Adoption of Global Minimum Tax Could Raise U.S. Revenue…or Not

August 19, 2021

Correction (8/25/2021): Due to a minor error in our Multinational Tax Model, several of the calculations in the original version of this post were incorrect. That error has now been corrected and this analysis has been updated accordingly.

The Biden administration has proposed significant changes to the tax rules that govern how much U.S. companies owe on their foreign profits while working to negotiate a global minimum tax. However, the global minimum tax and the Biden administration’s proposals are quite different.

A recent Tax Foundation report dug into the details on the revenue consequences of several options to change U.S. international tax rules. One part of this analysis looks at the policy outlined in the recent multilateral statement on a global minimum tax and how current U.S. tax laws might change to reflect that agreement.

The U.S. already has a minimum tax on the foreign earnings of U.S. companies. This is embodied in the Global Intangible Low-Taxed Income (GILTI) policy adopted in 2017. That policy requires U.S. companies with foreign earnings to pay taxes to the U.S. on those earnings based on a formula.

The GILTI formula provides a 10 percent deduction for the value of foreign tangible assets, a 50 percent exclusion, and an 80 percent limit on credits for foreign taxes paid. This is designed to result in a 10.5 percent to 13.125 percent tax on foreign income. GILTI applies to blended foreign income rather than taxing foreign earnings at the country level. It also does not allow excess foreign tax credits to be carried forward.

The global minimum tax is substantially different from GILTI. The statement released on July 1 and signed by more than 130 countries provides an outline for that policy. The tax rate would be at least 15 percent, and the full value of foreign tax credits could be utilized. The policy would be applied on a country-by-country basis, and excess foreign tax credits could be carried forward to offset future minimum tax liability. Finally, it would allow deductions for tangible assets and payroll costs (at 7.5 percent initially, then 5 percent after five years).

If lawmakers were to change GILTI to resemble to the global minimum tax proposal, this could increase the tax liabilities of U.S. multinationals by $106 billion relative to current law.

The modeled example does not perfectly align GILTI to the global minimum tax since that policy would also allow loss carryforwards and relies on financial statement income (rather than taxable income). There are also other unspecified details for the global minimum tax that are meant to address discrepancies between financial and taxable income.

Effects of Changing GILTI to Conform to the Global Minimum Tax Proposal on Federal Corporate Income Tax Liabilities of U.S. MNEs
Change in federal corporate income tax liabilities of U.S. MNEs ($billions)
Provision 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total
15% GILTI rate 12.4 13.2 14.2 15.1 6.8 7.0 7.2 7.4 7.6 7.8 98.8
 + Remove GILTI 80% foreign tax credit haircut -2.8 -3.0 -3.2 -3.4 -3.6 -3.7 -3.8 -3.9 -4.0 -4.1 -35.7
 + Country-by-country GILTI 7.2 7.7 8.3 8.9 9.2 9.5 9.8 10.1 10.3 10.6 91.7
 + Allow GILTI FTC carryforwards 0.0 -2.4 -3.7 -4.7 -5.4 -6.0 -6.5 -6.9 -7.3 -7.7 -50.8
 + Use OECD QBAI/payroll exemptions -0.4 -0.3 -0.3 -0.3 -0.2 0.8 0.7 0.7 0.7 0.7 2.1
Total 16.4 15.2 15.3 15.6 6.7 7.5 7.4 7.3 7.2 7.3 106.0

Note: This table presents the change in federal corporate income tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

The policy increases tax liabilities of U.S. multinationals mainly because of the higher tax rate on GILTI and because the tax would be calculated for each country where a company has foreign earnings. Removing the 80 percent limit on foreign tax credits and allowing excess credits to be used to offset future minimum tax liability would reduce tax liabilities for U.S. multinationals relative to current law.

One major caveat to these results is that they do not account for the possibility that other countries, particularly those with low corporate tax rates, could change their policies and conform to the global minimum tax standard.

The global minimum tax described in the July 1 agreement is optional for countries, so it is uncertain how many countries will adopt the rules that are outlined. The amount of additional revenue raised by the U.S. through changes to GILTI depends on what other countries do with their tax rules.

For the U.S. to increase its tax take in line with the $106 billion estimate previously mentioned, U.S. companies would need to continue paying low effective tax rates in some foreign jurisdictions. If companies end up paying more in foreign taxes due to other countries’ adoption of the minimum tax, or by earning more profits in higher tax jurisdictions, the U.S. revenue from changing GILTI will shrink.

What happens if the foreign earnings of U.S. companies are all taxed at least as much as the minimum tax policy in every jurisdiction where they operate, and the U.S. amends GILTI to reflect the global minimum tax?

In that scenario, the U.S. would lose revenue because foreign tax credits would increase more than the increase in GILTI liability. If a U.S. company currently pays a low foreign rate, then it would have a small amount of foreign tax credits to offset U.S. tax liability under GILTI. If foreign rates rise, however, the company would be able to offset more U.S. tax liability.

So, if the U.S. were to adopt the reforms to GILTI outlined above and there was worldwide adoption of a 15 percent minimum effective tax rate, U.S. tax liabilities of U.S. multinationals would fall by $43.9 billion as tax payments to foreign governments increase. The U.S. Treasury would bear the fiscal burden of low-tax countries adopting the minimum tax and U.S. companies claiming larger foreign tax credits.

This effect is not unique to GILTI being changed to reflect the minimum tax. Even if GILTI remained the same as in current law and U.S. companies began facing at least the minimum tax on all their foreign earnings, those companies would see higher foreign tax liabilities and lower liabilities to the IRS.

If the tax liabilities from GILTI were increased in line with President Biden’s proposals, worldwide adoption of the 15 percent minimum tax would erode $140.7 billion from the potential $1.32 trillion estimate of the increase in tax liability from Biden’s proposed policy.

This pattern holds for the other options that were modeled in our recent paper. Under each option, the potential for the policy change to increase tax liabilities of U.S. multinationals would be weakened as other countries adopt a 15 percent minimum tax. This is shown in the following table.

The magnitudes of the effects vary across the scenarios in line with how much worldwide income of U.S. companies is subject to U.S. taxes and the size of offsetting foreign tax credits. How sensitive U.S. tax revenue is to foreign tax hikes depends on how much foreign income the U.S. includes in its tax base and how responsive foreign tax credits are to the foreign tax rate.

Effects on Federal Corporate Income Tax Liabilities of U.S. MNEs With Other Countries Adopting a 15 Percent Minimum Effective Tax for Various U.S. Policy Options
Change in federal corporate income tax liabilities of U.S. MNEs ($billions)
Proposal Current rates 15% minimum Difference
Current law 0.0 -20.4 -20.4
Biden proposal 1315.9 1175.2 -140.7
Partial Biden 579.5 502.3 -77.2
GILTI fix 0.0 -62.5 -62.5
Pillar 2 106.0 -43.9 -150.0

Note: This table presents the change in federal corporate income tax liabilities of U.S. multinationals in billions of dollars for each provision. All estimates include profit shifting in response to the average tax rate differential with a semi-elasticity of 0.8.

Source: Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021, https://taxfoundation.org/us-multinational-tax-reform-options-gilti/.

In the ongoing budget debate, U.S. policymakers may choose to increase tax revenue by changing the tax rules for U.S. multinational companies. However, the true revenue impact of those changes will be tempered by how companies and countries respond to the recently proposed global minimum tax. If low-tax countries begin conforming to that policy, U.S. tax revenues will be reduced.

This interaction between the U.S. proposals and those that may be put into law in foreign jurisdictions should give lawmakers caution when evaluating the revenue potential of changes to GILTI.

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The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

The average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.