Last week, American voters – and business executives, onshore and abroad – finally got a look at Democratic presidential candidate Joe Biden's thoughts about how he planned to change the way the U.S. taxes cross-border commerce, if he wins the election in November.
Here, Daniel Bunn, vice president of Global Projects at the Washington, DC-based Tax Foundation think tank, reveals certain contradictions and discrepancies he sees in the Biden draft tax plan...
Last week, the Biden for president campaign published a set of proposed changes to the current U.S. cross-border tax regime, designed to promote a "Made in America" agenda.
The package contains several proposals that have a shared goal of increasing taxes on U.S. multinational companies, while attracting new investment to the U.S. – although there is a tension between those goals.
This is because the campaign’s proposals for higher taxes on U.S. businesses, and a targeted tax incentive for investing in the U.S., are likely to undermine – rather than support – a goal of promoting additional domestic investment.
First, the campaign will propose a 10% “Made in America” tax credit for businesses that invest in “revitalizing closed or nearly-closed facilities, re-tooling or expanding facilities, and bringing production or service jobs back to the U.S. and creating U.S. jobs,” according to Bloomberg.
Second, a 10% surtax will apply to services and sales to U.S. customers from a U.S. company’s foreign affiliate.
If a company based in the U.S. has a subsidiary in another country, and that foreign subsidiary sells its products or services to U.S. customers, the 10% surtax would apply.
For a business facing Biden’s proposed 28% corporate tax rate, this additional surtax would result in a 30.8% tax rate.
Third, the plan will include strong rules against U.S. companies moving their headquarters to other jurisdictions for tax purposes.
These so-called “inversions” occur when a foreign affiliate of a U.S. company becomes the parent company; such transactions are often motivated by the different tax treatments on offer in the two countries. Inversions were becoming more common in years leading up to President Trump's 2017 tax reform bill because the U.S. was an outlier, due to its high corporate rate, and its policy of taxing the worldwide profits of U.S. companies.
Fourth, the plan will change the minimum tax policy that the U.S. applies to foreign profits of U.S. companies.
The Global Intangible Low-Tax Income (GILTI) tax rate under the Biden proposal would increase to 21%. Current rules apply a minimum rate of 10.5%, though the effective tax rate on foreign profits can be much higher, and recent regulations provide for profits taxed above 18.9% to be exempt from the minimum tax.
The Biden plan for the minimum tax on foreign income will also change the calculation to a country-by-country minimum tax, rather than the current approach, which allows businesses to blend foreign income that is taxed at a high rate with income that is taxed at lower rates in some circumstances.
The Biden campaign is clearly working off a strategy that will require U.S. companies with foreign affiliates and foreign profits to pay more in taxes.
That fits with the campaign’s approach to taxes on U.S. businesses broadly; Biden has also proposed raising the corporate tax rate from 21% to 28%, and applying a 15% minimum tax, based on profits reported on financial statements.
What the campaign should be asking, though, is how requiring U.S. companies to pay more in taxes will create more jobs in the U.S.
Raising the corporate tax rate, increasing taxes on foreign earnings, and applying a 10% surtax when U.S. companies sell back into the U.S. market – effectively, a broad tariff – all create incentives against new investment, whether in the U.S. or abroad.
With all those new costs to doing business as a U.S. company, a 10% tax credit for investing in the U.S. may not result in a net increase in domestic investment.
The 2017 tax reform (Tax Cuts and Jobs Act), meanwhile, changed the game for U.S. international competitiveness, with a lower corporate tax rate and a system that taxed U.S. businesses on their profits made within the U.S., rather than on all worldwide profits.
Those changes were paired with policies that tax foreign profits at a minimum rate, and generally increase the costs of cross-border tax planning.
Biden's proposed tax changes would reverse many of those positive changes, and create new challenges for U.S. businesses when they're competing with foreign companies, both in the U.S. and in foreign markets.
If the goal of the Biden campaign is to bring new investment and jobs to the U.S., therefore, it is doubtful that these new tax rules will contribute to that goal.
This article was republished with the permission of the Tax Foundation, where it originally appeared on its website. Founded in 1937, the non-profit Tax Foundation is based in Washington, DC, and collects data and publishes research studies on U.S. tax policies, both at the the federal and state levels. Daniel Bunn is vice president of Global Projects for the organization.
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