Democrats have promised a revamp of the current international tax system to ensure that large multinational corporations pay their “fair share,” stop offshoring jobs, and are incentivized to invest in domestic growth. The international tax overhaul would also partially finance an infrastructure bill. The Biden administration has proposed the $2.3 trillion American Jobs Plan. House and Senate Democrats are working on their own infrastructure proposals as well.
Both the Biden administration and the Democratic members of the Senate Finance Committee (SFC) have unveiled proposals for international tax reform. On April 5, SFC Chair Ron Wyden (D-OR), as well as Sens. Sherrod Brown (D-OH) and Mark Warner (D-VA), released an international tax framework (SFC Framework) as a starting point to discussions on revamping the current system put in place by the 2017 Tax Cuts and Jobs Act. The Biden administration’s Treasury Department followed a couple of days later, releasing more details on the Made in America Tax Plan (MATP) on April 7, which was first mentioned as part of the American Jobs Act (AJP) on March 31. Treasury Secretary Janet Yellen subsequently released an op-ed in The Wall Street Journal on April 8, with more details on a global minimum tax, a key proposal in the MATP. Currently, neither the Biden administration nor the SFC has provided any legislative language, but the proposals have included a number of important details.
Below are three key takeaways from the two proposals:
- Same Starting Point But Different Policy Solutions. Both the SFC Framework and the MATP seek to address the same issues. Democrats believe that the current U.S. international tax system has resulted in more incentives for companies to offshore operations, putting domestic companies at a comparative disadvantage. Both proposals note the need to balance two priorities: (1) maintaining U.S. competitiveness and (2) protecting the corporate tax base. However, the SFC Framework and MATP have major differences on how to achieve this result. On the international tax front, the SFC Framework makes changes to the existing global intangible low-taxed income (GILTI) regime, the foreign-derived intangible income (FDII) tax, and the base erosion and anti-abuse tax (BEAT). It stops short of repealing these provisions in their entirety and replacing them with a new system. Unlike the SFC Framework, with the exception of its approach to GILTI, the MATP is a complete overhaul of the current system. The MATP would repeal the FDII, replacing it with a foreign-derived innovation income system and it repeals the BEAT, replacing it with the SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments) regime.
Most multinational companies are likely to prefer the SFC Framework’s approach.
- Are Wyden and Biden Colliding? Major differences between the SFC Framework and MATP suggest that there is little to no coordination between the administration and the Senate’s tax writing committee. This has resulted in two very different approaches to overhauling the international tax system and no details from the SFC on domestic corporate tax reform.
However, after the release of the MATP, Wyden came out in support of the administration’s global minimum tax of 21% on companies exceeding $20 billion in revenue annually. The Organization for Economic Cooperation and Development (OECD) was previously considering a 12.5% rate. For Wyden, this could ensure that U.S. corporations “pay their fair share” at home, without becoming uncompetitive globally. Additionally, a global minimum tax could eliminate the need for digital service taxes imposed by some foreign governments, targeting large American technology companies. Of course, the ability to sell this in the U.S. may depend on whether Treasury Secretary Janet Yellen can win broad international support for a global minimum tax in OECD negotiations.
Wyden has not released a statement on other pieces of the MATP. However, international tax scholar and current Treasury Department Deputy Assistant Secretary Kimberly Clausing has an established working relationship with Wyden. Clausing was a professor of economics at Reed College in Portland, Oregon, for over 20 years and has often advised Wyden in an informal capacity in the past.
- Bye-Bye Bipartisanship. While Senate Democrats might be applauding the MATP, Republicans have released critiques. In an April 8 letter to Yellen, House Ways and Means GOP members wrote, “[w]e are concerned that the OECD changes could directly reduce U.S. tax revenues and also leave the door open to other countries’ continued attacks on U.S. companies and our domestic tax base.” They also questioned whether other countries might enact minimum taxes at rates lower than the current GILTI effective rate, let alone the MATP’s higher GILTI rate. This would place American workers and companies at a competitive disadvantage versus their foreign peers.
If the administration and Senate Democrats continue to use international and domestic corporate tax reform to pay for infrastructure spending, reconciliation will be the only way to enact legislation, making bipartisan overtures largely symbolic.
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