A report from the Penn Wharton Budget Model found that recently proposed federal tax reforms would increase corporate income tax rates.
A new proposal from the House Ways and Means Committee aims to increase the corporate tax rate if they fail to meet the minimum tax. Tuesday’s report found that if the reforms proposed by the House Ways and Means Committee go into effect, it will triple the effective U.S. tax rate on the foreign income of multinationals from around 2.1 percent to 7.4%, on average by industries with foreign income. This rate is higher than a proposal by the Organization for Economic Co-operation and Development, an international organization that creates economic policy, which would force American multinationals to pay a residual tax rate of 6.1%.
The report conducted its analysis by examining the effect of tax rates on the foreign income of U.S. multinationals under the changes proposed by the House Ways and Means Committee and the Organization for Economic Co-operation and Development.
The 2017 Tax Cuts and Jobs Act changed the way multinational corporations are taxed by allowing multinational corporations to pay taxes only in the territory from which the income was generated, according to the director Penn Wharton Budget Model Policy Analysis Associate Alex Arnon.
According to Arnon, if it is implemented by himself, “the territorial device” which results from this policy can pose a problem.
“[The territorial system] creates its own set of bad incentives, because now ideally what you want to do if you’re a US corporation is that all of your income is technically earned in a foreign country with a very low tax rate, ”he said. said Arnon. “So all you really have to do is pay the very low tax rate to a foreign country – it could be Bermuda, or, say, the Cayman Islands – not a country where you really make money.” money, but you can make it show up there through various financial mechanisms.
To avoid these tax avoidance problems, Arnon explained, the United States has also implemented a minimum tax system, in which there is a minimum tax that a company must pay abroad in order for taxes to be paid. are exempt. If this minimum tax is not met, the United States will tax the income at a rate lower than the statutory rate. This led to an effective tax rate on foreign income of around 2.1%.
“It created a mixed system where, if you earn income and pay a lot of foreign taxes on it, you don’t have to pay US taxes on it. But, if you earn foreign income and don’t pay foreign tax on that, the United States is going to tell you you have to pay something, ”Arnon said.
This is not the first time that the PWBM has addressed the issue of taxation on foreign income. In July 2021, PWBM wrote an article on the effect of the OECD plan on profit shifting. According to the report, the future competitiveness of US multinational companies depends on whether other OECD countries have also increased their tax rates.
To make these predictions on taxation, PWBM imagines itself in the shoes of multinational corporations, according to Arnon.
“We are trying to examine – given what we know about multinational corporations’ sources of revenue and the tax systems they currently face – how would these changes affect them? Said Arnon.