U.S. Multinational Corporate Tax Data and Analysis
Recent proposals by the Biden administration and congressional Democrats seek to raise taxes on the foreign profits of U.S. multinationals, based on the claim that U.S. multinationals pay very low tax rates on those foreign profits. But how much are they taxed and how would the various proposals affect those tax rates?
American Multinational Enterprises (MNEs) typically structure their overseas operations through Controlled Foreign Companies (CFCs). These SFCs pay foreign taxes, and their U.S. parent companies pay residual taxes to the U.S. government, achieved by including a portion of SFC profits in U.S. taxable income, but allowing a tax credit for foreign taxes paid on that income. . Prior to 2017, these CFC earnings inclusions only occurred when they were repatriated as dividends to the U.S. parent or through the rules in Subpart F to capture passive foreign income. However, the Tax Cuts and Jobs Act (TCJA) of 2017 restructured US international tax rules to tax intangible foreign income at a reduced tax rate (between 10.5 and 13.125% until 2026, and between 13.125 and 16.4% thereafter) instead of taxing dividends. repatriations.
Several recent and current proposals would seek to restructure and increase residual US taxes on CFC profits.
- The Biden administration proposed numerous and substantial tax hikes on U.S. multinationals in its green paper, including a minimum tax rate of 21%, applied to all foreign income and calculated country by country instead of be shared globally.
- The House Ways and Means Committee has proposed raising taxes on U.S. multinationals, although to a lesser extent than the administration’s proposal. (See this recent comparison of various international tax proposals.)
- A separate proposal by Senators Ron Wyden (D-OR), Mark Warner (D-VA) and Sherrod Brown (D-OH) would restructure international tax rules for U.S. multinationals, but they did not specify tax rates real.
- Finally, the OECD Pillar 2 blueprint would set minimum taxes country by country at a likely rate of 15%.
We can use the Tax Foundation’s Multinational Tax Model to estimate the effective tax rates on CFC profits under current legislation and these alternative policies. However, measuring these tax rates requires answering two major methodological questions.
First, CFC profits may be overestimated due to a double counting problem identified by economists Jennifer Blouin and Leslie A. Robinson. Namely, when the Internal Revenue Service calculates CFC profits, they include dividends received from related parties. However, these related party dividends (RPD) are not actually profits; they are just payments from one subsidiary of a multinational group to another subsidiary. To solve this measurement problem, we calculate the effective tax rate on CFC profits, including DPI and excluding them. The exclusion of DPRs increases the measured effective tax rates.
Moreover, CFCs are not necessarily wholly owned by US multinationals. For example, if a US multinational and a foreign company collaborate in a joint venture, with the US multinational owning at least half of the resulting business, then this counts as a CFC. However, US taxes on SEC profits (via Subpart F rules and GILTI) apply only to the US multinational’s share of SEC business; calculations are pro-rated based on US ownership share. Since residual US taxes are pro-rated, we can calculate the effective tax rate on CFC profits, or we can calculate the effective tax rate on the pro-rated US share of CFC profits.
The following table shows the various measures of effective tax rates on CFC profits under various policies. The first two columns show measures of foreign tax rates only. The remaining three columns present the combined tax rates—including residual foreign and US taxes—on CFC profits.
|Foreign tax on…||Combined tax on…|
|All the benefits of the CFC||Benefits eg. RPS||All the benefits of the CFC||Benefits eg. RPS||US profit share|
|Current law (2022)||12.5||17.6||16.8||23.8||19.3|
|Current law (2031)||12.5||17.6||17.7||25.0||20.7|
|Proposal of ways and means||12.5||17.6||20.1||28.4||24.4|
|Wyden-Warner-Brown, basic version||12.5||17.6||17.0||24.1||19.6|
|Wyden-Warner-Brown, medium version||12.5||17.6||17.5||24.8||20.4|
|Wyden-Warner-Brown, high tax version||12.5||17.6||20.7||29.2||25.3|
|Pillar 2, American approach||12.5||17.6||18.3||25.9||21.6|
|Pillar 2, foreign approach||12.5||17.6||17.2||24.3||19.8|
Notes: Unless otherwise noted, all proposals use 2022 effective tax rates. Combined effective tax rate includes GILTI Subpart F residual U.S. and foreign taxes and CFC dividends.
Source: Tax Foundation multinational tax model.
Including dividends from related parties, the measured foreign tax rate on CFC profits is only 12.5%. However, if DBPs are excluded, the effective tax rate in 2022 increases to 17.6%. Under current law, US residual parent taxes increase that effective tax rate by 4.3 percentage points, from 12.5% to 16.8%. Excluding DPRs, these U.S. residual taxes instead increase the effective tax rate by 6.2 percentage points, from 17.6 to 23.8 percent, above the statutory income tax rate in the states. -United. effective tax rate of 6.8 percentage points, from 12.5 to 19.3%. Given that the GILTI minimum tax rate is expected to increase from 10.5% to 13.125% after 2026, the combined effective tax rates on CFC profits will be slightly more than 1% higher in 2031 than in 2022 in under current law.
Note that the combined effective tax rates on CFC profits are higher under current law than under pre-TCJA law, regardless of measurement issues. Under pre-TCJA law, the high US corporate tax rate of 35% applied to only a small portion of these CFC profits. The TCJA reduced the statutory tax rate applied to CFC profits, but significantly expanded the portion of those profits subject to US tax, ultimately increasing residual US taxes on foreign profits.
The Biden administration’s international tax proposals would dramatically increase effective tax rates on those profits. As a share of all CFC profits, the combined effective tax rate would increase by 5 percentage points in 2022 to 21.8%. Excluding dividends increases the measured increase in the tax rate to 7 percentage points, and pro-rating increases it to 7.7 percentage points. Under the Biden administration’s proposal, the effective tax rate on CFC profits would be between 21.8 and 30.8 percent, depending on the measure, significantly higher than foreign tax rates on corporate profits. CFCs. The recent Ways and Means proposal would have similar but lesser effects.
Because the Wyden-Warner-Brown proposal does not specify relevant tax rates or foreign tax credit haircuts, the effective tax rates on CFC profits are uncertain. Using a basic version of the proposal with minimal rate changes – 21% corporate tax rate, 13.125% GILTI/FDII rate and 20% foreign tax haircuts – the proposal would slightly increase corporate tax rates. effective taxation on CFC profits from the current law in 2022 but lower it slightly from the current law for 2031. A version with moderate tax rate changes – 25% tax rate of corporations, 15% GILTI/FDII rate (to comply with OECD Pillar 2 proposal) and no foreign tax haircut – only slightly increases effective tax rates compared to the version of basis of the proposal. A high-tax version – 28% corporate tax rate, 21% GILTI/FDII rate and 20% foreign tax haircuts – produces higher effective tax rates than the Ways and Means proposal but lower than the Biden administration’s proposal.
Finally, we consider effective tax rates produced by implementing versions of the OECD Pillar 2 proposal for a global minimum tax. Under the traditional U.S. approach to taxing CFC profits – including a portion in taxable income and allowing a foreign tax credit – its implementation would raise the tax rate. effective on CFC earnings by 1.5 to 2.4 percentage points, depending on measurement issues, over current law in 2022, and would raise it by 0.6 to 1.0 percentage points over the current law in 2031. However, using the planned approach of an additional tax, the implementation of Pillar 2 would only increase the effective tax rate by about half of the one percentage point per compared to 2022 and would lower the effective tax rate compared to 2031.
In general, the effective tax rates on the foreign profits of US multinationals are not that low compared to the US tax rate, contrary to popular rhetoric. The TCJA has raised these effective tax rates on foreign income, and recent proposals from the Biden administration and the Ways and Means Committee would further increase these rates. Depending on how it is implemented and the year of comparison, the OECD Pillar 2 proposal for a global minimum tax may be more or less stringent than the taxes imposed by current legislation.