Which Industries Would the Tax Hikes Target?

October 5, 2021

A recent Tax Foundation analysis considered how various proposals from the Biden administration, from Congress, and from the Organisation for Economic Co-operation and Development would affect the effective tax rates (ETRs) on the foreign profits of U.S. multinationals. That analysis focused on how each policy and proposal would affect the overall ETRs. But which industries would be most heavily affected by these proposals?

While these proposals vary by statutory tax rates and many other features, they all have two common features. First, they would switch Global Intangible Low-taxed Income (GILTI) calculations to apply on a country-by-country basis, which eliminates cross-crediting between high-tax and low-tax countries. This change would be most important for industries facing foreign tax rates that vary greatly by country but are relatively high on average. Second, the proposals would reduce or eliminate the 10 percent exemption for tangible assets in the GILTI calculations, of particular importance for industries with greater reliance on these assets.

The nonmetallic mineral product manufacturing industry—which produces glass, stone, clay, and concrete products—relies heavily on tangible assets and has high variation in the foreign tax rates it faces, exposing it to the country-by-country calculation and repeal or reduction of the tangible asset exemption. Accordingly, this industry is the most heavily impacted by all the proposals considered here. The transportation and warehousing industry has similar traits, and thus is always among the top five most heavily affected industries. Notably, across all of these proposals, almost all industries among the top five most affected already face effective tax rates on their foreign income in excess of the statutory 21 percent corporate tax rate.

Using Tax Foundation’s Multinational Tax Model, we estimate the effective tax rates on controlled foreign corporation (CFC) profits under current law and under each of the following proposals. For convenience, we focus on the ETRs for 2022, although these are set to increase under current law in 2027. For each proposal, we present the effects on the five most heavily impacted industries, as well as the overall average across industries.

Biden Administration Proposal

The Biden administration’s proposals in the Treasury’s Green Book would raise taxes on the foreign profits of U.S. multinationals by raising the corporate tax rate to 28 percent, raising the GILTI minimum tax rate to 21 percent, requiring that GILTI be calculated on a country-by-country basis, and repealing the tangible asset exemption in GILTI.

Table 1 presents the industries with the largest increases in ETRs on their portions of CFC profits. The nonmetallic mineral product manufacturing sector is most heavily affected, facing an effective tax rate hike of almost 16 percentage points, followed by a set of industries facing ETR hikes of approximately 11 percentage points.

Table 1. Combined Effective Tax Rates on Controlled Foreign Corporation (CFC) Profits, Most Affected Industries, Biden Administration Proposal
Industry Current law Proposal Difference
Nonmetallic mineral product manufacturing 21.8 37.7 15.9
Arts, entertainment, and recreation 27.9 39.5 11.6
Oil and gas extraction, coal mining 34.3 45.9 11.5
Transportation and warehousing 23.0 34.4 11.4
Petroleum and coal products manufacturing 25.3 36.4 11.0
All industries 16.8 21.8 5.0

Notes: All proposals use effective tax rates on CFC profits for 2022. The effective tax rate includes foreign taxes as well as residual U.S. taxes from GILTI and subpart F net of their foreign tax credits.

Source: Tax Foundation’s Multinational Tax Model.

House Ways and Means Proposal

While the proposal from the House Ways and Means Committee would raise taxes on U.S. multinationals, the changes to tax rules essentially consist of smaller versions of the Biden administration’s proposal: raising the corporate tax rate to 26.5 percent, raising the GILTI minimum tax rate to 16.6 percent, also requiring country-by-country GILTI calculations, and reducing the 10 percent tangible asset exemption in GILTI to 5 percent. However, it would reduce this tax burden by reducing the haircut on the GILTI foreign tax credit from 20 percent to 5 percent, by allowing carryforwards of CFC losses and excess foreign tax credits to address timing issues, and by exempting GILTI from expense allocation rules.

Table 2 presents the effects on the ETRs of the Ways and Means proposal. As under the Biden proposal, nonmetallic mineral product manufacturing is most heavily affected, although not by as much.

Table 2. Combined Effective Tax Rates on Controlled Foreign Corporation (CFC) Profits, Most Affected Industries, Ways and Means Proposal
Industry Current law Proposal Difference
Nonmetallic mineral product manufacturing 21.8 30.3 8.5
Primary metal manufacturing 32.4 39.5 7.2
Arts, entertainment, and recreation 27.9 34.5 6.6
Paper manufacturing 26.8 33.0 6.3
Transportation and warehousing 23.0 29.2 6.2
All industries 16.8 20.1 3.3

Notes: All proposals use effective tax rates on CFC profits for 2022. The effective tax rate includes foreign taxes as well as residual U.S. taxes from GILTI and subpart F net of their foreign tax credits.

Source: Tax Foundation’s Multinational Tax Model.

Wyden-Warner-Brown Proposal

Unlike the Biden administration and Ways and Means proposals, the international tax proposal from Senators Ron Wyden (D-OR), Mark Warner (D-VA), and Sherrod Brown (D-OH) focuses on restructuring the U.S. international tax rules while leaving specific tax rates ambiguous. The proposal would switch to country-by-country GILTI calculations but with a mandatory high-tax exemption. This change would eliminate cross-crediting like the country-by-country calculations in the administration and Ways and Means proposals but without raising compliance costs by as much as those proposals. The Wyden-Warner-Brown proposal would also repeal the tangible asset exemption in GILTI and repeal indirect expense allocation rules for research and development costs and for stewardship expenses. It would establish a common foreign tax credit haircut across the GILTI, subpart F, and foreign branch baskets.

The proposal does not specify the corporate tax rate, the GILTI minimum rate, or the haircuts on the foreign tax credit. Accordingly, we consider three versions of the proposal in Table 3. The basic version makes minimal rate changes, retaining the 21 percent corporate tax rate, setting a 13.125 percent GILTI minimum rate, and extending the current 20 percent GILTI foreign tax haircut to the other baskets. The medium version raises the corporate tax rate to 25 percent and raises the GILTI minimum rate to 15 percent but repeals the foreign tax credit haircuts. The high-tax version uses a 28 percent corporate tax rate, a 21 percent GILTI minimum rate, and 20 percent foreign tax haircuts.

As under the previous proposals, the nonmetallic mineral product manufacturing and the transportation and warehousing industries are among the most affected. However, the medium version and the high-tax version also include high-tax industries among those most affected; computer and electronic product manufacturing is the third most heavily affected by the medium version or the proposal, and the electrical equipment, appliance, and component manufacturing industry (which includes semiconductors) is among those most affected by the high-tax version.

Table 3. Combined Effective Tax Rates on Controlled Foreign Corporation (CFC) Profits, Most Affected Industries, Wyden-Warner-Brown Proposal
Basic version
Industry Current law Proposal Difference
Nonmetallic mineral product manufacturing 21.8 26.9 5.1
Transportation and warehousing 23.0 26.8 3.8
Arts, entertainment, and recreation 27.9 30.6 2.7
Petroleum and coal products manufacturing 25.3 28.0 2.7
Miscellaneous industries1 22.3 24.7 2.4
All industries 16.8 17.0 0.2
Medium version
Industry Current law Proposal Difference
Nonmetallic mineral product manufacturing 21.8 27.8 6.0
Transportation and warehousing 23.0 26.6 3.6
Computer and electronic product manufacturing 10.8 13.8 3.0
Petroleum and coal products manufacturing 25.3 28.3 3.0
Miscellaneous industries 22.3 24.7 2.3
All industries 16.8 17.5 0.7
High-tax version
Industry Current law Proposal Difference
Nonmetallic mineral product manufacturing 21.8 33.5 11.7
Arts, entertainment, and recreation 27.9 36.7 8.8
Transportation and warehousing 23.0 31.4 8.4
Petroleum and coal products manufacturing 25.3 33.6 8.2
Electrical equipment, appliance, and component manufacturing 19.5 27.7 8.2
All industries 16.8 20.7 3.8

Notes: All proposals use effective tax rates on CFC profits for 2022. The effective tax rate includes foreign taxes as well as residual U.S. taxes from GILTI and subpart F net of their foreign tax credits. The basic version retains the 21% corporate tax rate, sets a 13.125% GILTI minimum rate, and sets 20% foreign tax credit haircuts. The medium version uses a 25% corporate tax rate, a 15% GILTI minimum rate, and no foreign tax credit haircuts. The high-tax version uses a 28% corporate tax rate, a 21% GILTI minimum rate, and 20% foreign tax credit haircuts.

1 The miscellaneous industries category consists of: agriculture, forestry, fishing, and hunting; utilities; education services; health care and social assistance; repair services; other services, except government.

Source: Tax Foundation’s Multinational Tax Model.

OECD Pillar 2 Proposal

In July, the OECD’s Base Erosion and Profit Shifting project produced agreements on its two-pillar approach to taxing multinationals. Pillar 1 would partially shift the location of taxable profits to the location of sales, and Pillar 2 would establish country-by-country minimum taxes on foreign profits, at a minimum tax rate of at least 15 percent (with no foreign tax credit haircuts). It would switch from a 10 percent tangible asset exemption to exemptions on tangible assets and on payroll.

Note that the impacts of the proposal on U.S. multinationals depends on how Congress implements such as tax. The traditional U.S. approach to international taxation operates by including a portion of foreign profits in U.S. taxable income and providing a credit for foreign taxes paid. However, this implementation would be more severe than the implementation in other countries, which would generally use the OECD’s proposed approach of levying a top-up tax. The following table considers both potential approaches to implementing Pillar 2.

In general, the traditional U.S. approach to implementing Pillar 2 would impose higher tax burdens than the intended top-up tax approach that other countries would likely implement. Both versions include nonmetallic mineral product manufacturing, transportation and warehousing, and petroleum and coal product manufacturing among the industries most affected.

Table 4. Combined Effective Tax Rates on Controlled Foreign Corporation (CFC) Profits, Most Affected Industries, Pillar 2 Proposal
Traditional U.S. implementation
Industry Current law Proposal Difference
Nonmetallic mineral product manufacturing 21.8 28.1 6.3
Arts, entertainment, and recreation 27.9 32.6 4.7
Transportation and warehousing 23.0 27.6 4.7
Petroleum and coal products manufacturing 25.3 29.3 4.0
Paper manufacturing 26.8 30.6 3.9
All industries 16.8 18.3 1.5
Intended top-up tax implementation
Industry Current law Proposal Difference
Nonmetallic mineral product manufacturing 21.8 26.8 5.1
Transportation and warehousing 23.0 25.9 2.9
Computer and electronic product manufacturing 10.8 12.9 2.1
Petroleum and coal products manufacturing 25.3 27.4 2.0
Miscellaneous industries 22.3 24.1 1.8
All industries 16.8 17.2 0.4

Notes: All proposals use effective tax rates on CFC profits for 2022. The effective tax rate includes foreign taxes as well as residual U.S. taxes from GILTI and subpart F net of their foreign tax credits. The U.S. approach includes the foreign income and provides a foreign tax credit, with no changes to expense allocation rules. The intended top-up tax approach applies a mandatory high-tax exemption at a 15% tax rate and exempts GILTI from expense allocation.

Source: Tax Foundation’s Multinational Tax Model.

The debates over these minimum tax proposals have revolved around a goal of raising taxes on the foreign profits of large, high-tech multinationals. However, the common features of all these proposals—country-by-country calculations and reducing or repealing the tangible asset exemption—generally target firms with average foreign tax rates that vary by country and those whose production relies heavily on tangible assets. Nonmetallic mineral product manufacturing is most heavily affected by all of these proposals, as measured by the increase in the effective tax rate on CFC profits, and the transportation and warehousing industry is always among the top five most affected. High-tech industries appear among the top five most affected for only three of the seven proposals considered.

If Congress is interested in taxing the foreign profits of high-tech industries, these proposals would strike many industries other than the target.

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