Senate Finance Committee’s International Taxation Overhaul

The Senate Finance Committee released an article last week highlighting changes they plan to make to the current international taxation system. These changes will be made in an effort to begin rewarding companies that invest in the United States and its workers, and slow the incentives to doing business overseas. The article addresses some faults the administration has found with former President Trump’s 2017 tax law, and the changes the law made to the U.S. international tax system. The team at Evolution Tax and Legal is breaking down the Senate Finance Committee article and explaining the implications this will have for American companies in the future.

The article proposed changes to multiple areas of the international taxation system, which are outlined below.

GILTI

The global intangible low-taxed income system (GILTI) implemented in 2017 was aimed to provide tax breaks for corporations, but ultimately led to an increase in offshore jobs and tax-havens for U.S. businesses. To reform this policy, the committee suggests ending the incentive to offshore factories. Repealing this policy would end multinational corporations’ ability to earn tax-free income by putting large, tangible assets abroad. This reform would incentivise companies to continue doing business in the U.S., and increase jobs and national earnings. 

The committee proposes increasing the GILTI rate, which is currently set at just half the corporate tax rate. The low GILTI rat incentivises multinational corporations to earn income abroad, so by increasing this rate the gap will shift between multinational corporate earnings and corporate earnings on businesses operating solely in the U.S. Democratic proposals are still being determined about whether the GILTI rate should be equal to the corporate tax rate, but prior proposals suggest it being anywhere from 60 to 100 percent of the rate, with President Biden suggesting it be 75% of our current corporate tax rate. 

Moving GILTI to a country by country system is another proposal in the article, which aims to reduce corporations shifting dollars to tax havens in order to avoid paying U.S. taxes. The current GILTI tax rate depends on how much a corporation is paying in taxes to countries it is operating out of, through the foreign tax credit system. This allows each corporation to participate in tax avoidance planning structures, wherein for every dollar of high-tax income earned in legitimate business dealings – for example in countries like Japan and Germany – a corporation will have low-tax income stashed away in intangible tax havens. By shifting GILTI to a country-by-country basis, aggregates to be created to determine how much low-tax and high-tax income a corporation is paying to various countries. Systems propose to navigate this change include a “basket” system where every country a corporation operates out of is included in the aggregate, or a divided system where GILTI only applies to low-income countries, so if a corporation is paying a tax rate to a country that is above the GILTI rate, the operations in this country would be excluded from GILTI altogether. 

The last change to GILTI proposed in the article would be increasing incentives to onshore research and management jobs. This would allow expenses for research and management occurring in the U.S. to be treated entirely as a domestic expense, eliminating any foregin tax credit penalties a multinational corporation might face, and encouraging these programs to continue in the U.S. 

FDII

The current system for foregin-derived international income (FDII) in the U.S. provides a preferential tax rate for certain income of a U.S. corporation, and as a matching pair with GILTI, so it contributes to one issue: incentivizing offshore factories. Removing this incentive involves changing the current determination of FDII benefits. The current calculation involves tangible assets like factories and buildings, and corporations with more overseas assets receive a greater benefit. By repealing this incentive, corporations will be encouraged to grow their U.S. footprint, as opposed to moving abroad. 

Another proposal is to allow the government to provide the FDII benefit to companies that are consistently investing in the U.S. By rewarding not just based on profits, the government can encourage innovation and growth by rewarding companies who are investing in U.S. based innovation to help grow our economy and strengthen the workforce. This would involve shifting the current FDII “intangible income” to be entitled “innovation income” and it would include U.S.-based research, development, and worker training in the determination of benefits. 

The final proposed change to FDII is to equalize the FDII and GILTI rates. With the current GILTI rate lying 3.5% below the current FDII rate, this incentivises offshoring income. Whatever the final rates, the committee encourages equalizing these two rates to reduce the incentives to moving income abroad.

BEAT

The base erosion and anti-abuse tax (BEAT) was initially created to target base eroding activities. But, in partnership with other laws passed around the same time in 2017, it began to hurt U.S. investment instead of targeting erosion of the economy. By changing this system, the committee aims to promote activities such as investment in low-income housing, renewable energy, and low-income neighborhood job creating, while targeting companies who are eroding the U.S. tax base. The proposal to provide full value to domestic business tax credits aims to address these issues by restoring tax credits that support investment and opportunity in the U.S. to their full value. This will repeal the BEATs undercutting of these investments, and continue driving investment to important needs and underserved regions. 

The final proposal in regards to BEAT involves bringing it back to its true purpose: targeting base erosion. The proposal aims to put the burden of BEAT where it was originally intended to be, on corporations that are stripping the U.S. tax rate. Regular taxable income will be subject to the regular 10 percent rate, while base erosion payments should be subjected to an increased rate.

Conclusion

The Senate Financial Committee aims to repeal many of the rulings put in place under former President Trump’s 2017 tax law, and put the focus back on American businesses. By overhauling these international tax procedures, corporations who have been failing to provide their fair tax payments to contribute to the U.S. economy will face what they owe and this money can be put into rotation to contribute to the economic recovery post-pandemic. Furthermore, these proposals put the focus back on American workers and aim to reward companies who are continually working and investing in the United States. 
The team at Evolution Tax and Legal is uniquely qualified to help you with your international tax plans and payments. Being dually certified in both accounting and law allows us not only to understand the numbers, but understand the policy and intricacies behind current international tax law. If you need help navigating the world of international tax, contact the team at Evolution Tax and Legal today.