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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 been debated in recent months, there are clear divides between U.S. proposals and the global minimum tax rules.
While President Biden has led an effort on global negotiations over minimum taxation, his own proposals for U.S. companies differ from proposals at the international level. In fact, if other countries implement model rules released in December 2021, then Biden’s proposal would be a significantly more burdensome policy for U.S. businesses than what other countries might adopt.
The table in this post reviews some features of the current U.S. rules that apply to multinationals, and the Build Back Better 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. Additionally, the table shows some new features proposed in President Biden’s most recent budget. These features are compared to the approach taken in the global minimum tax model rules.
There are three key differences between President Biden’s approach and the model rules. The first is that the proposed changes to GILTI do not include an exclusion for a normal return on payroll costs. This means that a U.S. company subject to GILTI would likely pay a higher tax bill than a comparable foreign company subject to the global minimum tax model rules. Second, GILTI does not rely on financial profits to determine how much additional tax is owed. This means that U.S. rules will not cleanly mesh with foreign rules. Third, the global minimum tax only applies to large multinationals while GILTI applies regardless of a company’s total revenue as long as a 10 percent ownership threshold is met.
Not only do the designs of these policies differ, the revenue impacts of the policies also vary dramatically.
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.
| Current Law | Scheduled Change to Current Law | Build Back Better | President Biden’s Budget | Global Minimum Tax Model Rules | |
|---|---|---|---|---|---|
| Effective Date | 1/1/2018 | 1/1/2026 | 1/1/2023 | 7/15/1905 | 2023 (end of 2023 for the EU) |
| Rate | 10.5% (could be 13.125% or higher depending on exposure to foreign taxes) | 13.125% (could be 16.4% or higher depending on exposure to foreign taxes) | 15% (could be 15.8% or higher depending on exposure to foreign taxes) | 20% (could be 21.1% or higher depending on exposure to foreign taxes) | 15% |
| Exclusion for a Normal Return on Tangible Assets | 10% deduction for foreign tangible assets | 10% deduction for foreign tangible assets | 5% deduction for foreign tangible assets | Assumes that Build Back Better becomes law | 8% incrementally reduced to 5% over the first five years |
| Exclusion for a Normal Return on Payroll Costs | No | No | No | 10% incrementally reduced to 5% over the first five years | |
| Loss Carryovers | No | No | No | Included in Deferred Tax Asset | |
| Foreign Tax Treatment | Credit for 80% of foreign taxes paid, no carryover for excess credits | Credit for 80% of foreign taxes paid, no carryover for excess credits | Credit for 95% of foreign taxes paid, 5-year carryforward of excess foreign tax credits | Deferred tax asset recast at 15% rate | |
| Jurisdictional Calculation | Foreign income is blended together | Foreign income is blended together | Country-by-country | Country-by-country | |
| Threshold for Application | None, 10 percent ownership threshold | None, 10 percent ownership threshold | None, 10 percent ownership threshold | €750 million in global revenues | |
| Income Definition | Foreign taxable income as defined in the Internal Revenue Code, no use of financial accounting methods | Foreign taxable income as defined in the Internal Revenue Code, no use of financial accounting methods | Foreign taxable income as defined in the Internal Revenue Code, no use of financial accounting methods | Financial profits as defined by accounting standards and adjusted to align closer to taxable profits | |
| Average Effective Tax Rate on U.S. Companies’ Foreign Profits | 16.8% | 17.7% | 18.3% | 17.2% | |
| Under-taxed Profits Rule | Base Erosion and Anti-Abuse Tax (not comparable to the OECD model rules) | Base Erosion and Anti-Abuse Tax (not comparable to the OECD model rules) | Base Erosion and Anti-Abuse Tax (not comparable to the OECD model rules) | Yes, replacing BEAT | Yes |
| Qualified Domestic Minimum Top-up Tax | None | None | 15% alternative minimum tax on worldwide financial profits (not comparable to the OECD model rules) | Yes, only applied when a UTPR applies to a U.S. company | Yes |
| Estimated U.S. revenue increase over 10 years (in billions of dollars, see note) | $112.4 for 2018-2027 | $150.6 for 2022-2031 | $240 billion in addition to Build Back Better | $106 for 2022-2031 (could have a negative revenue impact if enough other countries adopt a domestic minimum tax rule, or if expense allocation for foreign tax credits is removed) | |
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Note: Other than the estimate for President Biden’s Budget, the estimates are based on Tax Foundation’s Multinational Tax Model. Where there are ranges, these reflect uncertainty about the choices that would ultimately be made. Effects of reduced profit shifting are included in the Tax Foundation estimates. Sources: U.S. Congress, “H.R. 1 An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Dec. 20, 2017, https://www.congress.gov/bill/115th-congress/house-bill/1/text; Joint Committee on Taxation, “Estimated Budget Effects of the Conference Agreement for H.R. 1, The ‘Tax Cuts and Jobs Act,’” Dec. 18, 2017, https://www.jct.gov/publications/2017/jcx-67-17/; U.S. Congress, “H.R. 5376 Build Back Better Act,” Nov. 19, 2021, https://www.congress.gov/bill/117th-congress/house-bill/5376; Alex Durante et al, “House Build Back Better Act: Details & Analysis of Tax Provisions in the Budget Reconciliation Bill,” Tax Foundation, Dec. 2, 2021, https://www.taxfoundation.org/build-back-better-plan-reconciliation-bill-tax/; OECD, “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two),” Dec. 20, 2021, https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm; Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://www.taxfoundation.org/us-multinational-tax-reform-options-gilti/; Cody Kallen, “Expense Allocation: A Hidden Tax on Domestic Activities and Foreign Profits,” Tax Foundation, Aug. 26, 2021, https://www.taxfoundation.org/expense-allocation-rules-hidden-tax-foreign-profits/; Cody Kallen, “How Heavily Taxed Are U.S. Multinationals?” Tax Foundation, Sept. 29, 2021, https://www.taxfoundation.org/us-multinational-corporations-tax/; Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals,” March 2022, https://home.treasury.gov/system/files/131/General-Explanations-FY2023-Table.pdf. |
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Note: This post was originally published on September 24, 2021 but has been updated to reflect the latest details of President Biden’s recent budget.
Launch Resource Center: Base Erosion & Profit Shifting (BEPS)