‘America Last’ Corporate Tax Policies Can End With This Congress

President Donald Trump in March lamented and admired that Ireland, “this beautiful island of five million people, has got the entire US pharmaceutical industry in its grasp” through its corporate-friendly tax policies, and shared concern about the massive US trade deficit with Ireland.

The root of the trade deficit is US companies such as Merck & Co., Amgen Inc., and AbbVie Inc. booking their taxable income in Ireland rather than in markets where their real economic activity takes place.

But it’s not low Irish taxes that caused this situation. It’s the US’ own “America last” corporate tax policy. And it’s Congress’ job to look at US tax policy as the source of the problem—and the place to find a solution—as it debates a new national tax policy.

Major American companies have been heading for Ireland’s green pastures for decades, initially to gain a foothold in the large European market. The moves eventually became tax-driven, as Ireland’s low 12.5% corporate tax rate became a magnet for tech giants.

The revelation that Apple Inc.’s Irish subsidiary paid as little as 0.005% in taxes on its billions in global earnings failed to move US tax authorities to act. However, it didn’t go unnoticed by the EU authorities in Brussels, which ordered Apple to pay Ireland 13 billion euros ($14.4 billion) in back taxes last year.

The Irish government has closed the tax loopholes that were at issue in the Apple case, but the US companies continue to hold large amounts of profit abroad, mostly in tax havens—suggesting the problem was never entirely caused by Irish tax policy.

The 2017 US tax reforms overhauled the international tax rules by ending the ability of corporations to defer US taxes on their foreign income, sometimes indefinitely. But overall, the 2017 tax law failed to stem the tide of US corporations offshoring their profits.

Major US pharma companies still aren’t paying any tax in the US—their home jurisdiction and main market. They are, however, paying more in foreign taxes—close to 15% of their global profits, according to economist Brad Setser.

As it happens, 15% is the globally agreed minimum corporate tax rate that is in effect in dozens of countries, including Ireland but not the US. Ironically, it was the 2017 Tax Cuts and Jobs Act that inspired this global agreement by introducing the concept of a minimum corporate tax rate on global intangible low-taxed income, known as GILTI.

Under US law, the minimum rate was set at only 10.5%—half of the 21% rate for domestic corporate income. Beyond the too-low rate, another GILTI flaw is that it’s assessed on a worldwide basis rather than separately for each country, allowing companies to use low-tax jurisdictions by “blending” taxable income from high and low-tax jurisdictions.

The result is that there ends up being little to no low-taxed income for the US to tax as US companies continue to book profits in an array of low-tax jurisdictions, including Puerto Rico, which is treated as separate from the US for tax purposes.

Offshore profit-shifting is a problem that the US made—and that it can and should fix. Congress has an opportunity this year to do just that, as it works on a major tax package to address the expiration of certain 2017 tax cuts.

Revisiting and improving the groundbreaking international aspects of the 2017 tax reform to allow the GILTI rate to increase to above 15% could raise hundreds of billions in additional revenue over 10 years, according to recent estimates at the University of Pennsylvania’s Wharton School. That additional revenue can pay for other policy priorities or reduce the need to grow our already sky-high public debt.

Trump has insisted that the US-Irish trade relationship be based on “fairness.” Punitive tariffs on Ireland are possible, but it would hardly be fair or effective to punish Ireland for the sins of US tax policy. The US doesn’t need to resort to either punishing or joining tax havens such as Ireland. Instead, we should start by fixing our America-last tax code.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Zorka Milin is policy director at the FACT coalition, where she leads international tax policy and other transparency priorities.

Write for Us: Author Guidelines