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Sen. Ron Wyden (D-OR) has said he wants to make life easier for multinational corporations.
Multinationals evade a lot of U.S. taxes by taking advantage of loopholes that allow them to book profits in tax havens and otherwise avoid taxation. A recent estimate has put the revenue lost to the U.S. from such profit-shifting before the 2017 Trump tax law at $100 billion per year. Trump’s tax changes only made this worse, because they actually encouraged multinationals to shift not just profits, but actual jobs, offshore.
The Biden administration came out with a proposed reform in March that would reverse the Trump changes and add other significant improvements. Now, Sen. Ron Wyden of Oregon, the chair of the Senate Finance Committee, is out with a proposal much weaker than the administration’s.
Last April, I wrote in these pages about Wyden’s initial proposal. Last week, Wyden unveiled further details of his plan. This time, he enlisted Sens. Sherrod Brown of Ohio and Mark Warner of Virginia as co-sponsors. Unfortunately, it is clear that between April and August the lobbyists for corporate America have succeeded in making the Wyden proposal even worse.
The biggest difference between the administration proposal and Wyden’s is that the administration jettisons most of the 2017 Trump tax law. The Wyden proposal, on the other hand, keeps most of the Trump tax provisions, such as the Foreign-Derived Intangible Income (FDII) regime, which is an unjustified export subsidy for large multinationals, and the Base Erosion and Anti-Abuse Tax (BEAT), a completely ineffective and loophole-ridden provision.
According to Sen. Wyden, these provisions should be retained because they make life easier for the multinationals (“making taxpayer compliance and administration simpler,” as his release puts it). But is it the role of Democrats to make life easier for large multinationals? The Biden administration proposal eliminates both Trump inventions, FDII and BEAT.
Even on the most important revenue-raiser derived from the Trump tax law, a minimum tax device called the Global Intangible Low-Taxed Income (GILTI) rule, there are crucial differences between the administration proposal and the Wyden proposal. GILTI is intended to tax the offshore profits of American multinationals, but under the Trump tax law only profits that exceeded a fixed 10 percent return on physical assets are taxed. This created a strong incentive to move factories and jobs overseas. Both the administration proposal and the Wyden proposal eliminate this exemption. But there is still a crucial difference between them.
It is clear that between April and August the lobbyists for corporate America have succeeded in making the Wyden proposal even worse.
The administration proposal taxes all GILTI income at a 21 percent rate with no exemptions. The Wyden proposal, on the other hand, does not specify a rate, but only imposes tax if the foreign tax is below the GILTI rate. If the foreign tax is at or above the GILTI rate, then the income remains exempt even when repatriated, just as under the Trump tax law.
In principle, since the multinational has to pay tax either to the foreign country or to the U.S., there is no incentive to shift profits offshore. But with clever tax planning, a multinational can manipulate where expenses and profits are booked for purposes of evading the GILTI 21 percent rate, and pay at the lower foreign rate. For instance, a multinational could borrow in the U.S., but allocate the interest expense to another country. Under Wyden’s bill, the company could end up paying all taxes owed, at a lower rate, to a foreign country and nothing to the U.S. (For readers who want a more technical discussion, here are some additional details.) Under the administration proposal, such shenanigans are not possible because the foreign country tax rate does not matter and there are no exempt amounts under GILTI.
The idea of excluding income subject to high foreign tax from the GILTI floor comes directly from the corporate lobbyists who persuaded the Trump Treasury in 2019–2020 to adopt such an exclusion even though it had no basis in the statutory text (as the Wyden proposal states, it applies GILTI “through a high-tax exclusion modeled on regulations issued by the Treasury Department in 2019 and 2020”). Presumably, the reason for doing so is that the multinationals are concerned that the Biden Treasury may reverse this regulatory giveaway and therefore are seeking to enshrine it in the tax law. But why should Democratic senators go along?
A seat on the Finance Committee is a major political plum because it attracts so many corporate campaign contributions. It is a pity that in this case the contributors seem to have gotten what they paid for. Progressive Democrats like Sens. Warren and Whitehouse, who are also on Finance, should tell their chair to go back to the Biden administration proposal.
