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Qualified Business Asset Investment (QBAI) Exemption

Qualified Business Asset Investment (QBAI) is a 10 percent tax exemption for U.S. multinationals based on the value of buildings, machinery, or equipment. The QBAI exemption is part of the Global Intangible Low-Tax Income (GILTI) tax base, a measure that discourages companies from shifting profits out of the U.S., and part of the calculation for Foreign Derived Intangible Income (FDII).

Why do we have the QBAI Exemption?

The 10 percent QBAI exemption in GILTI attempts to limit U.S. taxation of foreign income to income that is easy to move to low-tax countries, usually intangible property like intellectual property (IP). This includes things like patents for technology, software, or medicines.

Assets like IP may have high up-front costs and require considerable research and development, but IP tends to be relatively cheap to replicate, resulting in low costs to scale and higher profits. IP is also relatively easy to relocate to foreign low-tax jurisdictions.

Policymakers used a 10 percent profit margin on foreign tangible assets as a proxy for mobile profits that can be shifted to low-tax countries to avoid paying taxes. Those mobile profits are the intended target of foreign tax policy like GILTI.

The QBAI exemption partially shields U.S. multinationals with lower profit margins on foreign tangible property from what might otherwise be an overly punitive domestic tax burden. GILTI still ensures U.S. companies are not escaping taxation on profits that are more easily shifted to low-tax jurisdictions. The purpose of QBAI is to ensure that U.S. companies are not punished simply for having operations or machinery abroad.

Eliminating the QBAI Exemption

Part of President Biden’s American Jobs Plan (AJP) aims to raise the tax rate on GILTI to at least 21 percent, calculate it on a country-by-country basis, and eliminate the exemption of a 10 percent return on tangible investment abroad (QBAI).

Many companies have factories and large economic footprints outside the U.S. not for tax avoidance reasons, but often to be close to their customers or to utilize well-established local supply chains in foreign jurisdictions. Removing QBAI would increase the tax burden on U.S. companies that need to be operating in foreign markets for economic reasons, instead of preventing profit shifting and corporate tax avoidance.

The repeal of the QBAI exemption also departs from the approach outlined in a statement signed by more than 130 countries (including the United States) on a global minimum tax and from the intention to minimize the exposure of U.S. companies with foreign factories to GILTI. Removing QBAI would result in a heavier tax burden on the foreign earnings of U.S. companies than what other countries are considering.

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