US congressional research papers prepare lawmakers for international tax debate

By Doug Connolly, MNE Tax

The US Congressional Research Service on August 26–27 published three reports addressing the status of corporate and international tax legislation and reform in anticipation of upcoming debates on corporate tax rates, international tax provisions, and actions related to ongoing OECD international tax talks.

The BEPS report addresses the OECD base erosion and profit shifting (BEPS) minimum standards, ongoing international tax talks, and implications for US tax policy. The 2017 tax law report reviews the changes to the US international tax system introduced by the Republicans’ 2017 tax reform, the impacts on US companies, and Democrats’ proposals to modify the provisions. The trends report looks at the decline in US corporate tax revenue and proposals to address it.

The reports come on the heels of the August 25 release of draft legislation for international tax reform by Senate Finance Committee Chairman Ron Wyden (D-Ore.) and other Senate Democrats.

With the House’s adoption of the budget resolution on August 24, Democrats have cleared a path to approve corporate tax reform through the budget process without needing any Republican votes in the Senate – so long as every Senate Democrat is on board.

However, according to an August 28 Politico report, there are rifts in Democratic support for hiking takes on US multinationals’ foreign earnings – with some members, particularly in the House, hearing complaints from corporations in their districts and voicing concerns about US competitiveness.

The three new reports from the Congressional Research Service highlight many of the issues and concerns underpinning these debates. The Congressional Research Service is a non-partisan agency that assists lawmakers in the legislative process by studying complex policy topics, reviewing different policy proposals, and analyzing potential impacts of changes.

BEPS report

The BEPS report notes that there has been a limited impact on US companies from the BEPS four minimum standards adopted by 139 countries and jurisdictions – i.e., on harmful tax practices, preventing treaty abuse, country-by-country reporting, and dispute resolution. The report states that this is generally the case because the standards were already incorporated in or were not particularly relevant to US tax provisions (e.g., no value-added tax, no patent box). The exception is country-by-country reporting, for which some companies have expressed concerns about confidentiality and compliance costs.

The current proposals on reallocating a share of profits of some large multinationals to source jurisdictions (Pillar 1) and implementing a global minimum tax (Pillar 2) would further impact US multinationals. There are associated concerns, the report notes, about loss of US revenue, particularly with respect to Pillar 1, due to the significance of the US digital economy. However, the report adds, there are potential benefits to US companies of a more uniform approach that would remove potentially more problematic unilateral measures.

The report notes that there are also several areas outside the agreed minimum standards where US law is at variance with OECD standards. It highlights in this respect the “check-the-box” rules, which allow disregarding certain subsidiary entities, resulting in hybrid entities for which interest may be deducted in one country but not taxed in another. In addition, the report states that there are also apparent conflicts with BEPS transfer pricing standards inherent in the US practice on cost-sharing arrangements.

2017 tax law report

The 2017 tax law lowered the US corporate tax rate from 35% to 21% and enacted significant changes to the international tax regime. The report notes that while the law nominally moved the US from a worldwide tax system to a territorial tax system, both systems could be considered hybrids. Whereas the former regime taxed foreign subsidiary income only when repatriated to the US parent, the 2017 tax law exempts such dividends but imposes a worldwide tax on global intangible low-taxed income (GILTI) at a reduced rate.

The report notes that provisions of the 2017 tax law seem to limit profit shifting that might otherwise be expected in a more territorial system. Relevant provisions in this respect include GILTI, through lessening the difference between income on US and foreign intangibles, and the base erosion and anti-abuse tax (BEAT), through restricting interest deductions. The report adds that the 2017 law’s anti-inversion rules also seem to have made such transactions less attractive.

Nonetheless, there have been numerous issues raised regarding the design of GILTI, BEAT, and other international provisions in the 2017 tax law, the report states. Biden and others have released proposals to strengthen the international tax rules, including by making GILTI fully taxable through eliminating associated deductions.

Furthermore, the report notes that some of the 2017 tax law’s provisions may violate various international agreements, including the OECD BEPS minimum standards, bilateral tax treaties, and World Trade Organization agreements.

Trends report

The trends report states that US corporate tax revenues as a share of the economy have declined from 3.9% of GDP in 1965 to 1.0% in 2020. The report notes that this trend is not global. Across OECD countries, tax revenues on average increased from 2.1% to 3.1% of GDP from 1965–2018.

The decline in the US corporate tax revenue is due to several factors, the report concludes, including decreased corporate tax rates and increased profit shifting, as well as shifts such as the increased use of the pass-through organizational form for businesses.

Biden’s corporate tax plan proposed several changes aimed at reversing the trend. These include increasing the corporate tax rate to 28%, increasing the GILTI minimum tax rate, repealing the deduction for foreign-derived intangible income (FDII), further limiting interest expense deductions, and other international tax measures.