The Global Minimum Tax: Will US Multistate Tax Conventions Apply?

A quick Google search for “Global Minimum Tax” brings up a host of news articles passionately advocating either for or against the proposal.  In fact, a casual consumer of news could be forgiven for thinking that the global minimum tax is synonymous with the Biden Administration’s Made in America tax plan.

The goal of a global minimum tax provision is to make American companies and workers more competitive by eliminating incentives to offshore investment and profit shifting. The plan is positioned as an important funding source for the American Jobs Plan, generating funding for a sustained increase in investments in infrastructure, research, and support for manufacturing.

As multistate tax experts, we are curious as to how it will all shake out. For example, how will local taxes be taken into consideration, if at all?  In the United States, there are 51 jurisdictions (including the District of Columbia), 46 of which subject corporations to an income tax, and even those that do not tax a corporation’s income find a way to tax the commerce of corporations.  The combined state/city corporate tax rate if you are doing business in New York City, for example, can exceed 18 percent – that is nearly as high as the US federal tax rate of 21 percent! Does that mean the “US tax rate” of a company doing business in New York City is 39%?

As a global tax standard moves forward, there are many considerations, and a lot to be learned from the ways US states tax the income of corporations.  Will a global minimum tax eliminate the need for international transfer pricing?  Probably not, but it will be exciting to watch!

Lessons from US Multistate Taxation

Multinationals represent a major source of tax revenue in the U.S. According to the Tax Foundation, in 2016, the U.S. Treasury received $316.1 billion of corporate income tax revenues, $201.3 billion of which came from U.S. multinationals. It is no surprise, then, that there is so much discussion on a proposal that would affect this sector.

The goal, of course, is to discourage multinationals from shifting profits – and tax revenues – to low tax countries.  Currently, multinational organizations can shift revenue from intangible sources – like patents or royalties on intellectual property – to low-tax countries, no matter where the revenue is realized. There’s really little difference between international and US multistate tax planning.  It’s all about shifting income from a high tax state (or country) to a low or no tax state/country.

Tax Credits, Share Price and Apportionment

Another interesting question is that of foreign tax credits.  US-based multinationals receive US federal tax benefit for foreign income taxes paid.  A global minimum tax could (maybe should) deemphasize – or even eliminate these credits if we move to a worldwide corporate tax rate.  Tax strategies could change significantly. 

If you look at most global companies, and in which countries they do business, you can see how they use aggressive tax strategies to impact their profits.  If the average rate of tax in the countries in which they do business is 30 percent, but they are paying at a 22 percent rate, they are likely shifting income aggressively into lower tax jurisdictions. 

Taking away that ability with a global minimum tax can impact share price.  A one or two percent increase in the overall corporate global tax rate can translate into pennies a share or more. A five percent increase could mean dollars per share. 

So, does the normalization of global taxation lead to the concept of global apportionment of income that has existed at the US state level for more than 60 years?

As a result of what started with the Uniform Division of Income for Tax Purposes Act, a single legal entity operating across the US, takes all of its income and apportions it to every state in which it does business for the purposes of calculating state income taxes.  Similarly, a company doing business in France and the US could apportion its income based on its operations in each country.  Wouldn’t this be fair?  It has worked in the US for a long time, and could eliminate the need for transfer pricing and/or the controversy associated with aggressive tax planning strategies.

Get Ready

No matter where the rate lands, changes in global tax policy are inevitable.  The global minimum tax is just one piece of a broader initiative to revamp international tax policy for a new, digital age.  Among the issues being debated among OECD member companies are policies around taxing cross-border digital services.

There’s an appetite – and a need – to modernize global tax policy and whether U.S. multinationals like it or not, there will likely be some movement toward a global minimum tax before year’s end. While we can’t know exactly when and how much, it is critical to begin thinking about and planning for its impact. Smart, flexible tax planning strategies can help companies respond quickly to new policies. Our tax planning team has been helping multinational companies work through the “what if” scenarios for decades  – contact us today with your questions!

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William Gagnon

wgagnon@gagnontax.com

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