US multinationals tax payments halved, investment and revenues boosted following 2017 tax overhaul, JCT report finds

By Doug Connolly, MNE Tax

US MNEs paid substantially lower corporate taxes following the 2017 Tax Cut and Jobs Act, both domestically and globally, a March 19 report from the US congressional Joint Committee on Taxation concludes. The report also reveals an increase in investment, revenues, and employment following the latest tax code overhaul. Profits, however, continue to be disproportionately reported in low-tax jurisdictions where US MNEs derive limited revenue and have limited assets.

The study report, titled “U.S. International Tax Policy: Overview and Analysis,” was prepared in advance of a Senate Finance Committee hearing scheduled for March 25. Also, this week, Senator Ron Wyden, D-Ore., chairman of the Finance Committee, is expected to unveil a new proposal to overhaul multinational corporate taxes.

In addition to the new statistics derived from the first year of tax filings post-TCJA, the report provides a detailed background on the current US international tax rules with a focus on TCJA-enacted provisions. It also reviews the US implications of the OECD “BEPS 2.0” project and economic literature addressing cross-border taxation.

Corporate US taxes paid dropped by half

The report looks at 2018 tax data – the first full year post-enactment of the TCJA – compared with 2017 (the TCJA was enacted at the end of 2017). The average tax rate paid in the US by US MNEs halved to 7.8% in 2018 from 16.0% in 2017. Similarly, the worldwide rate of taxes paid by US MNEs was roughly cut in half, from 15.8% to 8.8%.

The TCJA lowered the statutory US corporate tax rate from 35% to 21%. The tax rates paid by US MNEs in the EU and the US’s other top trading partners, which were not affected by the TCJA, did not significantly change between 2017 and 2018.

The data on tax rates paid by US MNEs were collected from their 2017 and 2018 Forms 8975, Country by Country Report, which is required to be filed by US MNEs with revenues in excess of $850 million.

More profits reported in low-tax jurisdictions, more employment in high-tax jurisdictions

The foreign countries where US MNEs reported the most revenues did not change significantly between 2017 and 2018 for either related or unrelated party revenues. Topping the lists were several European countries – including the UK, Ireland, Germany, the Netherlands, and Switzerland – as well as Canada, China, and Singapore.

Several of the top-reported countries for revenues also made the list of countries for most reported net profits. However, several low-tax jurisdictions also rose to the top of the reported profits list, including Bermuda, the Cayman Islands, and Luxembourg – states with cash average tax rates of 2.4%, 0.3%, and 1.3%, respectively.

Meanwhile, some relatively high-tax top trading partners, like Germany with a 22.0% average tax rate, were notably absent from the list of countries where US MNEs reported most profits.

The list of countries where US MNEs reported the most tangible assets largely mirrored the revenue lists, with some additional countries (Australia and Mexico) taking top spots.

The list of countries where US MNEs reported the most employees skewed towards relatively high tax jurisdictions, including India (34.3%–40.3% average tax rate), Mexico (29.7%–30.4%) and China (24.2%–21.4%).

Revenues, profits, investment, employment increase

US MNEs reported increases in revenues within the United States from 2017 to 2018 – an 8.1% increase in unrelated revenue and a 10.5% increase in related revenue. They reported even greater increases in foreign revenue (13.4% and 14.1%). Meanwhile, profits shot up by 34% within the US year-to-year and by 53% abroad.

Notably, the increase in revenues and profits was coupled with an increase in tangible assets within the US (a 6.4% increase) but not as much abroad (0.5% increase). However, over the same period, US MNEs increased their foreign employees 13.8% while increasing their US employees only 3.0%.

GILTI and FDII

The report looks at the effects of selected TCJA international tax provisions, including GILTI, FDII, and BEAT.

Certain foreign-source income of a controlled foreign corporation is taxed in the year earned under the global intangible low-taxed income (GILTI) provisions, which were intended, in part, to prevent base erosion and to raise tax revenue.

Analyzing a sample of US corporate tax data, the JCT found the average foreign tax rate on GILTI to be at least 10.4%. After foreign tax credits, it found a residual US tax rate on GILTI of 5.5%. Together, the data shows a combined tax rate of approximately 16% on GILTI.

In addition to being taxed at preferential rates on GILTI, US MNEs are also subject to tax at preferential rates on foreign-derived intangible income (FDII). The preferential rate is applied through the allowance of a deduction equal to 37.5% of the MNE’s FDII.

Like the GILTI provisions, the FDII provisions were intended, in part, to encourage MNEs to locate more intangible income (and associated activity) in the US.

GILTI and FDII deduction reporting were both uncommon for corporations in 2018. Out of 6.4 million corporate taxpayers, only 6,325 and 6,198 taxpayers reported GILTI and FDII deductions, respectively. About half of the taxpayers reporting GILTI or FDII deductions had assets less than $50 million.

BEAT

The TCJA also enacted the base erosion and anti-abuse tax (BEAT), which operates as an additional minimum tax applicable to certain MNEs with respect to payments to foreign affiliates. The tax only applies to taxpayers with average gross receipts in excess of $500 million.

The data show that the total BEAT liability for 2018 was approximately $70 million. A total of 479 corporations reported liability for the BEAT. Due to the income threshold, the BEAT disproportionally affected larger taxpayers; 42% of taxpayers reporting BEAT liability had assets in excess of $1 billion.