Choose Your Own Adventure: Global Minimum Tax Edition

September 27, 2021 1:59 pm Published by Comments Off on Choose Your Own Adventure: Global Minimum Tax Edition

Over the course of the last year, it has become clear that Democratic lawmakers want to change U.S. international tax rules. However, as proposals have surfaced in recent weeks, there are clear divides among various proposals.

While President Biden has led a renewed effort on global negotiations over minimum taxation, his own proposals for U.S. companies differ significantly from proposals that are being discussed at the international level. In fact, if other countries implement a policy outline that was recently agreed to, then Biden’s proposal would be a significantly more burdensome policy for U.S. businesses than what other countries might adopt.

The details on the structure of a global minimum tax are not yet finalized. However, it is worthwhile to compare Biden’s proposals for taxing U.S. companies’ foreign earnings against the recent agreement for a 15 percent global minimum tax supported by 130 countries and jurisdictions and the blueprint from the Organisation for Economic Co-operation and Development that preceded it.

The most recent proposals from members of the Senate Finance Committee and the House Ways and Means Committee also differ on some important points.

The table in this post reviews some features of the Biden proposals for changing Global Intangible Low-Tax Income (GILTI), which is the U.S. version of a minimum tax on the foreign earnings of U.S. companies. These features are compared to what might be in the global minimum tax based on the recent agreement and to the recent Senate and House proposals.

Not only do the designs of these policies differ significantly, the revenue impacts of the policies also vary dramatically. The President’s own proposal would raise the most, at $1.27 trillion, while adopting the global minimum tax proposal (leaving the current 21 percent corporate tax rate in place) would raise less than $100 billion.

As policymakers debate changes to GILTI and the design of the global minimum tax it is important to keep these differences in mind as well as the potential impact the policy design would have on cross-border investment decisions.

Which Global Minimum Tax Will We Get?
 Current LawPresident Biden’s Proposed Minimum Tax for U.S. CompaniesGlobal Minimum Tax OutlineSenate Finance Committee DraftHouse Ways and Means Committee Outline
Rate10.5% (could be 13.125% or higher depending on exposure to foreign taxes)21% (could be 26.25% or higher depending on exposure to foreign taxes and distortions for expense deductions)15% (July 1, 2021 agreement)Unspecified16.5% (could be 17.37% or higher depending on exposure to foreign taxes)
Exclusion for a Normal Return on Tangible Assets10% deduction for foreign tangible assetsNo (would repeal an existing 10% deduction)Yes, 7.5% for the first five years, 5% after that (July 1, 2021 agreement)No (would repeal an existing 10% deduction)Yes, 10% within U.S. territories, 5% in other foreign jurisdictions
Exclusion for a Normal Return on Payroll CostsNoNoYes, 7.5% for the first five years, 5% after that (July 1, 2021 agreement)NoNo
Loss CarryoversNoNoYes (OECD blueprint)Possible, details unspecifiedLosses can be carried forward
Foreign Tax TreatmentCredit for 80% of foreign taxes paid, no carryover for excess creditsCredit for 80% of foreign taxes paid, no carryover for excess creditsFull credit and carryover of excess to future years (OECD blueprint)Credit for 80-100% of foreign taxes paid, no carryover for excess creditsCredit for 95% of foreign taxes paid, excess credits can be carried forward
Jurisdictional CalculationForeign income is blended togetherCountry-by-countryCountry-by-country (OECD blueprint)Country-by-countryCountry-by-country
Revenue ThresholdNoneNone€750 million (July 1, 2021 agreement)NoneNone
Income DefinitionForeign taxable income as defined in the Internal Revenue CodeForeign taxable income as defined in the Internal Revenue CodeFinancial profits as defined by accounting standards and adjusted to align closer to taxable profitsForeign taxable income as defined in the Internal Revenue CodeForeign taxable income as defined in the Internal Revenue Code
Estimated revenue increase over 10 years (in billions of dollars) (see note)Not Applicable$1,266.30$49.3-$79.6$75-$1,077.2$743.70

Note: The estimates are based on Tax Foundation’s Multinational Tax Model. Where there are ranges, these reflect uncertainty about the policy choices that would ultimately be made.

Sources: U.S. Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” May 2021, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf; G7, “G7 Finance Ministers & Central Bank Governors Communiqué,” June 5, 2021, https://home.treasury.gov/news/press-releases/jy0215; OECD, “Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint,” Inclusive Framework on BEPS, Oct. 14, 2020, https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-two-blueprint-abb4c3d1-en.htm; Senate Finance Committee, “Wyden, Brown, Warner International Taxation Overhaul Discussion Draft,” Aug. 25, 2021, https://www.finance.senate.gov/chairmans-news/wyden-brown-warner-unveil-international-taxation-overhaul-discussion-draft; House Ways and Means Committee, “Build Back Better Act,” Sept. 2021,  https://waysandmeans.house.gov/legislation/markups/markup-build-back-better-act.


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