to implement changes than Republican lawmakers did when they rushed to pass the 2017 law. Slack has reported subsidiaries in Australia, Canada, Asia, and Western Europe.

“We had very little time to put that in action,” she said.

For Kumar Nandan, vice president of global tax at PPG Industries Inc., the proposed overhaul of GILTI would be unfair for the paint supplier, which makes many products outside the U.S. that are sold in foreign countries. PPG, which reported lobbying on international tax issues last year, has more than 125 foreign subsidiaries.

“We ought not to be penalized for making money offshore,” Nandan said.

To contact the reporters on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com; Colin Wilhelm in Washington at cwilhelm@bloombergtax.com; Siri Bulusu in Washington at sbulusu@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.