by Bryan Perry

April 13, 2021

One of the hotter topics within the wider discussion of the Biden Administration’s future tax policy is on how to generate more taxes from the revenues U.S. corporations produce outside of the United States.

The Trump Administration actually led this movement, as the Tax Cuts and Jobs Act (TCJA) introduced several new rules for taxing foreign profits of U.S. multinationals, including rules related to “Global Intangible Low Tax Income” (or GILTI) that result in a minimum tax of 10.5% on foreign profits.

The Biden Administration, led by Treasury Secretary Janet Yellen and many Democratic members of Congress, wants to make some material changes to the GILTI tax standards, and policymakers are busy figuring out what the ramifications will be on the tax burden of corporations.

The tax burden on GILTI was intended to fall on profits from intangible assets, such as patents that U.S. companies hold abroad. Companies whose foreign profits are mainly from intellectual property (IP) are not likely to have many tangible assets and are thus more likely to have their income taxed under GILTI. But the policy has come to have much wider implications, affecting not just information technology businesses but also multinational companies in manufacturing and other non-agricultural industries.

Share of Foreign Profits Table

Within the new infrastructure bill now being pushed, the Senate Finance Committee released its new version of a “GILTI Framework.” Secretary Yellen expressed support for President Biden’s tax policy by reporting that she is working with G-20 nations to agree to a global minimum corporate tax rate.

GILTI was designed to have a lower effective tax rate to avoid full double taxation of foreign earnings, but U.S. businesses that pay both foreign taxes and taxes on GILTI are subject to two layers of tax. (Additional foreign tax rules can mean much higher effective tax rates on GILTI, approaching 20%.)

Reduced Multinational Tax Burden Tax Reform Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

President Biden has called for increasing the domestic corporate tax rate from 21% to 28% and he is also calling for a doubling of the current 10.5% minimum tax on foreign profits to 21%.  The Biden blueprint for corporate taxes was reinforced by Secretary Yellen last week when she stated: “Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity.”

Yellen aims to advance Biden’s goals by forging international agreement on a minimum tax, leveraging those negotiations through the Organization for Economic Cooperation and Development (OECD) by altering cross-border tax rules in the increasingly digitized worldwide economy.

More attention on this agenda will be forthcoming this week at the annual International Monetary Fund – World Bank spring meetings that Yellen will be a central part of. This trend pivots entirely against the Trump administration’s position to move away from multilateralism in economics so as to limit China’s maneuverability for creating even greater leverage within these large global governing organizations.

Critics of the proposal say that a global minimum corporate tax rate will harm workers, who will feel the pain if their employers pay more taxes. Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, said, “It is hard to see what raising the corporate income tax, the burden of which will be ultimately shouldered by workers and shareholders, will do to help with inequality,” adding that “raising corporate costs will lead to less investment in fixed assets and that helps no one considering the private sector is the driver of ownership in infrastructure and investment in infrastructure.”

The Cato Institute says President Biden’s proposal for increasing taxes on domestic and foreign income would raise the amount of money collected from corporations by 38%. A net tax increase of 38% is pretty severe, so I personally don’t think it has much of a chance of materializing once lobbying efforts are in full swing. Cato’s Director of Tax Policy Studies warned that raising tax rates that much would cause many American corporations to move their profits and investments abroad and slash costs, so maybe striking the right balance is where the final tax package will land. Raising the domestic rate from 21% to 24% and the GILTI tax from 10.5% to 21% would reduce those incentives to move operations offshore.

All this tax talk is targeted to pay for Biden’s $2.25 trillion infrastructure plan, and if the money doesn’t come from corporations, then it will come from other sources in the form of higher individual income taxes, eliminating qualified dividends, eliminating step-up basis for estates, taxing unrealized capital gains, new gas/carbon taxes, and possibly a national Value-Added Tax (VAT) at some point.

Whatever the end game is for policymakers, taxes for corporations and for individuals are about to increase by varying degrees. To date, the stock market has paid little attention to this soon-to-be reality, instead opting to focus on Fed QE policies and Congressional stimulus. At some point, it would seem that this transformational change in tax policies will matter to the stock market – but then again, maybe not.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
We Are Now Essentially in Economic Nirvana

Income Mail by Bryan Perry
Taxing Foreign Profits – GILTI As Charged

Growth Mail by Gary Alexander
Inflation Will Roar Again – And Probably Soon

Global Mail by Ivan Martchev
Tuesday’s CPI Numbers Will Be Interesting

Sector Spotlight by Jason Bodner
Is the Stock Market a “Yellow Light Turning Red”?

View Full Archive
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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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