Multinational companies can expect some extraordinary changes in the US and international tax environment – and this time, it may be much more than an increase in rates.

While higher US tax rates have been proposed to fund the new Biden administration’s COVID and infrastructure priorities, new international tax proposals may lead to surprise tax bills for multinational companies. Most notably, the IRS will tax substantially more income earned in lower tax jurisdictions. President Biden’s new tax strategies complement a global coordinated framework to tax more income from international companies.

How to Pay for COVID Relief and New Infrastructure?

Starting Point – the Domestic Side

First, the Biden Administration has proposed increasing the corporate tax rate from 21% to 28%. However, the 28% rate is subject to Congressional negotiations, and some senators have already raised concerns about such a sharp increase. Proponents note that collections of US corporate taxes are only 1% of US GDP, far less than other developed countries, including Germany (2.1%), the UK (2.6%), Japan (4.1%), Canada (3.8%), South Korea (4.2%), and Australia (5.5%).1 In addition, the Joint Committee on Taxation estimates that US multinational companies pay a 7.8% effective federal tax rate.

The new tax plan also eliminates the Foreign Derived Intangible Income (“FDII”) tax rate of 13.125%, which effectively served as a tax break for profitable US companies selling internationally. The Global Intangible Low-Tax Income (“GILTI”) tax targeting US foreign-owned corporations would be increased from 10.5% to 21%, with even greater restrictions. These programs were designed to incentivize high value-added activities domestically while reducing incentives for investments in low-tax jurisdictions. The Base Erosion and Anti-Abuse Tax (“BEAT”) would also be removed. However, these 2017 Trump tax reform policies were regularly criticized for failing to stem offshore tax-driven investments and generating lower-than-expected tax revenues.

For the largest public companies, the Biden plan would also impose a minimum 15% tax on reported taxable income.

And then a Global Minimum Tax?

The Organization for Economic Co-Operation and Development (“OECD”), United Nations, and many other international organizations have been negotiating over global coordinated plans to tax multinationals. In effect, this framework would reverse recent trends of declining corporate tax rates.

Treasury Secretary Janet Yellen called for a global minimum tax for multinationals in a speech to the Chicago Council of Global Advisors on April 5, 2021. Under the proposal, US companies would pay at least a 21% tax rate on profits earned in every country with foreign operations. The IRS receives the difference between a 21% rate and the low-tax country rate. For example, a US subsidiary in Ireland paying a 12.5% tax rate on €1 million in profits, €125,000, would now pay the IRS the 8.5% difference in tax rates, €85,000 – for a total of €210,000 in tax. In effect, the global minimum tax reduces but does not eliminate incentives for tax-driven strategies.

Secretary Yellen stated, “together, we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations and spurs innovation, growth, and prosperity.”

Foreign-owned US subsidiaries may also see a bigger tax bill – early days, but under a new “Stopping Harmful Inversions and Ending Low-tax Developments” (“SHIELD”) proposal, multinational companies could lose US tax deductions for payments made to low-tax jurisdictions. In essence, this SHIELD would serve as another disincentive to utilize transfer pricing as a tax reduction strategy.

The US has added momentum to a likely sea-change in the international tax environment. Need help navigating? Contact KROST for practical strategies to manage the transfer pricing requirements of the US and countries around the globe.

1OECD (2019), Revenue Statistics 2019, OECD Publishing, Paris