Tax Receipts could either rise or drop by billions depending on which countries, including the United States, implement a proposed corporate global minimum tax, the Joint Committee on Taxation (JCT) found, also accounting for different assumptions for behavioral responses by multinational enterprises (MNEs).
Background.
The Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework in October 2021 put forth a two-pillar approach to combat international tax issues like base erosion and profit shifting. Pillar Two is a three-layered 15% minimum tax applied on a country-by-country basis, designed to ensure MNEs pay tax on income in each jurisdiction where they operate. The three components of Pillar Two are: 1) an income inclusion rule (IIR) taxed on parent entities based on income earned by constituent entities in low-tax jurisdictions; 2) an undertaxed profits rule (UTPR) that taxes constituent entities with parents in low-tax jurisdictions; and 3) a qualified domestic minimum top-up tax (QDMTT) levied by local jurisdictions to ensure domestic tax liability reaches 15%.
On June 20, the JCT unveiled its analysis of tax revenue implications if Pillar Two were to be enacted worldwide and/or in the U.S., factoring in the new corporate alternative minimum tax (CAMT) enacted by the Inflation Reduction Act (PL 117-169), as well as the global intangible low-tax income (GILTI) regime established by the Tax Cuts and Jobs Act of 2017 (PL 115-97).
“The adoption of IIRs and UTPRs in foreign jurisdictions could have significant effects on Federal tax receipts, driven by the response of U.S. and foreign MNEs,” read the report. “For example, U.S. MNEs facing the potential imposition of IIRs and UTPRs on foreign income may shift some amount of profits from low-tax non-Pillar Two compliant jurisdictions to high-tax jurisdictions, including Pillar Two compliant jurisdictions, where the [effective tax rate] is approximately 15 percent. The magnitude of such a response, however, is highly uncertain.”
The report established that its analysis assumed a specific order of taxes applied: local corporate income taxes, QDMTTs, controlled foreign corporation (CFC) rules, IIRS, and then UTPRs. It next provided “two illustrative results on receipts” representative of “upper and lower bounds” of the effects of Pillar Two’s implementation on federal income tax receipts. Each assumed that U.S. MNEs subject to IIRs and UTPRs shift as much as 75% of low-tax profits to other jurisdictions. The lower bound reflects U.S. MNEs shifting to jurisdictions with a QDMTT while the upper bound has low-tax profits shifted to the United States.
“In addition, for the upper bound, because GILTI allows corporations to blend profits with losses, corporations would be expected to shift no more than the amount of profits exceeding losses,” the JCT explained. “Therefore, the upper bound result assumes that U.S. MNEs shift the minimum of either (1) 75 percent of their low-tax profits or (2) the excess of global positive profits over global losses.”
For the lower bound, compared to the hypothetical baseline where Pillar Two is not enacted anywhere beginning 2025, federal tax receipts would fall $72.7 billion through 2028, and $174.5 billion by 2033. Conversely, in the upper bound, receipts would increase $90.7 billion through 2028, and $224.2 billion by 2033. The JCT said that this range “is significant and highlights the uncertain effect Pillar Two implementation” could have, but is not indicative of “a likely outcome.”
The JCT goes on to present five different scenarios to drive home this wide range:
- Pillar Two enacted globally except in the U.S.
- Pillar Two enacted globally, including the U.S.
- Pillar Two not enacted at all
- Pillar Two only enacted in the U.S. but without a UTPR
- Pillar Two only enacted in U.S. with a UTPR
Under scenarios 1 and 2, revenues would be reduced by $122 billion and $56.5 billion from the period 2023-2033, respectively. In scenario 1, the “enactment of QDMTTs worldwide captures much of the residual U.S. tax on income earned in those foreign jurisdictions,” the JCT projected. “Relative to the modified baseline, the loss of revenue from GILTI combined with the assumed decrease in profit shifting results in a revenue loss exceeding $120 billion over the budget window. In contrast, if the United States enacts Pillar Two in 2025, as in Scenario 2, the revenue loss is mitigated by increased receipts under the U.S. QDMTT, as well as a small increase in profit shifting into the United States relative to the modified baseline.”
Under scenarios 4 and 5, however, revenues jump $102.6 billion and $236.5 billion through 2033, respectively. “There are several factors contributing to the increase in revenue: (1) a Pillar Two compliant GILTI regime, (2) a compliant QDMTT, (3) revenue gained from a UTPR, and (4) a small increase in profit shifting into the United States relative to the modified baseline,” according to the JCT.
The report was prepared at the request of two high-ranking Republican taxwriters: Senate Finance Committee Ranking Member Mike Crapo of Idaho and House Ways and Means Chair Jason Smith of Missouri. “Even if Congress did implement OECD’s global minimum tax by 2025 along with the rest of the world, the U.S. would still lose tens of billions of dollars, and likely much more if it does not stack another book tax on the shelf alongside the Democrats’ dizzying book minimum tax,” the two lawmakers said in a joint statement. “Worse, by agreeing to prioritize the OECD’s tax scheme over the Republican-enacted global minimum tax from 2017, the Biden Administration handed each foreign country a model vacuum to suck away tens of billions from our tax base.”
They called scenarios 4 and 5 “highly unlikely.”
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