A key part of top Senate Democrats’ global tax plan would use a Trump-era tax break to help levy higher taxes on corporate income from tax havens.
The plan, spearheaded by Senate Finance Committee Chair Ron Wyden (D-Ore.) and released Monday, contemplates using a 2020 regulation issued by then-President Donald Trump’s Treasury Department that allows U.S. multinationals to avoid paying U.S. taxes on some of their foreign income that’s already highly taxed abroad.
Wyden and other Democrats have argued that the “high-tax exception” under the 2017 tax overhaul’s global intangible low-taxed income (GILTI) rules is a giveaway to companies and should be rolled back. But it turns out the exception is useful for something the Wyden plan wants to do: identify U.S. companies’ income in tax haven countries and have them pay more in taxes on it.
The apparatus and procedures that the high-tax exception has already put in place will make it simpler for the IRS to target that low-taxed foreign income, according to Wyden—and make it easier for the agency to get companies to pay more in taxes on it and start collecting those taxes sooner.
“Instead of providing a back-end regulatory tax cut (which the Trump regulations did), these rules can instead be flipped on their head to target offshore tax haven abuse by multinational corporations,” according to Wyden’s plan.
The rules needed under the Wyden plan are “already in place,” said Ashley Schapitl, a Finance Committee spokeswoman. The Wyden plan would simply make the exception mandatory, rather than elective as it is now, she said. “There’s no scenario where designing a new system, rather than using the existing structure, would be simpler for the IRS to implement.”
Treasury and the IRS didn’t immediately comment.
”I imagine if you go with something that already has the infrastructure, it’s going to be easier to implement,” said Kyle Pomerleau, a resident fellow at the American Enterprise Institute, where he studies federal tax policy.
Separating GILTI Income
Currently, taxes on U.S. companies’ GILTI income are imposed based on their total foreign income, not income in each country. That allows companies to offset income from high-tax and low-tax countries. Blending high-tax and low-tax profits effectively shields companies from paying higher taxes on their income from tax havens, and gives them an incentive to shift profits there.
One way of addressing that issue would be to assess taxes on a company’s foreign income on a country-by-country basis—that’s what President Joe Biden’s global tax plan issued last week would do. Wyden’s plan says that’s a possibility, but he also suggests simply separating GILTI income into just two buckets: income from low-tax countries, those below the GILTI rate, and income from high-tax countries, above the GILTI rate. That accomplishes the same goal but would be easier for the IRS to enforce, Wyden said.
The high-tax exception exempts U.S. companies’ foreign income from GILTI taxes if it’s already been taxed abroad at a rate of more than 18.9%. The business community asked Treasury for relief when they found their profits hit by the GILTI rules.
Wyden still doesn’t like the exception —his plan calls it “a dubious interpretation of current tax laws.” He would flip the regulation on its head: Instead of using it to separate out high-taxed income, Wyden would use it to identify which low-taxed income should be subject to GILTI.
In theory, that would enable the IRS to pivot to a new system and boost its collection of GILTI taxes very quickly, without the potentially lengthy delays involved in passing new regulations to create it. Such a system, the Wyden plan says, “could be quickly implemented to make corporations start paying their fair share right away.”
Wyden is “looking at the basic purpose of GILTI” to ensure income from low-tax jurisdictions is subject to a new minimum tax, said Eric Solomon, a partner at Steptoe & Johnson LLP and a former Treasury official. “He’s basically creating a bucket of low-tax foreign income and applying GILTI to that.”
Some are skeptical of the Wyden proposal. “What I’m scratching my head about is what is gained,” said Stephen Shay, a former deputy assistant secretary for international tax affairs at Treasury. Much of what the Wyden idea would accomplish could also be accomplished if you went country by country, he said. “I don’t see what this gets you except possibly a messaging benefit.”
And even if it can take advantage of what’s already in place, any benefit to the IRS and any increased tax collections might not start immediately. “I’m sure there are complexities even with this approach that the IRS will have to write regulations about,” Solomon said.
But Schapitl said that “complaints about potential complexity don’t hold water.”