In The US International Tax Reforms: Competition and Convergence, Pay-Offs and Policy Failures, Steve Shay explains and analyzes, for an international audience, the December 2017 changes in U.S. international tax law. Shay casts these changes not as “fundamental” reform, but rather as a headline domestic corporate tax rate cut coupled with an agglomeration of international revenue raisers and incentives. Overall, these changes largely represent a reshuffling of the deck (perhaps after scribbling furiously on several cards with Magic Marker), as well as a missed opportunity. Nowhere does the new law squarely address the taxation of foreign sellers into domestic markets—“the most important defect” in current international tax law, according to Shay.
Shay begins by deftly summarizing the political context of the December 2017 changes, with particular attention to the relative unimportance of international tax policy, writ large, compared to the budgetary machinations necessary to usher the bill through the reconciliation process.
Any congruence between the new law’s provisions and actions advocated by the OECD/G20 BEPS Project should be seen as little more than coincidence or opportunism, and Shay appropriately dissuades foreign observers from an attempt to understand the December 2017 changes in any kind of holistic sense. In a trivia game, the Tax Cuts and Jobs Act clearly would fall under the category of “Potpourri.”
Shay’s article continues by describing the new law’s headline corporate tax rate cut in context and elucidating the various provisions that affect the effective tax rates borne by inbound and outbound investment. Two potential consequences of the rate cut stand out: First, the lower statutory rate not only aligns the United States with many of its trading partners. It also likely reduces variations in average effective rates across domestic industries, which would be a result worth considering in any future tax reform effort. Second, the lower rate (and quasi-territoriality of the foreign divdends received deduction) may leave multinationals with a bunch of excess foreign tax credits—and the potential to manage this excess in a way that minimizes U.S. tax. Many of the levers in this type of tax planning are embedded in the new law: GILTI, the foreign DRD, FDII, and the BEAT. Now is the time to double-down on GrubHub and UberEats.
Shay concludes that the December 2017 changes will affect international investment only at the margins, while any improvements in policing international tax avoidance will come at significant cost, complexity, and confusion. In addition, Shay advocates renewed engagement by U.S. policymakers in multilateral conversations about international taxation, especially as those conversations apply to cross-border sales by companies without any physical presence in the destination jurisdiction.
Any future U.S. corporate tax reform, however, must engage with the December 2017 changes as a starting point, and it’s worth considering what might be salvageable from this middling mishmash of international tax provisions. In some cases, Congress may have introduced the correct variable but established the wrong value. For example, tax reform might retain the foreign DRD at an intermediate rate—that is, not 100% but also not zero. Or GILTI might trigger no corresponding deduction from income, rather than the 50% and 37.5% deductions currently on the books (and, indeed, Shay and others have proposed this type of reform elsewhere). Of course, the prime example of this phenomenon is the new law’s deemed repatriation of foreign earnings, which effectively sold an already-established portion of the tax base for pennies on the dollar—a diminution of national resources that, in contrast to the opening of the Arctic National Wildlife Refuge for energy exploitation, is unlikely to be held up in litigation. One might argue that the repatriation tax rates could have been lower, but the fact remains that any bargain element would be very difficult, if not impossible, to reverse. In any event, the political economy story is important in how we think about prospective reforms, and incremental changes may prove more attractive than reversing course.
Another consideration is what we mean by simplicity or complexity in international tax law. Without question, the December 2017 law is a disaster in terms of drafting. It is gobbledygook of the worst kind. But the law also highlights the delicate interplay of tax base, rate, and credits—essentially by putting all three in a blender and hitting purée. One version of tax simplification might involve reconstituting these categories in more easily cognizable forms. Another might require fewer, unified anti-abuse rules but permit more flexibility with exceptions to the base and rate. A third might more explicitly engage international coordination in an effort to avoid gaps and overlaps across regimes. With regard to the Tax Cuts and Jobs Act, the answer is “complexity,” but the corresponding range of questions warrants some winnowing.
Finally, the December 2017 changes may affect the players in various tax avoidance games, and it seems important to monitor who, as well as what, emerges in the new landscape of international tax planning. Different industries may adapt in different ways. More critically, the new law may unsettle the hierarchy of advisors in the field, or it may lead to retrenchment among the usual suspects. Any reconfiguration of the market in tax advice may affect both the new law’s efficacy and the course of future reforms.
In conclusion, Shay’s article provides a clear and cogent analysis of the December 2017 changes in U.S. international tax law, along with pointed and insightful critiques. Policymakers and scholars—both inside and outside of the U.S. tax community—should find Shay’s article to be a valuable contribution to the ongoing debate over the recent effort at tax reform.