Grassley Warns Biden Admin Tax Proposal May Result In Governments Providing Direct Cash Subsidies

last year

At a Senate Budget Committee hearing last week, Sen. Chuck Grassley (R-IA) spoke about President Biden's tax proposals.

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00:00The 2017 tax bill did a carrot and stick approach to the problem

00:06of multinationals shifting profits to low-tax jurisdictions.

00:12Tell us how that tax bill reduced the incentive to engage

00:17in profit-shifting transactions, and what are some examples?

00:23Thank you for the question.

00:25So the Tax Cuts and Jobs Act looked at the difference

00:31between the tax burden on foreign income and the tax burden

00:35on domestic income, and sought to close that gap.

00:39When there's a large gap between a domestic tax rate

00:43and a foreign tax rate, there's a large incentive

00:46for businesses to shift their profits, either artificially

00:50or actually offshore activities, you know, physical activities

00:55and employment, to minimize their exposure

00:58to a high tax rate.

00:59So the Tax Cuts and Jobs Act, number one,

01:01brought the corporate tax rate down, but then had a pairing

01:05of anti-avoidance policies,

01:07one in the global intangible low-tax income, the GILTI,

01:10which is a minimum tax rate applied to foreign income,

01:14and the foreign-derived intangible investment,

01:17which is the FDII, income, sorry, which is the FDII,

01:21to balance the difference that companies,

01:24when they're thinking about where to put their research

01:26and development, or put their IP, to allow them

01:30to think maybe it makes sense to keep that in the U.S.,

01:33rather than planning through different offshore structures.

01:38At the same time, we saw some changes in other jurisdictions

01:41that were helpful for this balance shifting in the U.S.,

01:44and we've seen a significant amount of IP come

01:47from offshore locations back to the U.S.,

01:50and profits being earned in the U.S., and we can see this

01:53in some data that I had in my written testimony,

01:55showing that royalties earned by U.S. companies on U.S. IP

01:59in the U.S. has increased dramatically,

02:02especially in bilateral data with Ireland.

02:05President Biden has proposed several changes

02:10to the U.S. tax system.

02:13So, Mr. Bunn, most notable are reforms

02:16to the provision called GILTI.

02:20This includes taxing foreign income of multinationals

02:24at higher rates than what other countries are expected to adopt

02:29as part of Pillar 2 agreement

02:33that the Biden administration just negotiated.

02:38In addition, President Biden proposed corporate tax increase

02:43to 28 percent.

02:45How would these changes affect the competitiveness

02:48of U.S. companies, and would these proposals tend

02:52to increase or decrease the incentives for multinationals

02:57to shift profit offshore?

03:00Thank you for the question.

03:01I think they would increase the incentive for planning

03:04through various structures and minimizing exposure to U.S. tax.

03:09The changes that the president is proposing would increase the

03:15gap between domestic and foreign, and do it in a context

03:20where a lot of foreign jurisdictions

03:23that are adopting the global minimum tax are going

03:26to have an effective tax rate of 15 percent.

03:28And if the U.S. has a much higher tax burden

03:32through GILTI or the domestic corporate tax rate,

03:35then companies are, instead of continuing

03:38to bring IP back or keep IP here in the United States,

03:43will probably see some of those same games

03:46to move things offshore or to develop things offshore rather

03:49than do them here in the United States.

03:52Also, Mr. Bunn, the administration claims Pillar 2

04:00tax framework will end, and I quote, a global race

04:05to the bottom with respect to corporate taxes.

04:08However, in reality, Pillar 2 may simply shift the focus

04:13from a competition base on low rates

04:18and traditional tax incentives towards one based

04:21upon providing direct cash subsidies.

04:25How do you feel, or how do you expect tax havens to respond

04:30to the implementation of Pillar 2?

04:33So we're already seeing some of this response.

04:36Some jurisdictions looking at the minimum tax rules,

04:39and minimum tax rules provide for certain things

04:42that I think a lot of jurisdictions are looking

04:44at through an attractive lens.

04:47The jurisdictions are looking at grants, refundable credits,

04:53and different mechanisms

04:54that the minimum tax rules treat more favorably

04:57than traditional tax credits.

04:59I was spending some time earlier this year looking at some

05:03of the jurisdictions and how they're planning

05:05to implement the rules, but Bermuda is looking

05:08at a refundable tax credit.

05:09Singapore is looking

05:10at a refundable investment tax credit.

05:12Switzerland, some cantons in Switzerland are looking

05:15at refundable credit programs,

05:17and the United Kingdom has had a refundable research

05:19and development credit program for a number of years

05:23that are treated very differently than our credits,

05:25and I think what we are seeing is a shift in this competition

05:29from rates to the tax base and using the rules themselves

05:33to create advantages for different jurisdictions.

05:38Thank you, Senator Grassley.

05:39Senator Johnson.

05:40Thank you, Mr. Chairman.

05:41I'm going to try and simplify these issues here,

05:43because this is incredibly complex.

Grassley Warns Biden Admin Tax Proposal May Result In Governments Providing Direct Cash Subsidies

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