As the debate begins over President Biden’s corporate tax increases, the temptation will be to focus on the headline tax rates. Those rates are bad enough, but worse lurks in the details. For one important example, dive into Mr. Biden’s plan for taxing U.S. companies’ global profits.
We’re talking about the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. American multinationals were previously charged the full U.S. corporate tax rate on their global profits, but only when they repatriated their foreign earnings. That created a strong incentive to park foreign profits overseas. Gilti taxes many foreign profits as they arise, but at half the top domestic rate. That less punitive approach allowed more companies to return overseas cash to the U.S.
Gilti was flawed from the start and needs fine-tuning, but Mr. Biden would make it worse in every respect. Start with the rate. The 2017 tax law set the statutory Gilti rate at half the regular corporate rate, so Gilti now is 10.5%. Mr. Biden would increase that to 21%, three-quarters of the 28% rate he proposes for companies overall.
That’s the statutory rate, though, and the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. Before the 2017 reform, companies could claim a credit of 100% of foreign tax paid against their U.S. tax bill, and also could carry losses forward or back. Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs.
This means today’s effective Gilti rate is at least 13.125%, so any U.S. company paying less than that percentage of profits in foreign taxes will owe Treasury a Gilti payment. Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe, and that’s before those countries apply deductions and exemptions.
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