As a presidential candidate, Joe Biden promised to change the tax code in ways that would penalize "offshoring," or having U.S. companies set up facilities overseas in a way that avoids paying taxes.
Several of Biden's tax proposals on overseas corporate operations have advanced, said Thornton Matheson, a senior fellow at the Urban Institute-Brookings Institution Tax Policy Center.
After taking office, Biden proposed several tax changes that could affect the offshoring, said Thornton Matheson, a senior fellow at the Urban Institute-Brookings Institution Tax Policy Center.
(Warning: We're about to explain the complicated details of international tax policy.)
One change would affect the global intangible low-taxed income, or GILTI. This refers to the income earned by foreign affiliates of U.S. companies that exceeds a 10% return on their tangible assets. Currently, a U.S. corporation must include half of the GILTI income earned by its foreign affiliates in the gross income that is subject to the U.S. corporate income tax. However, it can claim a tax credit for 80% of the foreign tax paid on GILTI.
Notably, under the current rules, a multinational corporation might be able to avoid GILTI taxation by "blending" income earned in low tax-rate countries with income earned in high-tax rate countries, effectively sidestepping much of the tax bite.
Biden's Build Back Better legislation, which has passed the House and is now being considered by the Senate, would change how GILTI operates. It would effectively bar that cross-country "blending" strategy and would increase the effective tax rate on GILTI from 10.5% to 15%.
The second provision that could affect offshoring decisions involves foreign-derived intangible income, or FDII. This refers to U.S. income from the sale of goods and services abroad that exceeds a 10% return on domestic tangible assets.
Currently, U.S. corporations can take a 37.5% deduction from the 21% corporate tax for foreign-derived intangible income, resulting in an effective 13.125% tax rate.
The impact could be mixed, Matheson said. "GILTI reform makes it less advantageous to invest offshore, but it increases the pressure for 'inversion,'" she said. Inversion refers to U.S. corporations being acquired by a foreign entity, with shareholders continuing to own the corporation indirectly through their ownership of the foreign acquirer's shares.
Biden's proposals face a challenging road in the Senate, but they are still alive. We rate this promise In the Works.