Potential Base Erosion ProposalsThe framework for tax reform released by the “Big Six” includes “rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.” This passage suggests that the eventual tax reform plan may include some sort of “global minimum tax”—an anti-avoidance measure under which all or targeted types of income of U.S. multinational corporations are taxed at a rate no lower than a designated floor rate. Although some have expressed concerns about such a plan, a global minimum tax represents a potential middle-ground between worldwide and territorial taxation systems, and has garnered some bipartisan support over the years. October 25, 2017
Such protection could take a number of forms, including specific anti-avoidance measures or anti-deferral measures. The current Subpart F regime is itself a species of such protection. Recent discussions of a reform focused on variations on a so-called “global minimum tax.”
In 2011, the Obama Administration’s budget proposal included a modification of Subpart F income (offshore income that is subject to current U.S. tax) to include excess earnings on intangibles in low tax jurisdictions. In 2014, then-House Ways and Means Committee Chair Dave Camp (R-Mich.) similarly proposed in his “Tax Reform Act of 2014”, three different plans—so-called Option A, Option B, and Option C (the last, also referred to as the “round-tripping” rules)—for taxing offshore intangible income. Playing off the name of the Camp Options, an industry group released an “Option D”, which would provide a dividends received deduction from foreign corporations that decreases as the foreign tax rate on such income decreases.
In considering the type of measure the tax reform might eventually adopt, it is helpful to examine these past proposals. The following chart compares and contrasts the salient features of the different proposals that have been offered:
The two following graphs compare the tax rates of the different plans. Note that these graphs assume a U.S. corporate tax rate of 25%, and that the different proposals do not all tax the same income base (as shown in the preceding table), so the graphs are not at all times a perfect apples-to-apples comparison. In the first graph, we have shown how the U.S. tax rate changes as the foreign effective tax rate increases:
In the next graph, we compare for each plan how the total effective tax rate (the sum of the U.S. tax rate and the foreign effective tax rate) changes as the foreign effective tax rate increases:
It is still unclear what form any base erosion/global minimum tax provisions might take in a future tax reform proposal. But the above analysis should serve as a helpful primer for what has been discussed in the past.