Biden’s Country-by-Country Tax Canard His idea for taxing overseas profits is too much even for Europe.
https://www.wsj.com/articles/bidens-country-by-country-tax-canard-11618528445?mod=opinion_lead_pos1
We’re spelunking our way through the Biden Administration’s corporate-tax plan so you don’t have to, and how the plan would calculate tax bills is even worse than the higher rates. Nowhere is that clearer than its “country-by-country reporting” for taxing foreign earnings.
Under the 2017 tax reform, American companies pay U.S. tax on global profits as those profits arise each year. This is done largely via the global intangible low-tax income, or Gilti, regime that imposes an effective tax rate of at least 13.125% on overseas profits arising especially from intellectual property held by offshore subsidiaries. The Biden plan would increase the Gilti tax rate to a statutory 21% (and an effective 26.25% after accounting for quirky tax mechanics).
But wait, there’s more. The Biden plan also would overhaul how companies calculate Gilti liability. Currently companies aggregate overseas earnings, losses and foreign tax credits in various markets into a single global calculation. The Biden plan would go country-by-country, meaning that for each jurisdiction in which a company does business it would have to compute its Gilti taxable profit, work out any local tax credits, and then figure the tax due.
Progressives favor this approach because they think the aggregate method allows companies to use higher tax payments in high-tax jurisdictions to offset tax windfalls in low-tax jurisdictions. But it’s not that simple.
Country-by-country reporting would introduce vast new complexity into the tax code. Even with modern computing power, running Gilti calculations in individual jurisdictions would be complex and expensive. Enforcement would be difficult because the volume of documentation would drown tax bureaucrats.
Country-by-country reporting also threatens to make overseas investment uneconomical. A flaw in the 2017 version of Gilti—which the Biden plan leaves in place—is that it doesn’t allow companies to carry losses forward or back. This is possible for most other provisions in the corporate tax code, and it’s vital for investment. If a company opens a new factory or starts a new business line that’s loss-making in its first few years, carry-forwards allow the company to recoup those losses before owing taxes once the investment becomes profitable.
But under Gilti, if an American company starts a new subsidiary in high-tax Italy that makes losses its first few years, that company still will owe tax in the subsidiary’s first profitable year. The partial solution in 2017 was to allow companies to calculate Gilti on a global basis, so profits in some places would offset losses in others.
The Biden plan’s country-by-country reporting removes that mitigation. It would tax profits that don’t exist in an economic sense, because Gilti would sometimes apply on “profits” that only recoup earlier losses. And companies would have to pay astronomical sums to their accountants for the pleasure.
A surefire sign that this is a terrible idea is that the Organization for Economic Cooperation and Development isn’t proposing anything like it in its global minimum-tax plan. The OECD’s current proposal would include an option for companies to carry losses forward and back to avoid the fatal flaw in the Biden country-by-country Gilti. So far OECD negotiations have bogged down in the minutiae of how such provisions would work in a country-by-country reporting regime.
This means tax-happy Europeans might prefer to abandon their long-cherished dream of an OECD tax deal rather than adopt anything resembling the Biden plan. Why would Congress do to American companies what European governments won’t do to theirs?
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