In July 2021, over 130 countries agreed to an outline for international tax reform. With proponents championing it as a way to make corporations “pay their fair share,” the deal would change where some large multinational companies pay taxes and institute a global minimum tax.
At the time, the agreement spelled dramatic changes for tax policy. But a year later, the project seems stalled, with countries cautiously waiting for others to make the first move. The U.S. should take this as a warning before making tax changes of their own.
The push toward a global minimum tax deal, in many ways, began in 2017 with the passage of the Tax Cuts and Jobs Act (TCJA), which introduced a first-of-its-kind minimum tax on the foreign earnings of U.S. companies along with strong incentives for investment in the U.S.
These changes came with mixed results: While the 2017 rules under the Trump administration drove more investment and profitable assets to our shores, they made the tax code more opaque and more difficult to administer.
Those policies, along with other changes brought about by foreign jurisdictions, have successfully reversed the trend of U.S. companies keeping profits from some of their most valuable assets and activities outside the reach of the IRS.
Prior to 2017, headlines regularly announced U.S. companies shifting their headquarters to other jurisdictions. It was common for companies to ensure that software, patents, or other intellectual property (IP) landed in the lowest tax location possible.
Much of that intellectual property has now moved back to the U.S. This has expanded the U.S. tax base and helps to justify keeping high-value research and development activities here.
This shift can also be seen in trade data. Rather than U.S. companies providing services from offshore jurisdictions with no corporate taxes, they are now providing many of those services from the U.S.
But the 2017 tax law was far from perfect. A stated goal of the TCJA was to create a simpler tax code. But researchers ranked the complexity of the U.S. corporate tax system 50th out of 69 countries in 2020.
Complexity strains aside, with the Trump-era tax rules in place, other countries wanted a piece of the pie. Unfortunately, the global minimum tax deal negotiated by the Biden administration might give it to them, reversing the 2017 law’s positive trends while magnifying its weaknesses.
To begin, the approach taken by Congress to implement these new rules was premature. The House-passed Build Back Better Act (BBBA) was developed before model guidelines for the global minimum tax were released last December.
Compared to the model rules, the BBBA approach is more burdensome. The U.S. foreign tax credit rules require a mind-numbing amount of calculations across every jurisdiction where a U.S. company has operations. Those regulations recently became more difficult to deal with even in the absence of the BBBA passing the Senate. Rather than pivoting to a purer application of the global minimum tax rules or simplifying any of the U.S. international tax rules, Democrats have continued to double down on the worst parts of our international tax system.
The Biden plan would move the U.S. from having the second bite at the apple for the foreign earnings of U.S. companies to further back in line. The global minimum tax employs several tools, and if a country has a goal of raising revenue or protecting its existing tax base, the correct tools need to be deployed at the right time. The U.S. currently taxes foreign income immediately after a foreign government exercises its right to tax (or, in some cases, does not exercise that right). The BBBA approach exposes domestic profits of U.S. companies to tax liability elsewhere.
This would directly undermine the incentives that have supported increased research investment in the U.S. and led to the reshoring of valuable IP.
The TCJA started a conversation about a different way to tax multinationals, but a year since the landmark global agreement, it is time to reassess if we are heeding TCJA’s lessons.
Adopting the international tax proposals in the BBBA would make a challenging situation worse. The goals of simplicity and competitiveness have, unfortunately, been shoved aside, resulting in increasing the tax and administrative burden on U.S. multinationals and ensuring the U.S. is a less attractive place to invest.
Daniel Bunn, a global tax policy expert, is executive vice president of the Tax Foundation, a nonprofit research organization in Washington, D.C.