What a GILTI Increase Really Means for U.S. Businesses
By Catherine Schultz, VP, Tax and Fiscal Policy
As part of the Build Back Better Act, Congress is considering increasing the tax on “global intangible low-taxed income” (GILTI) — the foreign earnings of U.S. headquartered businesses. No other country in the world imposes a foreign minimum tax on its businesses, so the changes would put U.S. businesses — who employ tens of millions of Americans — at a severe disadvantage compared to their foreign competitors in China and Europe, none of whom pay a minimum tax on foreign earnings now and will not for many years, if at all.
It would apply GILTI on a per-country basis, resulting in higher taxes on foreign earnings than under present law and increasing administrative burdens and complexity. It would also only permit a foreign tax credit for 95% of the taxes a company pays in a foreign jurisdiction. The other 5% would be double taxed — that portion of the tax would be paid in the foreign jurisdiction and in the U.S. under GILTI.
Some proponents of the GILTI increase point to an agreement by members of the Organization for Economic Co-Operation and Development (OECD) to adopt a 15% global minimum tax. And while there has indeed been progress in moving toward a global minimum tax, adoption of such a tax by individual countries is complex, difficult and many years away. That matters a great deal for U.S. businesses.
First, let’s look at where we’ve been. In early October, the OECD announced plans to establish a global foreign minimum tax, with 136 countries signing a framework agreement. Under this proposal, “companies headquartered in a country enacting the foreign minimum tax would theoretically be required to pay at least a 15% tax rate on their foreign earnings.” This is similar to the global intangible low-taxed income (GILTI) enacted in the U.S. as part of the 2017 tax reforms.
This would appear to create a more level playing field — but there’s no guarantee that other countries will actually follow through (or when). No country is required under the agreement to enact a minimum tax, nor are there any deadlines to do so. In fact, the OECD’s framework says the adoption of a minimum tax is entirely voluntary. This means that implementing such a tax will take years at best, requiring more than 100 countries to move through their own legislative processes.
Moreover, the OECD agreement would provide full credit for foreign taxes and a more generous deduction for both tangible property and payroll as well as more generous carryovers of both losses and foreign tax credits. As a result, the more restrictive GILTI calculation would mean that GILTI would impose a greater tax burden than under the OECD agreement — making U.S. globally engaged businesses less competitive, whether other countries adopt the OECD agreement or not.
Bottom line? The GILTI provision would erode America’s competitive standing and favor foreign competitors in China and Europe over American businesses and workers. We urge Congress to say “no” to this harmful tax policy.