There is no free money to be obtained by changing the taxation of US multinational corporations
Every administration comes to power claiming that there is a huge pot of money that can easily be raised by changing the way we tax the international operations of US multinational corporations. However, this is a pipe dream, and the Biden administration’s rudimentary and contradictory plans to change the way we tax foreign-source income would likely generate little revenue and do nothing to create jobs in the United States.
The way the United States taxes the income of American companies doing business abroad has been controversial for some time. Until the passage of the Tax Cuts and Jobs Act in 2017, the United States taxed foreign-source income globally, which meant that a domestic company that operated abroad paid taxes to the US rate rather than national rate. Hardly any other country has a territorial regime.
The rationale for a global tax regime was that Congress did not want a multinational company with operations around the world to have a tax incentive to produce elsewhere. However, it forced American companies competing in foreign markets to pay a higher effective tax rate than its competitors in the market.
For example, if Caterpillar, a company with significant operations in my hometown, sold tractors in Spain before 2018, it would be subject to the US corporate tax rate of 39% (including state and local taxes) on its profits, which was the highest in the OECD, while its non-US competitors in Spain were only subject to the Spanish corporate tax rate of 25%. This difference was one of the main reasons that many American companies, after completing a merger with a company based abroad, relocated so that their head office for tax purposes was outside the United States. , a procedure called business reversal.
The prevalence of corporate reversals, combined with a high corporate tax rate and the ability of U.S. corporations to defer their tax obligations on foreign source income until those profits are repatriated, means that the Treasury has raised relatively little money from the foreign operations of US companies.
The tax code and the law on employment have tried to solve these problems. He not only lowered the federal tax rate to 21%, but also moved the tax code from a global tax system to a territorial one, which helped put American businesses on an equal footing when ‘they do business abroad.
This is a good thing, because overseas sales by American companies can create a lot of jobs in the United States, even if what is sold is not made in the United States. For example, Caterpillar tends to produce low-margin equipment close to the market in which it sells, but its complex high-margin tractors are mostly made in the United States. Its presence in the market through the sale of its low-margin products is driving global demand for its high-margin equipment, she says. But even when it produces and sells both products overseas, it still creates jobs in the United States: most of its logistical, marketing, and technical support is still done domestically, for example.
The much lower corporate tax rate – well within the average for OECD countries – has also reduced incentives for business reversals.
Another issue the TCJA addressed was the practice of US companies transferring their intellectual property overseas so that the income they earn is taxed at a lower rate. US multinationals have large tax departments that strive to distribute profits among various jurisdictions through the transfer of intellectual property or debt to minimize global tax obligations, which usually meant reducing US tax obligations first and foremost.
The TCJA’s inclusion of a low-tax intangible global income, or GILTI, has targeted this practice by imposing an effective tax of between 10% and 13% on what it considers âabove normalâ returns.
However, it’s not clear that GILTI – or the global hybrid-territorial tax system – will stay in place. The recently released “Green Paper” which details the Biden administration’s revenue proposals for fiscal 2022 proposes to “revise the global minimum tax regime,” which many have interpreted as a doubling of GILTI.
However, that is not what he is proposing. Rather, it calls for the resumption of a global tax regime of the type that was in place before 2018 and the imposition of a minimum tax on profits abroad – or, to be precise, on EBITDA. . If a business does not pay enough taxes in a foreign jurisdiction, it will owe taxes in the United States. The proposal is concomitant with the recent G-7 agreement to establish some sort of minimum tax on multinational companies.
Unfortunately, there is no reason to believe that this will end up generating more tax revenue for the United States or creating more economic activity domestically either.
The main motivation for France and other developed European countries to adopt some kind of global minimum tax is that they want to tax the income of Facebook, Apple, Amazon, Netflix and Google, the FAANG.
These US-based multinationals – with a combined market capitalization of nearly $ 7 trillion – are all domiciled in the United States and also have most of their employment in the United States. This is also where they currently pay most of their taxes.
Europe would like to change that. France’s attempt to implement a digital tax regime was only suspended at the last moment by the G7 tax deal, although it is not clear whether the United States – or any of the other countries – will follow through on vague promises agreed at meetings.
But if the United States follows through on both the Biden Green Book’s proposals and the G7 agreement, the United States will once again put its multinationals at a competitive disadvantage when operating abroad and sacrifice US corporate tax revenues to European countries without getting much in return.
The corporate tax is not a very good tax: it discourages capital investment which in turn reduces productivity, production and wages. It’s also not as gradual as most people think it is, and it’s devastatingly expensive for businesses to comply.
French philosopher Jean-Baptiste Colbert once said that taxation is the art of plucking goose feathers in order to get the most feathers with the least hissing noise. Corporate tax, along with all taxes on capital investments, produces a lot of whistles for relatively few feathers.
The TCJA has accomplished a heroic feat in reducing the corporate tax rate and making it more difficult for multinational corporations to evade it. While it may have reduced income, there is evidence that it has also boosted economic growth and domestic investment.
Going back to a global tax regime and imposing an onerous minimum corporate tax in place of GILTI wouldn’t generate much additional revenue for the US Treasury, but it will undoubtedly reduce economic growth.