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A Starbucks Coffee logo is seen in the center of Dublin, November 16, 2020.
A September 2 article from University of Michigan law professor Reuven Avi-Yonah criticized the Senate Finance Committee’s plan to raise taxes on multinational corporations. This is a major part of the Democrats’ Build Back Better agenda, particularly with other tax measures being cut back. That heightens the importance of international tax reform, both as a revenue-raiser and a way to force large corporations to pay their fair share. It also intersects with the international agreement announced Friday on a 15 percent global minimum corporate tax.
Avi-Yonah argued that the Finance Committee proposal maintained bad aspects of the Trump tax law, which contains loopholes for tax avoidance. The piece triggered a significant debate inside the Senate Finance Committee.
Three members of that committee—chair Ron Wyden (D-OR) and senior members Sherrod Brown (D-OH) and Mark Warner (D-VA)—asked the Prospect for the ability to respond. We granted that and gave Professor Avi-Yonah the ability to offer his own response. That exchange follows.
To the Editors:
We share the same goals as Professor Avi-Yonah—ensure mega-corporations pay their fair share of taxes, and fix our broken international tax system.
Unfortunately, in his September 2nd article, Professor Avi-Yonah is incorrect about a key aspect of the law and our international tax framework; specifically the “high-tax” rules in our country-by-country proposal.
He raises a serious concern—mega-corporations gaming the system—writing that a multinational could “borrow in the U.S., but allocate the interest expense to another country,” and then that company could end up paying “nothing to the U.S.”
This is not how the high-tax rules work. The tax planning he describes is not allowed under current law—you cannot borrow in the U.S. and then get a tax advantage from pretending that debt is foreign to make your tax rate look higher. And we would certainly not allow it in a new system. In this case, he is just wrong about the law.
Here’s where Professor Avi-Yonah gets it right. The Trump administration rules on GILTI were a massive giveaway to big corporations—a proverbial cherry-on-top for mega-corporations following the 2017 Republican tax law.
In fact, Senator Wyden and Senator Brown introduced legislation to close that Trump loophole by reversing those regulations.
That bill was not supported by Senate Republicans, and those awful rules are now law. But we figured out that this corporate giveaway can be turned on its head.
Under our proposal, instead of a giveaway, these rules become a tool to collect hundreds of billions of dollars from big corporations. This is right in line with President Biden’s proposal. That is why we are working with our colleagues in the Senate and House of Representatives, Treasury Secretary Yellen, and President Biden to fix our broken tax code. When we succeed, billionaires and mega-corporations paying their fair share will fund a generational investment in this country. It will be something we can all be proud of.
Senator Ron Wyden (D-OR)
Senator Sherrod Brown (D-OH)
Senator Mark R. Warner (D-VA)
Reuven Avi-Yonah responds:
I appreciate the time Senators Wyden, Brown, and Warner took to respond to my article. In general, we are in agreement. On the one point where they disagree with me, they are technically correct. However, with a minor adjustment the same result can easily be achieved by corporations bent on gaming the system, and therefore I stand by my position that it would be far better if they followed the Biden administration proposal rather than permit the multinationals to game the system.
The Biden proposal is to apply the minimum tax that was enacted in 2017, and that applies to the foreign profits of U.S.-based multinationals separately to each country that the multinational operates in. This prevents corporations from gaming the system by averaging high- and low-tax countries, which creates an incentive to invest in low-tax countries rather than in the U.S.
The Wyden proposal eliminated the country-by-country approach in favor of a high-tax exclusion, so that profits in a country where the tax rate equals or exceeds the minimum U.S. tax rate (currently 10.5 percent, proposed to be 21 percent) are exempt. The problem with this system is that it can be manipulated by allocating deductions to the income from a low-tax country so that it will appear to be high-tax (because the foreign country will apply its low tax rate to a broader base than what the U.S. sees).
The technical error in my article was that I showed allocating U.S. deductions to the foreign country to achieve this spurious high-tax effect. I was wrong because it is not possible to allocate U.S. deductions to foreign income to achieve a spurious high-tax result. But substantively the same result can be achieved by allocating foreign deductions that are only recognized by the U.S. and not by the foreign country. So again the foreign country will appear to be high-tax while in fact it is not. At that point, it is easy to shift income from both the U.S. and from a low-tax foreign country to the spuriously high-tax country—and pay no U.S. tax on either the U.S. income or the low-tax foreign income.
None of this manipulation can be done under the Biden proposal, because there are no exemptions: All the foreign income is subject to the same minimum tax. This is more consistent with the U.S. practice from 1913 to 2017 of taxing all the income of U.S. persons “from whatever source derived” (U.S. Constitution, 16th Amendment), with no exemptions.
Exemptions from U.S. tax for foreign income were one of the pernicious innovations of the Trump tax law. Wyden et al. want to keep it, while Biden wants to eliminate it.
