A group of Democratic senators proposed changes to international tax provisions in former President Donald Trump’s 2017 tax reform law in a bid to discourage offshoring and increase tax revenue for domestic investment.
At the core of Senators Ron Wyden (D-Oregon), Mark Warner (D-Virginia) and Sherrod Brown (D-Ohio) efforts are calls to reform three systems: Global Low Tax Intangible Income (GILTI), the Intangible Income Derived from Abroad (FDII) and the Anti-Abuse and Base Erosion Tax (BEAT). They argue that some of the international tax provisions in Trump’s 2017 tax reforms inadvertently created incentives for US corporations to offshoot production and jobs, and shift profits to foreign tax havens.
The systems were meant to return companies’ deferred offshore income to the United States at lower tax rates, where those earnings could be invested in American jobs. But in practice, Democratic senators said, they created new incentives for companies to invest more abroad to take advantage of the new waivers.
“Many companies did not even recoup the profits. Those that did, most of it was spent on share buybacks, “Warner told reporters on a conference call.
One of his proposals is to raise the GILTI rate to the same level as the FDII rate, according to a document titled Overhauling International Taxation, jointly developed by Democrats in the Senate Finance Committee (pdf).
“The architects of the 2017 tax law couldn’t help but put their thumb on the income offshoring scale, by making the GILTI rate (10.5 percent) lower than the FDII rate (13.125 percent). If FDII remains, regardless of what the final GILTI and FDII rates are, those rates must equalize, ”the document says.
Lawmakers also suggested repealing an incentive stemming from an exemption for “Qualified Business Asset Investment” (QBAI) in the GILTI system, which they said gave multinational corporations the ability to earn tax-free foreign income through the investment in tangible assets: factories, machinery. , buildings, etc., abroad.
“This is an irrational incentive to make new investments abroad instead of here, or, worse still, to close American factories and move them abroad; those factories and jobs could have stayed in the United States, “they wrote in the document.
Another proposed reform to the GILTI framework is to change its foreign tax credit system to a country-by-country arrangement, rather than on a global average basis. They said the current agreement opens the door to abuse of tax havens by allowing companies to structure their tax minimization strategies in a way that transfers profits to tax havens to reduce or eliminate GILTI taxes.
“For example, if a company operates in nine countries, it would have nine GILTI ‘country baskets’, with no aggregation between them. This system would help reduce the transfer of profits and the abuse of tax havens, ”they wrote.
Another change they propose to GILTI is to treat research and administration expenses that actually occur in the United States as “entirely internal expenses, eliminating penalties for foreign tax credits under GILTI and helping to retain these activities in the United States.”
They also propose the repeal of a similar QBAI incentive under the FDII system which, according to them, encourages offshoring. They also suggest replacing FDII’s ‘income considered intangible’ with a new ‘innovation income’ metric, which they say would stimulate national innovation activity.
The lawmakers also argued that the BEAT provisions could be modified “to capture more revenue from companies that erode America’s tax base.” To do so, they propose changes to the BEAT system, including increasing the BEAT rate on payments for erosion of the tax base and increasing the value of tax credits to national companies.
While their proposal is unrelated to President Joe Biden’s idea to raise the corporate tax rate to 28 percent to partially fund his $ 2 trillion infrastructure plan, they said in their framework that the measures “may increase the revenue needed to invest in the United States.
And while it is unclear how corporations will view the Democratic proposals, the Tax Foundation cautions that international tax reforms must be undertaken carefully and with an eye to how they interact with other corporate tax burdens, so as not to undermine their international competitiveness. Trump’s tax reforms “generally improved corporate taxation and the competitiveness of US multinationals,” the organization said.