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Louis Jacobson
By Louis Jacobson January 7, 2022

Build Back Better bill would change overseas tax provisions

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.

Our Sources

Urban Institute-Brookings Institution Tax Policy Center, "Briefing Book: A citizen's guide to the fascinating (though often complex) elements of the US tax system," accessed Jan. 5, 2022

Tax Foundation, "Options for Reforming the Taxation of U.S. Multinationals," Aug. 12, 2021

Proskauer Rose LLP, "Senator Manchin Announces That He Will Not Support the Build Back Better Act – Where Things Stand Now," Dec. 19, 2021

Email interview with Jesse Solis, media relations manager for the Tax Foundation, Jan. 5, 2022

Email interview with Thornton Matheson, senior fellow at the Urban Institute-Brookings Institution Tax Policy Center, Jan. 4, 2022

Louis Jacobson
By Louis Jacobson May 27, 2021

Tax changes aimed at offshoring included in American Jobs Plan

Before a campaign appearance in the industrial battleground state of Michigan, Joe Biden unveiled a tax plan that included disincentives to "offshoring," the practice of companies setting up operations overseas, rather than maintaining jobs in the United States, because the company expects cheaper costs or lower tax rates.

Two key elements of Biden's plan were the establishment of a 28% corporate tax rate and a 10% "offshoring penalty surtax."

As president, Biden has taken steps to advance this goal, though it remains to be seen   whether each provision will become law.

In his American Jobs Plan, an infrastructure-heavy proposal, Biden proposed raising the federal tax rate on corporations from 21% to 28%. That increase would leave the rate lower than 35%, the level it was before President Donald Trump signed a tax law that lowered the rate in 2017. 

The American Jobs Plan also includes tax provisions that focus specifically on offshoring. 

The proposal would eliminate the rule that allows U.S. companies to pay zero taxes on the first 10% of returns when they locate investments in foreign countries.

It would also provide a tax credit to "support onshoring jobs," though the proposal does not outline specifics.

The White House has been negotiating with senators for weeks to see if Democrats and Republicans can come together. Key leaders in both parties have expressed a willingness to come together on a bipartisan bill, but no deal has been struck.

If a bipartisan compromise emerges, there's no guarantee that Biden's offshoring tax proposals will make the final version.

In fact, a 28% corporate tax rate has already prompted opposition, with Republicans arguing that it would leave the United States at a competitive disadvantage. And at least one Democrat, Sen. Joe Manchin of West Virginia, has already said he opposes any increase beyond 25%.

It's unclear whether Biden's offshoring proposals will make a final bill. But they are part of his opening volley, which is enough to rate this promise In the Works.

Our Sources

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