One such provision is the U.S. corporate tax rate of 21 percent. And what might the corporate tax rate look like under a Democratic-controlled Congress and White House? Democrats provided some insight on March 7, 2018, when Senate Democratic leaders announced their Jobs and Infrastructure Plan. Among the provisions to fund the proposed infrastructure spending would be an increase in the corporate tax rate from 21 percent to 25 percent. Although the plan represents a four percentage point increase, the proposed rate is still considerably less than 35 percent and demonstrates the bipartisan consensus in maintaining a competitive corporate tax rate.
But apart from the obvious increase in tax burden, what would an increase in the U.S. corporate tax rate mean for how U.S. multinationals plan for their intangible income? By intangible income, moreover, I mean it as defined under the Act. That is, intangible income is the income exceeding a deemed tangible income return equal to 10 percent of qualified business asset investment (“QBAI”). (In the case of intangible income earned offshore, the tangible return is reduced by allocable interest expense, resulting in a net deemed intangible income return.) Foreign-related intangible income that is earned in the United States is known as foreign-derived intangible income (“FDII”); that which is earned outside the United States is known as global intangible low-taxed income (“GILTI”).
An increase in the U.S. corporate tax rate to 25 percent would not likely change how U.S. multinationals plan for where their intangible income is earned for two reasons:
- The new taxation system in which we operate; and
- The policy goal of parity on the taxation of FDII and GILTI.
In other words, an increase in the rate should not diminish the benefits of onshoring versus earning intangible income outside of the United States.
The Act provides a new approach for the taxation of foreign-related intangible income of U.S. multinationals, whether earned by U.S. or non-U.S. members of the multinational group. The beneficial rate on FDII is achieved through a deduction of 37.5 percent on such income through 2025, after which point the deduction is reduced to 21.875 percent. Therefore, with a corporate tax rate of 21 percent, the effective rate on FDII is 13.125 percent through 2025 and roughly 16.4 percent thereafter. The future decrease in the deduction percentage, however, was one of the mechanisms for keeping the cost of the Act under USD 1.5 trillion over a ten-year period. Lawmakers have expressed their intention to extend such provisions before they change.
Additionally, GILTI is now included in the current gross income of a U.S. shareholder of any controlled foreign corporation. GILTI receives a deduction of 50 percent through 2025, after which point the deduction is reduced to 37.5 percent. Again, the reduction was one of the means for keeping the cost of the Act within the desired limit. The foreign tax credits allowed for foreign taxes paid with respect to GILTI are limited to 80 percent of the foreign taxes paid. Through the deduction and the haircut on foreign tax credits, the desired effect is to subject GILTI that is taxed at less than 13.125 percent through 2025, and roughly 16.4 percent thereafter to additional U.S. tax.
An increase in the U.S. corporate tax rate to 25 percent would not necessarily change the deductions for FDII or GILTI or the inclusion of GILTI in current gross income. The effective rate on both FDII and GILTI would be 15.625 percent through 2025 and roughly 19.5 percent thereafter. Any diminishment in the benefit of FDII under an increased rate would also come at an increase in the cost on GILTI.
It also seems unlikely that anything would change the policy goal of taxing FDII and GILTI on an equal footing. A four percentage point increase in the U.S. corporate tax rate would not necessarily mean also relinquishing the inclusion of GILTI in current gross income of U.S. parent corporations. I believe it is wrong to assume that intangible income earned by non-U.S. members of the group would somehow be shielded from increases in the U.S. corporate tax rate when the express policy objective is to tax FDII and GILTI at parity.