Susan Morse (Texas; Google Scholar) presents The Quasi-Global GILTI Tax virtually at Duke today as part of its Tax Policy Workshop Series:
It has become more difficult to frame the taxation of global corporate profit as a matter of national tax policy. For decades, the consensus starting point gave the corporate income tax national boundaries. Now, it seems more comfortable to think of some elements of the corporate income tax as global or at least quasi-global taxes – sources of public revenues levied on a world-wide basis.
Perhaps the U.S. minimum tax on global intangible low-taxed income, or GILTI approaches the global tax description. The tax on GILTI, enacted in 2017, describes a tax base measured by the income of controlled foreign corporations or CFCs, such as corporate subsidiaries of U.S.-parented multinationals. This tax base roughly equals non-subpart F CFC income in excess of a 10% exempt return on tangible assets. GILTI is included in U.S. shareholders’ tax base subject to the allowance of a 50 percent deduction, which means that GILTI is taxed at a lower U.S. rate. The tax on GILTI is reduced (but not below zero) by a foreign tax credit equal to 80 percent of foreign taxes paid or accrued on the same income, where foreign taxes are calculated in the aggregate and not on a per-country basis.
GILTI thus seeks to ensure that tax is imposed once on a certain kind of global income -- excess cross-border corporate profit. If tax is not imposed elsewhere on this income, then the U.S. will collect it. Ruth Mason calls GILTI an example of a “fiscal fail-safe” that supports the new norm of full taxation. The U.S. does not tax GILTI where non-U.S. jurisdictions, in aggregate, impose corporate tax on GILTI at a rate that at least equals 62.5% of the maximum U.S. corporate rate. This threshold is 13.125% when the U.S. rate is 21%, as it has been from 2018 to 2020.
The GILTI threshold thus sets an implied minimum tax rate at which excess cross-border corporate profit will be taxed. Because the threshold is measured in the aggregate, it does not allocate tax revenue among foreign jurisdictions. Although the tax on GILTI not quite a source of public revenue levied on a worldwide basis, it approaches this definition, because it is collected without the consent of affected jurisdiction and because the U.S., as the enacting jurisdiction, does not specify how the tax will be allocated. This Essay presents a thought experiment that considers the tax on GILTI as a quasi-global tax.
A minimum tax is also the centerpiece of the OECD’s “Pillar 2” Global Anti-Base Erosion, or GloBE, proposal. However, unlike GILTI, the GloBE minimum proposal operates on a per-country basis. It also has backup rules to allocate default jurisdiction to tax where a parent corporation is located in a low-tax jurisdiction. GloBE thus takes on the task of allocating jurisdiction to tax, and envisions that every jurisdiction will have a corporate tax rate that at least equals the set minimum. A Baker and McKenzie report on Pillar 2 explains that the proposal “promises to be a tide that lifts all boats (whether jurisdictions like it or not) by setting a floor on acceptable ETRs.”
GILTI (in contrast to GloBE) does not undertake to divide jurisdiction to tax as among non-U.S. jurisdictions. GILTI calculates the tax imposed by non-U.S. jurisdictions on an overall basis. To see the difference, consider a hypothetical multinational firm with two foreign subsidiaries. Assume further that the minimum tax rate (whether implied by the GILTI system or set by a GloBE approach) is 131.25%. Say one foreign subsidiary earns 100u and pays 26.25u in foreign tax, while a second foreign subsidiary earns 100u and pays 0u in foreign tax. Under the GILTI minimum tax system applicable to U.S.-parented multinationals, no additional tax will be due. Under the GloBE approach, the second foreign subsidiary will owe 13.125u in additional tax, for instance to the country where the multinational parent is incorporated.
GILTI’s structural contribution consists of supporting the continued collection of a sum of corporate tax worldwide, on excess cross-border corporate profit, up to its implied minimum tax rate. It does not try to divide that sum as among non-U.S. jurisdictions. But aside from allocating between the U.S. and the rest of the world, division of jurisdiction to tax is not GILTI’s issue.
Perhaps this leaves room for the consideration of more innovative jurisdiction allocation methods. GILTI tax revenue might be allocated in accordance with factors that depend on labor force or environmental exploitation or in accordance with a principle of declining marginal utility of public goods. Novel allocation approaches could proceed from multilateral negotiation or from competition, including the possibility that developing nations might compete for revenue in the forum of public opinion. Of course there are political obstacles to pursuing goals of international justice, but perhaps progress is more likely if a sum of corporate tax revenue is at least made available for division.
Part I of this essay discusses the idea of a global tax, as contrasted with a national corporate tax, and suggests why the label “quasi-global tax” might fit the tax on GILTI. Part II explains that unilateral U.S. GILTI guidance to date may strengthen the case for treating the GILTI tax as a quasi-global tax, even if it does not represent good national tax policy.