We’re working 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 this clearer than in the “country-specific reporting” on the taxation of foreign income.
As part of the 2017 tax reform, American companies pay US taxes on global profits as those profits accrue every year. This is largely done through global low-tax intangible income (Gilti), which provides an effective tax rate of at least 13.125% on overseas profits, particularly those resulting from the intellectual property of offshore subsidiaries. The Biden Plan would raise the Gilti tax rate to the statutory 21% (and to 26.25% after taking into account the whimsical tax mechanisms).
But wait, there’s more. The Biden Plan would also revise the way companies calculate gilti liability. Currently, companies are aggregating overseas profits, losses, and overseas tax credits in different markets into a single global calculation. The Biden plan would run on a country-by-country basis, meaning that for each jurisdiction in which a company does business, it would have to calculate Gilti’s taxable profit, calculate local tax credits, and then calculate the tax due.
Progressives advocate this approach as they believe that the aggregate method allows companies to use higher tax payments in high-tax areas to offset tax losses in low-tax areas. But it is not that simple.
Country-by-country reporting would make tax legislation considerably more complex. Even with modern computing power, performing Gilti calculations in individual jurisdictions would be complex and expensive. Enforcement would be difficult as the volume of documentation would drown the tax bureaucrats.