The U.S. and other countries are moving forward on increasing tax rates on multinational corporations, with the Biden administration and G-20 leaders agreeing on the need for more revenue.
Earlier this month, G-20 leaders agreed on a plan to impose a minimum tax rate of 15% on corporations and to keep companies from shifting their profits to low-tax countries. New data released Thursday by the Organization for Economic Cooperation and Development indicated that multinational corporations have continued to shift their profits to other countries despite record low tax rates (
“There have been lots of discussions about these issues about where and how profits should be taxed and what are the minimum rates over the last two to three years,” said Rob Mander, global head of tax at RSM International. “Over the last three months, we’ve had a real acceleration of bringing the issues and parties together. At a high level, there have been a few things that have done that. There’s a new administration in the U.S. The second thing is there’s a recognition that at some stage, a global solution is going to be better than a series of regional solutions. Then the third and final thing is as there’s a recognition of the increasing need for tax revenues going through the next stage of the pandemic, this is something that has application to more than just the digital part of our economy.”
Proposed changes from the Biden administration would reverse some of the provisions of the Tax Cuts and Jobs Act of 2017, increasing the 21% corporate tax rate that was supposed to be permanently set by the TCJA and overhauling some of the international tax provisions introduced by the TCJA known as GILTI (global intangible low-taxed income) and FDII (foreign-derived intangible income). That could upend the careful tax planning that companies have been doing with their clients after passage of the TCJA.
“Doubling the GILTI is not going to be viewed as an overly positive development for those who are subject to the rate,” said James Alex, a principal at RSM who formerly worked at the Treasury Department during the Trump administration. “The one thing that I think isn’t talked about a lot is the burden that is going to come from this change. The change that came with the TCJA was enormous.”
Major changes in store for the U.S.?
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After passage of the TCJA, the Treasury Department and the IRS needed to spend the next few years developing regulations to implement the various provisions of the 2017 tax overhaul. Accounting firms then had to put those far-reaching policies into practice for their corporate clients.
“It was an enormous burden on our clients to be in alignment from first a modeling perspective and then a planning perspective and then with compliance from all the changes that came from TCJA,” said Alex. “FDII, for example, is a terrifically complicated provision that requires enormous recordkeeping, yet our clients got it done. We worked with a lot of our clients to do that, and that consumed a lot of their focus and a lot of our focus. And now all of a sudden to have an election happen and for President Biden to come in, which he’s certainly entitled to do, to say we’re going to make changes to everything that just took three or four years for Treasury to get the guidance out, three or four years for clients to plan, understand, implement, and finally get a tax return, which is not an easy thing to do. It seems like a simple matter, but you ultimately have to get out a return.”
Clients may take a dim view of all the changes in their tax plans they will need to do all over again. “I think there’s a surprise factor and I think there’s also a fatigue factor with regard to the change,” said Alex. “There are certainly clients who feel this is a good thing and ultimately to have the balance, but you’ve got to question. Some will look at it and say that means my rate may be going up, or it may not. But then we have to go back in again and start over with regard to some significant provisions in the international space, and I don’t think that’s discussed. That’s something we’re picking up from our clients. Whether you think it’s good tax policy or not, one could debate.”
He recalled when he was a state tax official in West Virginia and met with a group of business leaders and asked what they should do to foster growth. Their main request was not to change the state Tax Code. They just wanted reliability for the next few years in tax policy.
Changing landscape
While the infrastructure plan at least seems to be making progress, the shape of the tax provisions in the larger budget bill remain uncertain. “It just seems like such a changing landscape every day on Capitol Hill,” said Bill Smith, managing director of CBIZ MHM’s National Tax Office, in an interview last week. “You have an announced bipartisan agreement on spending, and then we heard from some of the staffers on Ways and Means that the next step was to determine how much of that they need to raise. Then there’s a third step: if they agree on that amount, how they’re going to do it. What tax law changes will be implemented?”
One of the offsets to help pay for the increased social spending was supposed to be increasing the IRS’s enforcement budget to pull in more tax revenue and close the tax gap, but that has provoked fierce opposition from Republicans. Democrats will need to use a budget reconciliation strategy to pass the trillions of dollars in new spending with only their votes, but they will need all 50 Democrats to agree, and already some are balking at so much spending.
“Then you have the potential elimination of the funding increase to the IRS, which was going to be a huge pay-for if they got the bill through,” said Smith. “Everything is in such flux right now, and it’s such a razor-thin margin. Even if they go with reconciliation, there’s no guarantee they will get all 50 Democrats. The Green Book issued by the Treasury put some meat on the Biden’s administration’s bare-bones plans, but I think of that at this point as sort of a wish list because it’s going to be so difficult to get anything enacted.”
The prospects for getting all the Democrats to agree on the reconciliation package are uncertain as the package is still taking shape. “With respect to passing certain components like the GILTI components, we’ve seen other bills with similar provisions,” said Brent Felten, a partner in the Crowe LLP tax services group. “We’ve seen a framework provided by Senator [Ron] Wyden that has some similar elements. The likelihood of passage of some of those elements are higher than maybe some of the others. As far as passing the way it’s written, it’s hard to say. We have a 50-50 Senate. You have the reconciliation process, so there’s a lot of horse trading and negotiation that has to happen. I would say that what we get is probably going to be markedly different from what has been proposed to date, but at least we have a directional signal for the administration, and there have also been several Democratic bills that have been introduced that indicate the same direction.”
Global minimum taxes
The latest moves by both the Biden administration and the OECD toward a global minimum corporate tax rate are just one element of a wider reaction against the overall lowering of rates. “Since 2000 there has been a seemingly unspoken consensus pushing corporate tax down within a range between 10% to 30% as a means to encourage economic activity,” said RSM's Mander. “That consensus has decisively changed, and higher tax rates, particularly for the largest global businesses, are inevitable. The question is, ‘Why now’? The pandemic is a big part of the answer. Governments have rightly supported businesses through the pandemic, but it has left them with debt and a growing sense that businesses need to repay society. There has also been a resurgence in cross-border collaboration and transparency between governments to find global solutions to previously national problems.”
The OECD’s international tax reform discussions on base erosion and profit-shifting were underway long before the Biden administration added new momentum this year with its proposal for a global minimum tax rate. “That was actually an idea that came out of the BEPS movement, Pillar 2 in particular,” said Crowe's Felten. “You had the action plans and then a couple of pillars. We’re just catching on in the United States, but it’s been an issue for a number of years already in the international community. There seems to be some consensus around a 15% rate right now.”
The OECD timeline may seem ambitious, but Mander believes the proposals may be ratified and introduced within three years. “There are still many questions to answer, and a number of compromises that will need to be made,” he said. “Without doubt the global tax system needs to be updated for the modern age and these proposals have the potential to make tax fairer, levelling the playing field between global multinationals and middle-market businesses. But the success of any tax policy is in the details, not just the big ideas. While it is the world’s 100 largest firms which are the focus of these early discussions, we must ensure the rules work for middle-market businesses who are at the heart of the global economy.”
Advocates for raising corporate tax rates are hoping the OECD and the G-20 will go even further in their negotiations. “To some degree, the devil is in the details,” said Eric LeCompte, executive director of Jubilee USA Network, a coalition of more than 750 religious groups and organizations. “We don’t really have a final plan yet, but the commitments that we have are very important. The plan calls for a minimum global corporate tax of at least 15%. That’s where negotiations are starting. Certainly we don’t believe that’s going to be enough, but it’s a good start, and we’re really hoping that with continuing negotiations, we’re able to get above 20% for a global minimum corporate tax. The other piece, which I think is a very important part of the discussions, is around digital companies being taxed if they operate in your territory. Right now with the global corporate minimum tax, if the plan fully moves forward as endorsed by the G-7, the G-20, and what the OECD has been working on, it certainly means that it will likely raise revenue in wealthy countries and in G-20 countries, but for developing countries at this point there’s not a lot of benefit. There can be from negotiations, but where developing countries in particular can see a lot of benefit from the negotiations and from agreements that are moving forward, is around taxing digital companies if they’re operating in your country. That’s a very important piece that’s also historic. It’s looking at the question of how it can be possible for developing countries in particular to raise higher revenues.”
Countries that are benefiting from offering the lowest tax rates would need to sign off on the plans before all the proposals for a global minimum tax rate could work.
“A big part of moving forward is trying to get the entire world on board,” said LeCompte. “At this point [over] 130 countries have endorsed the OECD working proposal on these tax issues, but we have a number of countries big and small that have not signed on or endorsed it yet. In addition to that, you also have countries like Ireland who are generally supportive that don’t want to see any kind of common tax rate that’s above 15%. For Ireland, the way that they’re doing their taxation, they’re taxing well below 15%. So going up is a concern for how they’ve built to some degree their financial system and also domiciled various corporations there. The commitment in itself is historic, but we’re still a ways from getting it done. The only way that any global taxation policy can work is if every country in the world commits or is a part of it. ... It’s the most progress we’ve made so far, but there is a lot more to do in terms of getting the details right.”
As for the U.S., it’s difficult for accountants to advise their clients on exactly what tax planning they should do until it’s clearer what the final legislation from Congress actually says, if it’s even passed, before they start worrying about the global tax discussions taking place abroad.
“What we are advising clients is to do some modeling that is not too tied to any one thing, but in a directional nature,” said Felten. “Rather than recommending tax planning, I would say ‘posturing for tax planning’ because you really want to understand what the impacts could be and what your pain points are and maybe what your options are. But I don’t think you want to start down the path of any of those options because the landscape could change dramatically between now and the time it enters into law.”
