1. How would the global minimum tax work?
Biden would put a 21% levy on the profits U.S. companies earn in each country where they operate abroad. That compares with as little as 10.5% to 13% that companies pay on their foreign earnings now, but is less than the 28% rate Biden wants to apply to domestic profits. Significantly, Biden’s plan would block companies from blending the rate they pay across all foreign jurisdictions — meaning they would pay the full 21% even on profits in low-tax countries. The plan would also eliminate a rule that allows U.S. companies to pay zero taxes on the first 10% of earnings when they locate investments in foreign countries.
2. What problem is this supposed to fix?
Multinational enterprises have long used creative methods to shrink their tax bills. One is to book profits on customer sales in places like Boston and Berlin as if they came from, say, Bermuda, which has no corporate income tax. U.S. tax law makes profit-shifting particularly lucrative because companies owe less taxes on their overseas earnings. While reducing the U.S. corporate tax rate to 21% from 35% starting in 2018, the Trump administration implemented a mix of carrots and sticks in a bid to push companies to bring home about $3 trillion in untaxed profits held overseas. Biden is looking to scrap much of Trump’s system for a minimum tax that applies worldwide.
3. What are the current rules?
The 2017 tax law included several international tax provisions that overhauled how multinational companies paid taxes. There was a levy on global intangible low-taxed income, or GILTI, which taxes profits made in many foreign countries; a base erosion and anti-abuse tax (BEAT), aimed at preventing global companies from shifting profits abroad; and a deduction for foreign derived intangible income, or FDII, that was designed to encourage American companies to produce more in the U.S. Biden says Trump’s revamp failed to erase incentives for companies to move offshore and didn’t provide enough reasons for companies to move jobs and assets back to the U.S.
4. Could companies find ways around the minimum taxes?
So far, Biden’s proposal doesn’t include enough details to assess that. If corporations end up owing much more in taxes under the Biden plan, some of them could seek to move abroad. Corporate inversions had been a popular strategy to move a tax domicile offshore, but those are now very difficult with updated Treasury Department rules. Companies could also become targets for takeovers by foreign firms, which would allow them to avoid many U.S taxes.
The lower rate on offshore earnings, compared with the 28% corporate tax rate Biden wants to apply to profits in the U.S., is an acknowledgment that companies also owe taxes in the jurisdictions where they operate. Biden is also hoping that other countries will adopt global minimum tax rules. The U.S. is involved in negotiations led by the Organization for Economic Cooperation and Development with 140 countries to develop a global agreement on minimum levies and taxing rights. Countries haven’t yet agreed on a minimum rate for the global deal.
6. How much more tax revenue could this bring the U.S.?
Over 10 years, the global minimum tax could raise about $442.1 billion, according to estimates from the Urban-Brookings Tax Policy Center. The Biden administration is counting on 15 years of revenue from this and the other corporate-tax changes to fund its proposed $2.25 trillion infrastructure package. The 28% corporate rate would raise an additional $727.3 billion over a decade, and Biden’s proposal to update regulations to make it harder for multinationals to avoid U.S. taxes could raise another $85.8 billion in that time period.
7. What do other countries do?
Like the U.S., most countries tax the income of multinational corporations within their borders and try to keep companies from abusing the use of offshore income. But few go as far as the U.S. does in taxing the foreign operations of their domestic companies. For example, the European Union has rules for taxing the income of European multinationals’ foreign subsidiaries, aimed at preventing tax avoidance, but they apply only in limited situations. The OECD wants to make sure a multinational meets at least a minimum rate in every country where it pays tax. The OECD rules would apply to the effective tax rate a company pays in each country, rather than on its globally blended rate. The Biden proposal would move the U.S. rules into line with the OECD’s per-country approach, so paying high tax in one country couldn’t offset a low rate in another.