Proposal Would Increase U.S. Taxes on Corporate Profits Earned Abroad

A plan from Senate Democrats offers the clearest picture yet of the penalties that American companies could be paying for shifting profits abroad. In draft legislation released Wednesday, Senate Finance Committee Chairman Ron Wyden outlines his vision for how to reform the global tax system for multinational corporations. Democrats say these businesses have been subject to lax rules that, for decades, have allowed them to shift profits and jobs outside the United States.

“Overhauling the international tax code is central to our efforts to restore fairness,” Wyden said in a statement on the legislation, which was co-authored by fellow Finance Committee members Sherrod Brown and Mark Warner. Wyden added that increased corporate-tax levies will “fund critical investments like the paid leave and the expanded child tax credit—Social Security for our children” that Democrats are planning.

The proposal is one legislative piece of a $3.5 trillion tax and spending package that Democrats are now crafting to implement the bulk of President Joe Biden’s longer-term economic plans. That process, known as reconciliation, got the green light in House action Tuesday, and is expected to take weeks or months to wrap up.

The Senate Democrats’ international corporate tax proposals don’t yet prescribe specific tax rates, leaving that to lawmakers to fill in as they consider the broader bill. Instead, the newly released plan works within the existing set of principles and regulations governing corporate taxes—a move that could streamline its implementation. The regulations would strengthen penalties for companies that move money and assets offshore to avoid Internal Revenue Service (IRS) levies, while boosting tax benefits for those that conduct research and development (R&D) domestically.

The Biden administration has called for a 28 percent domestic corporate tax  rate and a 21 percent minimum tax on profits earned offshore. Those figures have been subject to some debate, however. Senator Joe Manchin, a West Virginia Democrat, said he doesn’t want a corporate rate higher than 25 percent. Meanwhile, the U.S. is calling for other countries to adopt a 15 percent global minimum—lower than the 21 percent Biden has proposed for U.S. companies when they operate overseas.

The draft legislation, which asks for public feedback by September 3, is the most public piece of the Democrats’ efforts to overhaul the tax system, which so far has been done largely behind closed doors. Along with corporate-tax hikes, Democrats aim to boost levies on wealthy individuals.

The international tax proposals are considered to be one of the most technically challenging aspects of the legislation. They seek to revise many of the changes that Republicans made to the tax code in 2017.

The Wyden-Brown-Warner plan makes significant changes to the current international tax system, while requiring a less extensive rewrite than the Biden administration’s proposals. For example, the tax deduction for foreign-derived intangible income, or FDII, (which changes to “foreign-derived innovation income” in the proposal) would require companies to invest more in R&D and jobs domestically in the U.S. in order to claim the tax break.

Wyden also says that companies should pay more taxes on their offshore profits—what is currently known as global intangible low-taxed income, or GILTI.

Both Biden and Wyden have called for companies to calculate their overseas taxes on a country-by-country basis, a move that will give businesses less room to reduce their bills. But the Senate plan takes a simpler approach—including all high-tax countries in a separate group, avoiding the need for a location-by-location breakdown. Income earned in locations with low tax rates can be grouped together, with the American firm making a payment to the IRS based on that pool.

Writing comprehensive tax rules that encourage large U.S. companies to pay more taxes domestically has been a conundrum for policymakers for decades, as creative tax lawyers have been able to exploit lower tax rates in other countries, including Bermuda and Ireland. More than 130 countries signed onto an agreement earlier this year that seeks to reverse this trend by instating a 15 percent minimum corporate tax rate worldwide. The deal is slated to be finalized at the Group of 20 meeting this October, but it could take years to implement.

There’s a compressed schedule to finish the text-writing in Congress. The budget resolution that advanced through the Senate and House setting up the reconciliation process established a September 15 deadline for committees to finish their work.

Wyden’s counterpart, House Ways and Means Chairman Richard Neal, said he plans to begin considering his version of the tax legislation as soon as September 9, after which the Senate Finance panel could move on its package. The Constitution requires that tax legislation begin in the House.

Copyright 2021 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.