Any day now, the Biden administration will ask Congress to beef up the US’s backstop tax on the foreign income of large US multinationals like Apple, Google and Cisco. The White House is expected to request two main changes to bring the tax into line with recent multilateral agreements: raise the rate, and apply it country-by-country. Congress should ignore the second and go bigger on the first.
Under the current US system of taxing US multinationals on foreign income, the US does not, in the first instance, tax foreign profits earned through foreign subsidiaries, leaving that to foreign nations. But in the event that foreign nations charge less than (roughly) 10.5%—that is, less than half the 21% general US corporate rate—the US brands the income Global Intangible Low-Taxed Income and imposes however much tax is necessary to bring the overall rate to the halfway mark. That is, the US “tops up” foreign tax as necessary to meet the 10.5% minimum, thus imposing a global minimum tax.
Last fall and winter, the OECD proposed that all the nations of the world put in place what it calls Global Anti-Base Erosion rules. GLOBE rules are similar to, but distinct from GILTI. To bring GILTI into line with GLOBE, the US must do two things. It must raise the minimum rate from 10.5% to 15%. And it must do its topping up country-by-country. That is, the US currently tops up only when the MNE’s across-country average rate of tax on foreign income is below the threshold. Conforming GILTI to GLOBE would mean separately topping up the tax bill in each country that charges less than the threshold—without “topping down” in countries that charge more.
The US should raise the GILTI rate substantially beyond 15%. At the same time it should ignore the call to apply that minimum country-by-country. The problem with GILTI is that the rate is too low. Moving to a country-by-country system is, at best, a solution without a problem. At worst, it will exacerbate the problem it is meant to solve and generate a host of new problems.
The Biden administration needs revenue to finance its domestic priorities, and it believes US MNEs are not paying their fair share. Switching to a country-by-country calculus does indeed raise revenue from these companies. But raising the minimum rate also raises revenue and does so more sensibly.
Topping up country-by-country collects more tax from US MNEs that face a wider range of tax rates internationally—for no apparent reason. If, for instance, the minimum rate is 15%, and Apple earns all its foreign income in countries charging precisely 15%, it owes no top-up tax to the US even under a country-by-country calculus. By contrast, if Orange earned half its income in a country charging 20% and half in a country charging 10%, and if the US adopted a 15% country-by-country minimum, Orange would owe top-up tax—5 percentage points in the 10%-tax country—even though its average tax rate on foreign income is the same as Apple’s.
The arithmetic becomes clearer the more you stare at it; the rationale does not.
Proponents of a country-by-country approach believe that it is better at preventing the global “race to the bottom” in corporate tax rates. It remains unclear what precisely these proponents have in mind.
If, under a global-averaging system, low-tax jurisdictions race themselves all the way down to zero tax, the US still collects, say, 15% in global-average top-up tax. If the system becomes country-by-country and the low-tax jurisdictions race themselves down only to a 15% rate, the US has just handed these jurisdictions the 15% it was collecting. That’s better for erstwhile tax havens. How is it better for the US?
Shifting to a country-by-country system opens up an administrative can of worms, including, among other things, devising a robust method of allocating income among foreign nations. This is not an easy task, especially with smart, motivated, and well-financed taxpayers looking to game the system. The OECD proposers seem to think that relying more on financial rather than tax reporting is a simple fix. The simplest fixes in tax are always the ones that haven’t been tried.
Who is likely to object to pushing harder on the rate increase while pulling back on the country-by-country calculus? Republicans in Congress? Two things to remember here about Republicans: First, the Democrats won’t need them if they make the changes within the budget reconciliation process, which is not subject to filibuster. Second, and most importantly, the Republicans are themselves the authors of GILTI, which passed in 2017 when the GOP controlled both Congress and the White House. It’s true that the GILTI rate is only 50% of the regular rate, but before GILTI there was essentially nothing; the de facto tax regime for foreign income was defer then forgive. Republicans should be proud of GILTI and happy to see it enhanced.
Will our international partners object that we are not following the historic international agreement among more than 137 countries, an agreement that the US helped to negotiate? Let’s not go overboard. Congress is the decider on tax; Congress was never at the table. If the decider is not at the table, there can be no agreement.
Furthermore, the OECD proposed rate is only 15% because the US, in order to get the EU on board, had to bow to certain smaller EU nations, who have veto power over EU tax law and have been, along with the US itself, enablers of the basement tax rates enjoyed by US multinationals over the last several decades. There’s a good chance that France, Germany, and Italy would be pleased with a higher US threshold rate.
Finally, will US businesses object? If some change is the baseline expectation, and if a further rate increase is presented as, and calibrated as a substitute for moving to a country-by-country calculus, some businesses will object and some will be in favor. Multinationals facing relatively uniform foreign tax rates will lobby against it, but those facing variable rates should lend their support.
Even so, we are likely to hear from businesses about the potential damage to American competitiveness. As always, this argument should be taken with a grain of salt.
Competition is not the first word that comes to mind in sincerely reflecting on the last several decades of US international tax policy. Large US multinationals enjoy substantial market power globally, to the partial exclusion of foreign entrants. The US has helped them gain this position by effectively subsidizing their exports through essentially excusing them from income tax on foreign earnings. That market power is some insulation against the possibility—itself not at all clear—that lower tax rates will be paid by nascent foreign competitors. The US should raise the rate so that the US Treasury extracts some of the benefit of the market power that it helped to finance.
The Biden administration should continue to use global averaging and at the same raise the GILTI threshold rate beyond the 15% proposed by the OECD. It’s the most sensible response to the global catch-up on minimum taxes, and it is also the easiest.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Chris William Sanchirico is a Samuel A. Blank Professor of Law, Business and Public Policy at the University of Pennsylvania Carey Law School and is founder and co-director of the University of Pennsylvania’s Center for Tax Law and Policy. His research papers are freely downloadable here.
We’d love to hear your smart, original take: Write for Us