By Doug Connolly, Multinational Corporate Taxation
The US Congressional Research Service released three reports on August 26-27 on the state of international and corporate tax law and reform in anticipation of upcoming debates on corporate tax rates, international tax provisions and actions related to the ongoing international tax negotiations of the OECD.
The BEPS report discusses the OECD Minimum Standards on Base Erosion and Profit Shifting (BEPS), ongoing international tax negotiations, and implications for US tax policy. The 2017 Tax Law Report reviews the changes to the U.S. international tax system introduced by the 2017 Republican tax reform, the impacts on U.S. businesses, and the Democrats’ proposals to change the provisions. The Trends Report examines declining corporate tax revenues in the United States and offers solutions to address it.
The reports follow the August 25 release of an international tax reform bill by Senate Finance Committee Chairman Ron Wyden (D-Ore.) And other Senate Democrats.
With the House’s passage of the budget resolution on August 24, Democrats paved the way for passing corporate tax reform through the budget process without the need for Republican votes in the Senate – as long as every Senate Democrat is on board.
However, according to an August 28 report Politics report, there are loopholes in Democratic support for rising foreign earnings by U.S. multinationals – some members, especially in the House, hearing complaints from businesses in their districts and expressing concerns about U.S. competitiveness .
The three new Congressional Research Service reports highlight many of the issues and concerns underlying these debates. The Congressional Research Service is a non-partisan agency that assists lawmakers in the legislative process by studying complex political topics, reviewing different policy proposals, and analyzing the potential impacts of changes.
The BEPS report notes that there has been limited impact on US businesses from the four minimum BEPS standards adopted by 139 countries and jurisdictions – i.e. on harmful tax practices, prevention of treaty abuse, country-by-country reporting and dispute resolution. The report states that this is generally the case because the standards were already incorporated or were not particularly relevant to US tax provisions (eg no value added tax, no patent box). The exception is the country-by-country reporting, for which some companies have expressed concerns about the costs of privacy and compliance.
The current proposals on the reallocation of a share of the profits of certain large multinationals to the jurisdictions of origin (pillar 1) and the implementation of a global minimum tax (pillar 2) would have an additional impact on US multinationals. There are associated concerns, the report notes, about the loss of income in the United States, particularly with regard to Pillar 1, due to the importance of the United States digital economy. However, the report adds, there are potential benefits for US companies from a more uniform approach that would remove potentially more problematic unilateral measures.
The report notes that there are also several areas outside of agreed minimum standards where US law conflicts with OECD standards. In this regard, it highlights the “check-the-box” rules, which allow certain subsidiary entities to be disregarded, resulting in hybrid entities for which interest can be deducted in one country but not taxed in one. other. In addition, the report states that there are also apparent conflicts with the BEPS transfer pricing standards inherent in the US practice of cost-sharing agreements.
Tax law report 2017
The 2017 tax law lowered the corporate tax rate in the United States from 35% to 21% and made significant changes to the international tax system. The report notes that although the law moved the United States from a global tax system to a territorial tax system, the two systems could be seen as hybrids. While the old regime taxed the income of foreign affiliates only when they were repatriated to the US parent company, the 2017 tax law exempts these dividends but imposes a global low-tax intangible income tax (GILTI) at a reduced rate. .
The report notes that the provisions of the 2017 tax law appear to limit the profit shifting that might otherwise be expected in a more territorial system. Relevant provisions in this regard include the GILTI, by reducing the difference between income on US and foreign intangibles, and the Base Erosion Tax and Anti-Abuse Tax (BEAT), by limiting deductions. of interest. The report adds that the anti-reversal rules of the 2017 law also appear to have made such transactions less attractive.
Nonetheless, many questions were raised regarding the design of GILTI, BEAT and other international provisions in the 2017 tax law, the report says. Biden and others have released proposals to strengthen international tax rules, including making GILTI fully taxable by eliminating associated deductions.
In addition, the report notes that some of the provisions of the 2017 tax law may violate various international agreements, including the OECD BEPS Minimum Standards, bilateral tax treaties, and World Trade Organization agreements.
The Trends Report indicates that US corporate tax revenues as a percentage of the economy have increased from 3.9% of GDP in 1965 to 1.0% in 2020. The report notes that this trend is not global. In OECD countries, tax revenues increased on average from 2.1% to 3.1% of GDP between 1965 and 2018.
The decline in corporate tax revenues in the United States is due to several factors, the report concludes, including lower corporate tax rates and increased profit transfers, as well as changes such as increased use of the organizational form of transfer for companies.
Biden’s corporate tax plan proposed several changes aimed at reversing the trend. These include increasing the corporate tax rate to 28%, increasing the GILTI minimum tax rate, repealing the deduction for foreign source intangible income (FDII), further limiting interest expense deductions and other international tax measures.