The Tax Cuts and Jobs Act of 2017 included international tax provisions whose rules turned out to be burdensome for multinational companies, even though they saved through lower tax rates.
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The TCJA included a number of new international tax provisions with acronyms like GILTI (global intangible low-taxed income), BEAT (base erosion and anti-abuse tax) and FDII (foreign-derived intangible income). Republicans speeded passage of the far-reaching tax reform law through Congress in 2017 without support from Democrats, and the IRS and the Treasury needed to hash out the detailed regulations and guidance after it was signed into law. The legislation lowered the maximum corporate tax rate from 35 to 21 percent, but it also sought to close off incentives for companies to locate their tax addresses abroad through corporate inversions or to shift jobs and intellectual property overseas to countries with the lowest tax rates. The Biden administration has proposed far-reaching changes in these rules.
For the report, the GAO interviewed tax executives at several U.S.-based multinationals and found that some companies reported making specific changes, such as moving their intellectual property back to the U.S. in response to a new deduction for income earned from certain foreign-derived sales of property or services attributed to assets located in the U.S. However, in some cases the TCJA had the opposite effect and companies responded by moving profits abroad. “Preliminary studies on another provision taxing net income earned by foreign subsidiaries exceeding a specified threshold of certain assets hypothesized that this provision could encourage moving tangible property outside the U.S.,” said the report. “Other business representatives emphasized the importance of nontax factors in business planning decisions, such as entering foreign markets where executives believe potential customers may be located.”
The Treasury and the IRS proposed eight regulations and finalized six of them to implement four international provisions of TCJA between December 2017 and October 2020 and used guidance to supplement the regulations, the report noted. While they generally complied with the legal requirements for issuing regulations and offered public comment opportunities for some guidance, the Treasury and the IRS didn’t fully address expectations set in governmentwide guidance related to paperwork burden estimates under the Paperwork Reduction Act of 1995, economic analysis requirements for regulations, and public comment on significant guidance.
The GAO made three recommendations in the report, suggesting the Treasury and the IRS should develop more specific paperwork burden estimates for future TCJA regulations; quantify the anticipated benefits and costs of their regulations; and identify find to get public comment for significant guidance when appropriate. The Treasury and the IRS generally agreed with the goals of the GAO recommendations but pointed to the challenges in meeting them. GAO believes the recommendations are valid.
The TCJA included much more than international tax provisions, and the Treasury and the IRS had to produce a great many more tax regulations and pieces of guidance than the ones mentioned in the GAO report. “One of the most significant efforts since passage of the TCJA has been Treasury and IRS’s development of the regulations and guidance necessary to effectively implement the new law,” said Mark Mazur, deputy assistant secretary for tax policy at the Treasury, in response to the report. “This effort has included 65 proposed regulations and 59 final regulations. It has also included 90 guidance documents published in the Internal Revenue Bulletin.”
He argued that the Treasury and the IRS have been taking the requirements of the Paperwork Reduction Act seriously and it has been using econometric models since 2014 to estimate the burden on business entities, including tax planning, recordkeeping and filing activities. But it is difficult for the IRS to distinguish between the burdens imposed by its regulations as opposed to the original law like the TCJA. “In most cases, it is not practicable, or even possible, for the IRS to reliably estimate the incremental burden, if any, created by a regulation separately from the governing statute and related information collection,” Mazur wrote. “Both statute-driven and regulation-driven compliance burdens are included in the IRS’s holistic approach to burden estimation.”
