Trillions at Stake: Behind the Numbers at Play in U.S. International Corporate Tax Reform

Congress Must Curb Corporate Profit Shifting Without Delay

This is the first in a two-part blog series about U.S. international tax reform occurring alongside negotiations under the Organization for Economic Cooperation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) to create a two-pillar solution to address the digitalization of the economy and to create a global minimum corporate tax.

Decisions being made by the U.S. Congress in the coming days and weeks about how the U.S. should reform its international corporate tax system will have big consequences for U.S. government revenues and for America’s workers and families. Among other needed U.S. international tax reforms, it is imperative that the U.S. prioritize (a) fixing the global intangible low-taxed income (GILTI) tax so that it more properly encourages investment in the United States and discourages profit-shifting and destructive climate practices, and (b) reforming the base erosion and anti-abuse tax (the BEAT) so that it more effectively deters all base-eroding payments and deductions. The Build Back Better Act (BBBA) does a good job of furthering some of these priorities; it currently falls short on others.

Follow the Numbers

$70 to $100 billion a year. That is how much profit-shifting by multinational companies costs the U.S. government each year. Over a ten-year budget window, that is equal to near $1 trillion dollars. How much did President Biden’s proposed international tax reforms raise? $1 trillion—a commensurate solution for a drastic problem occurring in real time. How much does the BBBA currently raise from international tax reform? Around $300 billion. More can and should be done to combat profit shifting. Here are some other key numbers to keep in mind:

25%. Perversely, under current law, U.S. multinationals get a multitude of tax benefits for investing and earning profits offshore. That includes a 50% deduction against foreign profits under GILTI. Under even the GOP’s 2017 Tax Cuts and Jobs Act, this deduction lowered to 37.5% following 2025.  Currently, the BBBA simply accelerates this reduction to 37.5%. Oddly, this potentially increases the tax incentive to offshore investment, production and jobs compared even to the GOP TCJA under the BBBA, as is evidenced by the below table.[1]

Current Law (from TCJA)Current Law After 2025 (from TCJA)Current BBBA DraftPresident Biden’s Plan (with 26.5% corporate rate)
Domestic profit tax rate21.0%21.0%26.5%26.5%
Offshoring Deduction (Under GILTI)50.0%37.5%37.5%25.0%
Foreign profit (GILTI) tax rate10.500%13.125%16.563%19.875%

What is truly odd, though, is that there should ever be a subsidy under U.S. tax for earning profits offshore. By the way, the GILTI offshoring deduction is in addition to an exemption for an amount of foreign profits equal to 10% of offshore investment (called QBAI) that the BBBA lowers to 5% and that provides yet another subsidy for moving factories and call centers offshore. Counterarguments that foreign investment spurs domestic growth may be valid in limited circumstances, but there are more direct and less expensive ways to spur domestic growth.

By reducing the deduction for offshore profits under GILTI to no more than 25%, as proposed by President Biden, we would at least mitigate this undesirable incentive and instead more clearly encourage investment and job creation here. That is, for a corporate tax rate of 26.5% on domestic profits, the GILTI rate on foreign profits should be at least equal to 19.875%.  Stricter anti-inversion rules proposed by the President complement these changes to reduce the risk of U.S. companies trying to change their paper-addresses to avoid paying their fair share, and should also be adopted.

$150 billion. That is the amount that could be raised by decreasing the deduction for offshoring under GILTI to no more than 25% and it is nearly double the amount the BBBA currently raises through GILTI changes. This revenue can also help to quell any concerns about BBBA  “costs,” and if these concerns result in limiting the Child Tax Credit or other key BBBA climate or infrastructure investments, that is how much it will cost America’s working families to keep the GILTI deduction for offshoring at 37.5% instead of lowering it to 25%. This reform is a progressive way to raise additional revenue for an already progressive package to grow a more sustainable economy.  

$50-86 billon. That is the size of the subsidy currently provided to large oil companies that are currently entirely exempted from GILTI taxation and that benefit from murky rules that allow foreign taxpayers to treat foreign government payments in exchange for a direct economic benefit as creditable foreign taxes. The BBBA rightly removes these climate-destructive subsidies.

Last place. Currently, the GILTI tax applies based on aggregate offshore profits and tax burdens, allowing income earned in jurisdictions with even higher taxes than the U.S. to generate tax credits that can offset GILTI tax due in tax-havens and create an overall lower tax burden. Based purely on tax policy, this places the U.S. in last place for desirability of investment (admittedly: an ordinal; not a number), and it greatly encourages increased profit-shifting. The BBBA fixes this problem by applying GILTI (and related foreign tax credits and attributes) on a country-by-country (CbC) basis. To be compliant with the OECD two-pillar solution—the subject of my next blog—CbC application of the GILTI is also required.

0. That’s the number of justifiable policy reasons there are for encouraging payments and deductions by multinational companies meant to erode the U.S. tax base. The TCJA’s BEAT had several key flaws, but among these was the failure to stop base-eroding payments via inflated COGS. Not surprisingly, COGS have increased since 2017. The BBBA commendably expands the BEAT to address COGS. Any final BEAT reform should also address the currently weak disincentive for base-erosion payments and deductions and more closely align with U.S. goals in the OECD process. For example, as in the discussion draft put forward by Senators Wyden, Warner, and Brown, the BEAT rate for base-eroding payments or deductions should be higher, and would ideally line up with the GILTI rate or the minimum OECD rate (which might include moving the BBBA proposed 15% rate to taxable years starting after 2021). Similarly, the removal of the exception for low base-erosion taxpayers in the BBBA should also be accelerated, and the U.S. should substantially lower the gross-receipt threshold to advance similar priorities during OECD negotiations.

Competition, Timing, Electivity, and the OECD Process

Opponents of international tax reform have used a series of unconvincing and unsubstantiated arguments to try to derail progress. These concerns avoid three fundamental truths: U.S. multinationals are competitive today, will be competitive with these reforms, and should bear a fair share of the investments in the BBBA that directly benefit them.  

What type of competition are we talking about? FACT Coalition member, Oxfam, has previously pointed out that concerns around competitiveness for these reforms are really only about the competitiveness of U.S. multinationals in making offshore investments.[2] This is in contrast to the decision by U.S. multinationals to invest in the U.S. or offshore. A larger deduction for offshoring in GILTI (and, thus a lower GILTI rate) incentivizes investment offshore. Reducing the GILTI deduction to 25% and employing a GILTI rate of 19.875% under the BBBA actually encourages investment in the U.S.

More than Twice as Competitive. Under GILTI today, U.S. multinationals pay taxes on foreign profits at a rate of close to 10.5%. In contrast, foreign multinationals might pay a 0% rate on foreign profits. Based purely on tax rates, that’s a 10.5% advantage for foreign multinationals. The OECD deal is about creating a global minimum tax to increase the rate that foreign multinationals pay on foreign profits to at least 15%. With the OECD Deal, a 19.875% GILTI rate would only be 4.125% more than the global minimum rate of at least 15%. Compared to the 10.5% differential in place today, U.S. multinationals are more than twice as competitive from a tax perspective with an OECD deal and reduced 25% GILTI deduction. 

Skating By, Regardless. U.S. multinationals currently face an effective tax rate of less than 8%–less than half of our top trading partners or foreign investment destinations per JCT statistics (and less than half the average working taxpayer).  That is true even though the U.S. has the only global minimum tax.

Country-by-country Effective Tax Rates of Large US Multinational Corporations

CountryEffective Tax Rate
United States8%16%17%
Top 10 US trading partners18%19%20%
Top 10 destinations of US foreign investment19%19%20%
Top 10 tax havens4%4%5%
All other foreign countries16%19%23%
All countries (incl. USA)9%14%15%

Even with all of President Biden’s over $1 trillion in international tax reform proposals (including a GILTI rate of 21%, a domestic rate of 28% and a more comprehensive base-erosion regime), U.S. multinationals would remain competitive based on tax costs with their foreign multinational counterparts. The modest proposals here will not be serious problems for our large, profitable friends.

More important than a tax rate comparison, though, is the competitive advantage enjoyed as a result of being a U.S. company. Historic (and current) debt and equity capital market dominance in the U.S.—including pre TCJA —show that U.S. multinationals enjoy a competitive advantage in capital costs that is not likely to be interrupted by a more appropriate GILTI rate. Empirical evidence also supports that an amenable environment for the largest, most profitable businesses is buttressed by investments like those contemplated in the BBBA and related Bipartisan Infrastructure Framework (H.R. 3684).  It seems more than fair to ask multinationals to pay their fair share of the investments that will maintain their competitive advantage regardless of the outcome of any OECD negotiations.

Facing these difficult facts, multinationals have now sought to protect surging profits by raising concerns around the timing and elective nature of the OECD process. These too are hollow arguments.

We Should Lead the OECD. There is little chance that U.S. multinationals would face competitive harm due to the timing of the OECD process. But whether the OECD agreement proceeds in October and a minimum global rate as low as 15 percent is adopted, or whether the OECD negotiations entirely fail, per the above, the competitiveness concerns of U.S. multinationals are being blown out of proportion. So, where is the concern here? A gap year or two between U.S. reform and OECD reform cannot be a problem if U.S. multinationals will remain competitive even without a global agreement (they will). Any gap year also won’t fundamentally change long-term capital allocation decisions.

In contrast, there are serious risks for not implementing U.S. international tax reform now. Profit shifting is a $1 trillion dollar problem today. At the same time, climate change is accelerating faster than anticipated, our national infrastructure is crumbling, and persistent inequities are undermining our workforce and faith in our governance. These are real issues for U.S. multinationals and, well, everyone else, and BBBA investments funded by shutting down profit-shifting can help to address these challenges today. In 2023, the political opportunity to make needed international tax reforms and the investments contemplated by the BBBA may have slipped away. The U.S. should lead with reforms it wants to see implemented by the OECD and not wait to follow.

Electivity, Schmelectivity. Just as with timing considerations, the elective nature of the OECD negotiations really only matters if U.S. multinationals would be uncompetitive in the event the OECD agreement were not finalized. That is, the worst-case scenario around an elective process is that it would be the same as if no agreement were finalized. As competitiveness concerns are overblown, it is difficult to see why the elective nature of implementation should be problematic.

Nonetheless, concerns around the elective nature of OECD implementation are particularly confusing given that the U.S. has already adopted a global minimum tax that is the basis for the OECD negotiations. This is not a debate to adopt a global minimum tax in the U.S.—the GOP already did that in 2017. Rather, the reforms prioritized by this blog are meant to improve the U.S. system that is already in place. The design of these provisions is such that they don’t really require other jurisdictions to have similar regimes; though, they can create pressure on other countries to adopt similar regimes or needlessly lose revenue (such as through an improved BEAT). So, who cares if other countries don’t act in their own interest to elect into similar regimes?

If an OECD agreement is finalized, though, there is good reason to believe that the very countries with whom we compete for corporate headquarters will elect to implement compliant taxes. Indeed, the Pillar 2 global minimum corporate tax is specifically designed to protect the tax bases of wealthy countries that host corporate headquarters. There is power in numbers, and our relatively high-tax trading partners should want to protect their corporate tax base because it likely funds investment in the factors that attract long-term corporate investment.  This explains why these countries have invested so much in the OECD negotiations, and are likely to implement any final OECD agreement.

In part two of this two-part blog series, I will provide more insight into where the OECD process stands as it heads into a critical October, as well as whether a more sustainable OECD approach might specifically address some of the ways that the OECD deal currently favors wealthier nations.

[1] The FACT Coalition has also presented a similar table relying on effective tax rate analysis, taking into account foreign tax credit limitations under GILTI, including as modified by the BBBA. This analysis remains relevant; however, by converting the GILTI to apply on a country-by-country basis (which must be prioritized, per the below), this absolute comparison is particularly helpful given that low-tax jurisdictions (or tax-havens) should not run into foreign tax credit limitation issues under GILTI.

[2] For more nuanced concerns regarding merger & acquisition activity or inversion-risk, the analysis in this blog regarding the competitive advantage provided by U.S. debt and equity capital markets (as well as low effective tax rates) generally also addresses these issues. Further, stricter anti-inversion rules referenced in this article can act as a back-stop to inversion concerns.