Read the article “How Ron Wyden Wants to Weaken Taxes on Multinationals”
The amount of tax paid is determined by the foreign country, but in order to determine whether the foreign rate equals the GILTI rate, it is necessary to define the tax base (tax rate = tax paid/tax base). And the base is open to manipulation.
For example, suppose a U.S. multinational earns $100 million of income in the U.S. with a tax rate of 28%, $100 million in Country A with a tax rate of 15%, and $100 million in Country B with a tax rate of zero. The GILTI rate is set by the U.S. at 21%.
Before tax planning, the result would be that the multinational would pay $28 million to the U.S. on U.S. income. On Country A income, it would pay $15 million to Country A and another $6 million to the U.S. because the GILTI rate of 21% is higher than the Country A rate (21 - 15 = 6). On Country B income, which is all GILTI with no foreign tax, it would pay $21 million to the U.S. The total tax is $70 million (28 + 6 + 21 = $55 million to the U.S. and $15 million to Country A).
Now, however, the multinational reduces its tax base in Country A, for example, by borrowing in the U.S. and allocating some of the interest expense to the Country A income. Suppose the amount of interest allocated to Country A (which Country A does not see or recognize for tax purposes) is $30 million. The result would be that the Country A rate for GILTI purposes would be not 15% but 15/70, which is 21.4%. Since this is above the 21% GILTI rate, the Country A income becomes exempt under the Wyden proposal.
At this point, the multinational can shift $100 million of income from the U.S. to Country A and also $100 million of income from Country B to Country A. This is easy to do, and just requires allocating more deductions to Country A to keep the tax rate above 21%.
The end result is that instead of paying $70 million, the multinational pays $45 million, all to Country A. Its U.S. tax bill is zero.
