One strong global minimum tax outweighs two weak ones

According to recent news Report, Congressional Democrats are considering watered-down versions of two of last year’s measures Build Back Better Act, The alternative minimum tax on global book income of large corporations would allow a deduction for current investment expenditures, and the global intangible low-income (GILTI) reform would continue to allow for cross-country pooling of foreign income and tax credits.

imposing a single global minimum tax that is consistent with OECD/G-20 Pillar 2 Model Two weaker global minimums would be easier than levying taxes and increasing revenues more efficiently. And, by fully combining GILTI with Pillar 2, the US will take a leading role in preventing the “race to the bottom” in global corporate taxation.

book-tax income difference

Minimum tax on global book earnings, which would only apply to large public corporations, responds to public concerns over companies reporting Substantial shareholder profit but little or no taxable income, But most book-tax differences stem from companies’ response to tax incentives enacted for specific policy purposes.

biggest difference between book and tax income is cost recovery – the rate at which companies deduct the cost of investment expenditures – that totaled in 2019 $217 billion, Financial accounting requires businesses to deduct investment costs in line with the declining productivity of assets. But tax rules generally allow for quick deduction of certain investment expenses to encourage investment. The current US policy of “100 percent bonus depreciation” generously allows full expenses for assets with a tax life of up to 20 years.

There are book and tax depreciation differences Temporary—Sooner or later, all investment costs are deducted from the book or tax income.

But accelerated depreciation provides real gain in terms of present value. Joint Committee on Taxation Estimates That the Build Back Better Act’s alternative minimum tax would raise about $320 billion in its first decade. Maintaining the deduction for capital expenditures will sharply reduce those revenues, especially upfront.

In addition, the fixed phase of equipment spending will reduce the book and tax income gap without the need for a new alternative minimum tax. From next year, bonus depreciation will start reducing by 20 per cent in a year till it ends in 2027.

two eldest Permanent The differences between book and tax income are equity-based compensation and tax-exempt interest. Taxing equity-based compensation would be highly progressive, but its Current tax treatment is fair, Meanwhile, re-taxing tax-exempt state and local government bond interest would hurt the effectiveness of that subsidy,

GILTI Governance Reforms

Another common way for multinational corporations to reduce their tax liabilities is by relocating income to a foreign jurisdiction with a lower tax. “country-by-country” provision of OECD/G-20 Pillar 2 Model This can be prevented by ensuring that corporations pay an effective rate of at least 15 percent in each country in which they operate.

Allowing cross-country pooling of foreign income and tax credits allows corporations to use additional tax credits generated in high-tax countries to shield income reported in low-tax countries from U.S. taxation. This “America Last” The policy benefits investments in both high-tax and low-tax foreign jurisdictions and reduces U.S. revenue.

East revenue estimate The Build Back for Better Act shows that limiting income and foreign tax credit pooling will raise about $70 billion over 10 years. This figure envisions raising the GILTI rate to 15 percent and reducing the 10 percent on foreign tangibles to 5 percent, in line with the Pillar 2 model. It also considers eliminating tax preferences for foreign oil earnings – a sensible move. Profit tax cut for petroleum industry,

If the US wants to reduce the tax burden on foreign income, it can adopt a column 2 provision by excluding 5 percent of foreign payroll from the global minimum tax. It will support investment in low-tax jurisdictions with significant real activity, such as Ireland and Switzerland.

Under column 2, if the US does not adequately tax the foreign income of its multinationals, it puts other countries at risk by imposing a “top-up tax” on that income. If that happens, US multinationals will still bear a 15 percent tax burden on their foreign income, but the revenue will go overseas.

The US is currently the only country in the world with a global minimum tax, and its GILTI regime inspired the Pillar 2 blueprint. Pillar 2 now calls for tighter restrictions to prevent the global “race to the bottom”. Aligning GILTI with Pillar 2 will keep the US at the forefront of international tax innovation and help end corporate taxation declines.