Recent discussions of a global minimum tax may lead many to believe that there is just one proposal being discussed for the world. That is not the case.
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 had previously been discussed at the international level. In fact, if other countries implement a policy as was outlined last year, 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 G7 agreement for a 15 percent global minimum tax and the blueprint from the Organisation for Economic Co-operation and Development that preceded it.
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 G7 agreement and an OECD blueprint released last October.
*First, the tax rate differs. Current U.S. law requires businesses to pay taxes on GILTI; the tax rates vary according to how much in foreign taxes a company owes. Rates could be as low as 10.5-13.125 percent but can be substantially higher because of U.S. foreign tax credit and expense allocation rules.
President Biden is proposing a tax rate on foreign earnings of 21 percent, which could result in an effective rate of 26.25 percent or higher due to foreign tax credit and expense allocation rules.
As the G7 agreed recently, the rate of the global minimum tax could be 15 percent.
*Second is the treatment of tangible assets. Companies have foreign assets like factories and distribution centers for various reasons. Sometimes they need to produce their products close to their consumers or they need to locate near natural resources.
Biden is proposing eliminating a 10 percent deduction for those tangible assets, essentially increasing the tax costs of a U.S. company that might want to enter a new market and reach more foreign customers. The 10 percent deduction was meant to exclude a normal rate of return on assets from GILTI.
The global minimum tax blueprint from the OECD would include an exclusion for a normal return on foreign tangible assets, although it did not specify how large that deduction would be.
*Third is the treatment of payroll costs. Biden is not proposing a deduction for foreign payroll costs, but the OECD blueprint included a proportion of payroll expenses that could be deducted. This is like the exclusion for a normal return on tangible assets but extended to payroll costs.
*Fourth is the treatment of losses. It is generally good tax policy to allow businesses to deduct losses against profits. This avoids a volatile income tax bill for companies and recognizes the costly start-up phase for new ventures.
Biden is not proposing any loss carryforwards in his minimum tax approach. This contrasts with the OECD blueprint, which envisions loss offsets being available.
*Fifth is the treatment of foreign taxes. Current U.S. law limits credits for foreign taxes to 80 percent of their value when calculating taxes owed on GILTI. This means that the nominal tax rate on GILTI can be 13.125 percent or higher. Biden has not proposed changing the 80 percent limitation on foreign tax credits, so the tax rate on GILTI could be 26.25 percent or higher if companies are exposed to high foreign taxes.
Current GILTI policy also prevents companies carrying excess foreign tax credits into future years. This creates volatility in GILTI liability if a company has a large foreign tax burden in one year but cannot use extra tax credits to offset GILTI liability in future years.
The OECD blueprint envisioned full creditability for foreign income taxes and the possibility of using excess tax credits in future years to smooth out tax liability over time.
*The sixth element for comparing the two approaches shows the one place that there is commonality. Biden has proposed calculating GILTI for each country where a company operates. This would represent a significant change from current GILTI policy, which allows companies to blend their foreign income into one pool before calculating additional U.S. tax liability.
However, the country-level calculation is in line with the OECD’s jurisdictional approach, which was discussed in the blueprint.
*A seventh element is whether a revenue threshold applies. In current law GILTI and in Biden’s proposal, there is no revenue threshold that applies before a company might have to calculate extra U.S. tax liability. However, the OECD blueprint suggested using a revenue threshold like €750 million (US $893 million) to target the global minimum tax at the largest companies.
*An eighth way to compare the two approaches is in how they define income that is subject to tax. GILTI is a part of the U.S. Internal Revenue Code and applies to a definition of foreign income defined by Congress. However, the OECD blueprint suggests defining income based on financial statements, like those reported to shareholders of public companies. This would likely be done at the level of the corporate group, taking into account the financials of the global entity.
The OECD recommends making several adjustments to financial profits, but there would be significant reliance on financial accounting rules rather than statutory tax law when defining income.
Eight Ways to Compare Biden’s GILTI Proposals and the Global Minimum Tax Outline
||President Biden’s Proposed Minimum Tax for U.S. Companies
||Global Minimum Tax Outline
||21% (could be 26.25% or higher depending on exposure to foreign taxes and distortions for expense deductions).
||15% (G7 agreement
|Exclusion for a Normal Return on Tangible Assets
||No (would repeal an existing 10% deduction
||Yes (OECD blueprint
|Exclusion for a Normal Return on Payroll Costs
||Yes (OECD blueprint
||Yes (OECD blueprint
|Foreign Tax Treatment
||Credit for 80% of foreign taxes paid, no carryover for excess credits
||Full credit and carryover of excess to future years (OECD blueprint
||Country-by-country (OECD blueprint
||€750 million (OECD blueprint
||Foreign taxable income as defined in the Internal Revenue Code
||Financial profits as defined by accounting standards and adjusted to align closer to taxable profits
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.
The Biden proposals for changing GILTI are significant as are the discussions of a global minimum tax. However, comparing the policy outlines shows that Biden is proposing a more burdensome set of tax rules for U.S. multinationals than has been discussed at the OECD.
If the Biden approach on GILTI is adopted while the rest of the world takes a lighter form of a global minimum tax, that will have significant ramifications for U.S. businesses, making them less competitive against their foreign peers.
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.