State Global Minimum Taxes Would Combat Offshore Profit Shifting

The Tax Cuts and Jobs Act of 2017 promised to stimulate economic growth and curtail global tax evasion. It was touted as a remedy for the slow bleed of capital through offshore profit shifting.

Six years later, tax evasion remains a critical concern, offshore profit shifting largely continues unabated, and there’s little indication the trillion-dollar legislative gamble has yielded the intended crackdown on tax havens. The anticipated bulwark against the exodus of domestic capital appears to be little more than a picket fence.

If the tide of offshoring profits is to be stemmed, multilateral action is necessary, and non tax-haven states should consider adopting a global minimum tax.

Tax Cuts and Jobs Act

The TCJA’s headline change was a reduction in the federal corporate income tax rate to 21% from 35%, with the goal of making the US more competitive globally.

The bill introduced measures such as the Global Intangible Low-Taxed Income and the Base Erosion and Anti-Abuse Tax to deter additional profit shifting to tax havens, and encourage the relocation of existing offshored profits back to the US. The idea was this would help pay for the myriad tax cuts.

Despite the optimism, the best evidence suggests that the TCJA’s deterrent effect on the use of tax havens has been marginal at best.

Offshoring Continues

The percentage of foreign profits offshored has remained constant at about 35% from the period prior to the TCJA through to today. The share of foreign profits from US multinationals booked in tax havens has similarly remained constant, at about 50%.

A National Bureau of Economic Research working paper and related forensic analysis suggests that if there’s been any positive effect, it has been largely limited to six companies that have repatriated intellectual property to the US—Alphabet Inc., Microsoft Corp., Meta Platforms, Inc., Cisco, Inc., Qualcomm Inc., and Nike Inc.

One caveat to crediting the repatriating six to the TCJA is that it correlated with changes in the Irish tax code. Of the six, at least three—Alphabet, Microsoft, and Meta—used Ireland and the so-called “Double Irish” tax plan enabled by changes in the Irish tax code.

Tracing the proximate cause of a corporation’s decision to repatriate intellectual property, and the repatriation of profits that follows, is a bit like trying to determine the mass of a thrown stone from the ripples it created on a pond. But, for the sake of argument, let’s assume the repatriating six acted in direct response to the TCJA.

Notwithstanding this case-by-case success, while some individual corporate actors may have shifted their profit offshoring practices specifically in response to the TCJA, looking at the bigger picture there has been little change.

The Cayman Islands, a popular tax haven

Photographer: David Rogers/Getty Images

Potential Remedy

One potential solution to the issues the TCJA left unaddressed is a simple global minimum tax. Such a tax would allocate any deficit in collection based on the degree of engagement a corporation or individual has with a given market or jurisdiction, creating a global tax liability irrespective of the geographic distribution of profits.

The global minimum tax would be owed, and any tax jurisdictions that chose not to collect their share would simply see that share divided among those jurisdictions that adopted the tax.

The EU Tax Observatory suggests just such a reform the 2024 Global Tax Evasion Report: a strengthened global minimum tax on multinational companies, with the day-one goal of a policy free from loopholes.

More than 140 countries agreed to a global minimum tax of 15% on multinational profits under a 2021 G20 and OECD initiative. The tax has weakened since then because of modifications such as an economic substance carve-out, which permits a multinational to remain subject to a low-tax jurisdictions’ rates, as long as it has sufficient economic ties to that jurisdiction.

A refined global minimum tax could provide a more robust and cohesive strategy to protect individual countries’ tax bases. Unilateral efforts such as the TCJA have severe limitations even assuming perfect policy drafting, and tax avoidance requires a unified front to ensure profit offshoring is given no quarter.

Keying the tax apportionment of any deficits to the percent of global sales made by a multinational in each jurisdiction lets non-tax haven jurisdictions collect on the deficits created by offshoring.

Outlook

As the calendar flips over to 2024, the TCJA’s shortcomings are laid bare—but there’s a potential path forward in the form of a global minimum tax. It won’t get rid of offshoring, but it reimagines tax policy toward a recognition of a global, interlinked system of policies.

The final policy remedy for offshore profit shifting doesn’t lie within the borders of any single tax jurisdiction—but in the collective resolve of the global community to pursue fiscal fairness.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social