18 06 2018

DeFazio Tables US Anti-Profit Shifting Bill

US congressman Peter DeFazio (D-OR) has introduced legislation designed to amend the Tax Cuts and Jobs Act so that incentives for US corporations to shift income and production overseas are reduced.

Introducing the bill, DeFazio said: "The new tax law [the Tax Cuts and Jobs Act] allows multinational corporations to reduce their overall tax liability by requiring only a minimum tax on an average of profits earned in both low-tax and high-tax countries, instead of taxing profits earned in different countries separately. This system incentivizes companies to shift earnings abroad in order to bypass US taxes."

The Per-Country Minimum Act, introduced in the House of Representatives on June 6, would require the new regime concerning the taxation of Global Intangible Low-Taxed Income (GILTI) to be applied on a per-country basis, meaning that taxes would be paid based on a per-country basis rather than on a global basis.

The GILTI regime was included in the TCJA to discourage US corporations from shifting high-yielding intangible assets such as intellectual property rights to low-tax jurisdictions. GILTI is defined as the portion of the income of a controlled foreign corporation owned by US shareholders that exceeds a notional 10 percent return - a rate that is intended to reflect the normal rate of return on tangible assets. After a 50 percent deduction, GILTI is subject to an effective corporate tax rate of 10.5 percent, half the regular 21 percent US corporate tax.

Discussing the bill, the Institute on Taxation and Economic Policy (ITEP) said: "Ironically, allowing the foreign tax credit on a worldwide basis may encourage companies to invest in high-tax foreign countries because it would allow them to generate larger foreign tax credits."

"To fix this loophole created by the TCJA, Rep. DeFazio's Per-Country Minimum Act would require that the tax rate on GILTI be applied on a per-country basis," the ITEP said. "In other words, it would not allow foreign tax credits from higher tax countries to reduce taxes on GILTI earned in low- or zero-tax countries. This reform would raise a significant amount of revenue and curtail the incentive to shift profits into tax havens."

The bill also includes provisions that seek to ensure that income generated from intangible assets held offshore are not more favorably taxed than IP held in the United States. Under the proposal, the 50 percent deduction under the GILTI framework would be reduced to 37.5 percent. "While the ideal tax rate on offshore income should be the same as on domestic income, increasing the effective rate on this income from 10.5 percent to 13.125 percent is a step in the right direction[...]." The tax rate on foreign derived intangible income (or FDII) is 13.125 percent.