The global minimum tax has upended many conversations about international taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy, including in the United States. The goal of the policy is to set a worldwide 15 percent minimum effective tax rate on corporate profits and enforce it through a set of interconnected rules. If enough countries adopt those rules, then even those that do not will see profits of large multinational companies in their jurisdiction subjected to the 15 percent tax rate.
One important question for Congress is how much global minimum tax revenue might the United States raise?
The answer really depends on the minimum tax rules and how they get adopted. As of right now, it looks like proposed changes to U.S. international tax ruleInternational tax rules apply to income companies earn from their overseas operations and sales. Tax treaties between countries determine which country collects tax revenue, and anti-avoidance rules are put in place to limit gaps companies use to minimize their global tax burden. s will raise less revenue than revealed in official estimates of the Build Back Better Act (BBB).
The global minimum tax model rules were released in December and quickly proposed as a directive in the EU. The rules have three ways to enforce the 15 percent global minimum tax.
- The first is a domestic minimum top-up tax. This rule would let a country collect a minimum tax on profits located within its jurisdiction—whether from domestic entities or local entities of a foreign company.
- The second is an income inclusion rule. This allows a country to collect the minimum tax on the foreign profits of its companies if those profits are not taxed at the 15 percent effective tax rate.
- The third is the under-taxed payments rule. This allows a country to apply additional tax to a local entity if other entities in its corporate structure have profits taxed below 15 percent. This could be in another jurisdiction, even the jurisdiction of the parent company.
A takeaway from this particular set of rules is that wherever in the world a company might have profits taxed below the effective rate of 15 percent, the global minimum tax (to borrow from Liam Neeson) will look for you, will find you, and will tax you.
But, back to the question at hand. How do these rules impact U.S. tax revenue?
Last August, Tax Foundation published a series of revenue estimates for several alternatives for international tax proposals. At the time, this was meant to provide a sense of the trade-offs and revenue impacts for options to change the way Global Intangible Low-Tax Income (GILTI) gets taxed. In a way, GILTI is the U.S. version of a global minimum tax, and it has been collecting revenue since it was adopted in 2017.
One of our estimates showed a rough approximation for U.S. adoption of the global minimum tax which was still being negotiated at the time. In our model, that hypothetical policy raised $106 billion in U.S. tax revenue over 10 years. It included several changes to GILTI to make it roughly align with the design of the global minimum tax.
Following that report, we published another set of estimates based on a different scenario. That alternative used the following logic. GILTI is a tax on profits of U.S. companies that face low levels of tax abroad. If a global minimum tax gets agreed to, though, some foreign jurisdictions will likely increase the taxes they levy on U.S. companies. This would mean that revenues for GILTI could shrink even if the U.S. raised the rate and adjusted the base to align with the global minimum tax.
That scenario showed that U.S. (and global) adoption of the minimum tax would decrease federal revenues over 10 years by $43.9 billion.
However, it was not yet apparent how much of the revenues might get captured through a domestic minimum tax (the first way to collect the global minimum tax liability). The model rules made this clear, and in recent months some jurisdictions have said how they are planning to collect (at least part) of the minimum tax revenues themselves. Low-tax jurisdictions that are exploring options in that direction include Ireland, Switzerland, Singapore, and the United Arab Emirates.
Once the EU directive on the global minimum tax is approved many EU member states will likely put the domestic minimum tax rule in place.
On a global scale, this does not impact the overall revenue raised from the global minimum tax. However, it does impact where that revenue is raised.
If the U.S. is currently raising revenue from Irish subsidiaries of U.S. companies via GILTI, and Ireland adopts the domestic minimum tax, GILTI will raise much less. It may not be zero because of mismatches between GILTI and the minimum tax rules, but the change will be substantial.
The revenue score that the Joint Committee on Taxation (JCT) provided to Congress showed that the GILTI changes proposed in the Build Back Better Act would raise $144.3 billion (combined with changes to Foreign Derived Intangible Income). If a significant number of countries adopt domestic minimum taxes that erode the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. for GILTI, then that revenue may never be collected even if Build Back Back passes. In other words, JCT does not account for prospective actions by foreign governments in its revenue estimates.
This means that if Congress passes Build Back Better this year before other countries implement the global minimum tax, that portion of the revenue estimate will be closer to false hope than an economic projection.
Congress could, of course, choose to implement its own domestic minimum tax to raise revenue. A proposal in the Build Back Better Act does provide a minimum tax on book income, though it has some important differences from the OECD proposal. These differences include better treatment for tax credits and a narrower scope. The OECD rules focus on companies with more than $850 million in revenues, while the Build Back Better proposal is aimed at companies with more than $1 billion in profits.
So, the challenge at the moment is for Congress to understand what revenue will actually be raised by their proposals and to compare those outcomes against a more important priority: designing U.S. international tax rules with competitiveness, simplicity, and durability in mind.
Up to this point, one goal for the Build Back Better Act has been to increase the amount of revenue the U.S. raises from U.S. companies at home or abroad. With the global minimum tax rules in play, it is likely that the expected gains to the U.S. Treasury from foreign profits of U.S. companies will diminish.
Other countries are assessing the model rules and training their sites on a new or streamlined approach to business taxation while maintaining a competitive edge. U.S. lawmakers would do well to take a similar path.