Businesses hate GILTI but may like Democrats’ overhaul plan even less

“It changes the premise and conceptual basis of this scheme which is supposed to try to get the excess profits generated by intangibles into a scheme which only taxes all income,” said Mindy Herzfeld, a tax expert. International at the University of Florida Law School. “They should probably rename it.”

In fact, Democrats say they intend to remove the name GILTI from the law, although lawmakers continue to use the term, at least for now, as it is well known.

The GILTI overhaul is one of the most significant structural changes Democrats are proposing as part of their efforts to raise corporate taxes.

This would bring the American system closer to a purely “global” system in which the profits of multinationals would be subject to tax regardless of where they are earned. It would also help raise billions of dollars in revenue that Democrats want to help cover the cost of a $ 2 trillion infrastructure plan.

But the proposal puts the Biden administration on a collision course with OECD countries as it pushes them to adopt a global minimum tax. Many of these countries wish to focus such a tax on intangible income.

It’s also alarming companies, already unhappy with the Democrats’ plans to raise the corporate tax rate.

“The potential increase in international taxes is as large as any increase in corporate rates, and at least as damaging to the competitiveness of American companies, as it impairs their ability to compete in foreign markets face to face with foreign companies whose countries don’t impose such a tax, ”said Jessica Boulanger, spokesperson for the Business Roundtable.

Republicans created GILTI in their 2017 tax reform as a means of stalking money, large corporations often find themselves in overseas tax havens like Bermuda. Companies had baffled tax authorities for years because they could easily transfer things like patents and the money they generated to offshore subsidiaries located in low-tax jurisdictions.

Addressing the issue was especially important to Republicans because they wanted to move the US system closer to a “territorial” tax system where the IRS would not go after US corporate profits in other countries.

But if businesses could evade U.S. taxes simply by moving overseas, that would give them a big reason to raise the stakes, so lawmakers created GILTI to ensure they paid taxes on their top profits every year. easier to handle.

There was, however, a question on how to do this: it is difficult to define what counts as intangible income.

And Republicans wanted to distinguish between companies that played by the rules and companies that had legitimate reasons for being abroad, such as needing to be near their foreign customers.

So the Republicans came up with a clear, albeit crude standard: If a company made less than 10% profit on its assets abroad, it was assumed to be for legitimate business reasons. But if they earned more than 10%, that money was considered “intangible income” and subject to a GILTI tax rate of 10.5%.

It is still too early to know how well GILTI is performing.

Perhaps the best evidence comes from a recent study by the Official Joint Committee on Taxation, which reviewed a sample of large business tax returns from 2018. JCT says businesses paid an average of 16 percent in taxes on GILTI’s income, 5.5 percent going to the IRS and the rest to other governments.

He also found businesses using tax havens like the Netherlands, Cayman Islands and Singapore.

But this data was so early – in 2018, companies were still trying to figure out how GILTI would operate – that they had little chance of meeting the new rules.

There is anecdotal evidence that GILTI earns more than just intangible income. And despite its 10.5% price tag, some companies claim they end up paying a lot more than that, thanks to a lot of obscure restrictions that come with GILTI.

Democrats would erase the distinction between tangible and intangible income by getting rid of something called QBAI or Qualified Business Asset Investment. This is the mechanism used by Republicans to try to separate intangible income from other income.

The QBAI provision basically says that if you have tangible assets like a factory in a foreign country, the first 10 percent of the profits are exempt from GILTI.

Democrats say this encourages companies to move overseas, so they can capture that 10% savings, although there isn’t much evidence that companies actually do.

Democrats, who say businesses should pay a lot more in taxes, would also make other changes to GILTI, though the administration and congressional lawmakers differ on some details.

They both want to change the way companies calculate their tax bills, with the administration pushing to require companies to calculate them on a country-by-country basis rather than for all of a company’s foreign operations. This would tend to increase their GILTI tax. Senate Democrats are proposing to allow businesses to split their bills between high-tax and low-tax countries.

Democrats also want to raise the GILTI tax rate. Biden would increase it to 21% while pushing the domestic rate to 28%, while Senate Democrats have raised the idea of ​​having the same rate for both.

As for the name, Senate Finance Committee spokesperson Ashley Schapitl said, “The term ‘GILTI’ would be deleted. Senators simply used it to better explain how they would revise the 2017 law ”.

It is not known if Democrats intend to rename the tax.

Republicans say they are getting bigger GILTI to intangible and tangible income would harm companies carrying out legitimate business activities in other countries.

“QBAI is no escape route,” the senator said. Rob portman (R-Ohio) said at a finance committee hearing last month. Procter & Gamble “can’t cost-effectively ship diapers overseas – it just can’t be done.”

The proposals put the business community, which has long complained about GILTI, in the curious position of now having to defend the current iteration of the tax.

“We don’t want to defend this,” one person said on condition of anonymity. “Yet here we are, saying, ‘Hey, leave him alone.'”

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