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June 12. 2017

ACT Tax Facts: Foreign Minimum Tax on US-Headquartered Global Companies

The attractiveness of the United States as a jurisdiction in which to locate the headquarters of a global company is markedly declining. Since 2000, the number of US-headquartered companies in the Forbes 500 list of global companies has declined by over 25 percent, from 202 in 2000 to 147 in 2016.1 And, foreign acquisitions of US companies were over three times greater than US acquisitions of foreign companies measured by deal value in 2015.2

Uncompetitive U.S. tax policy is an important reason why the share of U.S. headquartered companies is dwindling. The Administration and Members of Congress on both sides of the aisle recognize the need to align the US corporate income tax system with the rest of the world by reducing the corporate income tax rate and adopting a modern international tax system that removes the repatriation tax barrier for US-headquartered companies to invest their foreign earnings at home (so-called “territorial” taxation).

The House GOP Tax Reform Blueprint3 provides for a “territorial” tax system that would allow US-headquartered companies to invest their future foreign earnings in the US without a repatriation tax. The Blueprint addresses concerns about profit shifting by imposing tax based on the place of consumption.

Alternative approaches to tax reform would adopt a territorial tax system, like 29 of the other 34 OECD member countries, but unlike these countries would couple adoption of a territorial tax system with a minimum tax on foreign business income to address concerns that US income would be shifted abroad (i.e., US tax base erosion). For example, President Obama’s FY 2017 budget included a 19-percent per-country minimum tax on foreign income.

Imposing a current tax on the active foreign business income of US-headquartered companies unless they pay a minimum amount of tax to foreign governments (a form of “US headquarters tax”) would put US companies at a significant competitive disadvantage in today’s global economy.

  • No other country imposes a broad foreign minimum tax on active business income. As a result, the United States would be a much less attractive location for global companies to locate their headquarters, and US companies would continue to be under pressure to move their headquarters abroad.
    • Other countries use “carrots” rather than “sticks” to combat tax base erosion. Rather than imposing minimum taxes on the foreign income of their globally-engaged companies, other governments offer low domestic tax rates for mobile income. As of the end of 2015, 16 countries (including France, Italy, and the UK) had adopted “patent boxes” that typically provide single-digit tax rates on income from qualified intangible property.4
  • Increased foreign takeovers of US companies. Because a foreign minimum tax would apply only to US-headquartered companies, the real world effect of this new tax would be an increase in corporate “inversions” and more foreign takeovers of US companies.
  • Penalty for companies that are not eroding the US tax base. A foreign minimum tax would penalize US companies that reduce their foreign taxes in full compliance with foreign law or that acquire foreign companies with low foreign tax rates, both instances where no US tax base erosion is at stake. Thus, a foreign minimum tax is not well-targeted to addressing US tax base erosion.
  • Would not stop US tax base erosion. Because the minimum tax rate would be lower than the US statutory rate, there would still be a tax advantage to earning income abroad instead of in the United States. For example, at a 20% corporate rate and a 10% minimum tax rate, a US company could continue to enjoy a tax advantage by owning intangible assets abroad. Thus, again proving a foreign minimum tax is not well targeted to reducing US tax base erosion.
  • Revenue transfer to foreign governments. A foreign minimum tax would increase tax payments by US companies to foreign governments because there would be no incentive for US companies to reduce their foreign taxes below the minimum tax rate or for foreign governments to grant tax incentives to US companies. Thus, over time, most of the additional tax payments by US-based companies would go to foreign governments – not the US Treasury.
    • Not a sustained revenue source. Increased foreign tax payments and foreign takeovers of US companies may be reasons why the Joint Committee on Taxation estimated revenues from the Obama foreign minimum tax would fall by 24% from 2021 to 2025.5
  • Complexity. Real tax reform means elimination of minimum taxes — including the alternative minimum tax (AMT) — not adding a new and unprecedented foreign minimum tax.

In summary. The US needs pro-growth tax reform. Unfortunately, a US headquarters tax misses the mark: it would increase foreign takeovers of innovative American companies, encourage foreign governments to raise taxes on US-based companies, and increase the cost of tax compliance for US-based companies.

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1 Forbes 500, Forbes International 500, and Forbes Global 2000 lists.
2 Thomson Reuters SDC M&A Data for 2015. Deals limited to those in which at least 20% of the shares of the target were acquired. Includes asset sales and divestitures.
3 House Republicans, “A Better Way,” (June 24, 2016).
4 Congressional Research Service, “Patent Boxes: A Primer,” (May 1, 2017).
5 Joint Committee on Taxation, “Estimated Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year 2016 Budget Proposal.” JCX-50-15, (March 6, 2015).