Top Senate Democrats have the same broad goals as President Biden in their plan to overhaul the way multinationals are taxed—they want to reboot the international tax system to encourage companies to keep jobs and investment in the U.S.
The Democrats’ plan released Monday and Biden’s corporate tax proposals last week will help raise revenue for the administration’s sweeping $2.25 trillion infrastructure plan. Both mark a sea change from the 2017 tax law, which dramatically lowered corporate tax rates and eased rules in the name of making U.S. companies more competitive globally, but which both Biden and Senate Democrats say has given incentives for companies to ship jobs overseas.
But the plan proposed by Finance Committee Chair Ron Wyden (D-Ore.) and Sens. Sherrod Brown (D-Ohio) and Mark Warner (D-Va.) doesn’t call for an increase in the corporate tax rate, as Biden’s proposal does. The Senate plan would also retain in altered form some provisions of the 2017 law that Biden apparently wants to scrap.
“Wyden’s proposal has meaningful differences from Biden’s, but they are moving in the same direction. Both are trying to tilt the investment playing field towards the U.S. via higher taxes on earnings outside the U.S. along with a closing of the gap between domestic and foreign tax rates,” John Gimigliano, KPMG’s federal head of tax legislative services, said in a statement.
Here is a comparison of some key provisions of the 2017 tax law, the Biden corporate tax plan, and the Senate Democrats’ plan.
- CURRENT LAW: 21%, lowered under the 2017 tax law from 35%.
- WHITE HOUSE: The administration would increase the rate back to 28%.
- WYDEN: On a call with reporters, Wyden said specific tax rates will be part of a larger discussion among the Democratic caucus.
- CURRENT LAW: The 2017 law imposes a 10.5% tax on global intangible low-taxed income (GILTI) from companies that isn’t already taxed at a rate of at least 13.125%. It applies to income U.S. shareholders earn from controlled foreign corporations—those that are more than 50% owned by U.S. shareholders who own 10% or more of the total stock in the CFC. A first slice of income from tangible foreign assets is exempted from GILTI. The tax is imposed based on a global amount, allowing some companies to “blend” their income from high-tax and low-tax countries, and thereby avoid paying higher taxes on income from tax havens.
- WHITE HOUSE: Biden proposes to double the GILTI minimum tax rate to 21%. He would also eliminate the 10%exemption and impose the GILTI tax on a country-by-country basis, forcing companies to pay higher taxes on profits from low-tax countries.
- WYDEN: The plan would“shrink the gap” between tax rates on U.S. and foreign earnings but doesn’t commit to a specific number, calling it “an open question.” The answer will depend heavily on other decisions regarding the corporate tax rate, base erosion, and other incentives or disincentives for U.S. and foreign investment, the plan says.
- CURRENT LAW: The 2017 law’s base erosion and anti-abuse tax, or BEAT, attempts to prevent U.S. companies from shifting profits out of the U.S. to other countries where they would be taxed at lower rates. Multinationals are subject to the 10% BEAT, under tax code Section 59A, when more than 3% of their total deductible payments, such as interest and royalties, are considered to be eroding the U.S. tax base.
- WHITE HOUSE: The administration’s plan appears to call for eliminating BEAT, which it calls “ineffective.” It talks about denying deductions to companies that try to strip profits out of the U.S. if they’re based in a country without a strong minimum tax.
- WYDEN: The plan says BEAT should be reformed to capture more revenue from companies eroding the U.S. tax base. Domestic business tax credits whose value was reduced in the 2017 law should have their value restored, the plan says, and the BEAT tax rate should be increased. The plan doesn’t mention a specific number, but Wyden proposes that there be a higher rate for income specifically tied to base erosion payments, while “regular” taxable income would still be taxed at 10 percent.
- CURRENT LAW: The 2017 tax law offers companies a reduced tax rate of 13.125% on their foreign-derived intangible income, or FDII—foreign income that’s tied to intangible assets that a company holds in the U.S., like patents, trademarks, and copyrights. It’s intended to promote spending on research and development in the U.S., by giving companies an incentive to keep their intangible assets in the U.S. rather than moving them elsewhere.
- WHITE HOUSE: Biden wants to eliminate the FDII tax incentives and use the revenue to “expand more effective R&D investment incentives.” The plan doesn’t provide any specifics on the new R&D incentives.
- WYDEN: His plan suggests FDII could be retained in a revamped form, with a focus on income generated by “innovation” activities like R&D and worker training in the U.S., rather than intangible assets. Wyden would also “equalize” the tax rates for FDII and GILTI, instead of having the GILTI rate be lower.
—With assistance from Kaustuv Basu.