Treasury Secretary Janet Yellen called for a global minimum tax for US multinationals in a speech to the Chicago Council of Global Advisors on April 5, 2021. Under the proposal, US Multinational Enterprises (MNEs) would pay at least a 21% tax rate on profits earned in every country with foreign operations. The proposal increases the current GILTI rate of 10.5% and would apply more broadly by eliminating the exclusion for the 10% return on tangible fixed assets.
The initiative follows President Joe Biden’s campaign platform that called for raising the US corporate income tax (CIT) rate to 28% and replacing the current global intangible low-tax income (GILTI) tax with a much stronger minimum tax on foreign earnings.
The current GILTI tax on foreign subsidiary earnings has the following main elements:
- 5% effective tax rate (21% CIT rate with a 50% earnings deduction)
- Exclusion of a 10% return on foreign tangible assets
- Global pooling of foreign profits and foreign tax credits (FTCs)
- Elective High Tax Exclusion (HTE) for Controlled Foreign Corporations (CFCs) with effective tax rate above 18.9% (90% of standard CIT rate)
By contrast, Biden’s foreign minimum tax proposal has the following main elements:
- 21% effective tax rate
- Full income tax base (no exclusion of basic returns on foreign investments in tangible assets)
- Would eliminate pooling of profits and FTCs (by imposing country-by-country limitation)
It is noted that alternative versions of the US GILTI rules changes are being worked on and will likely be considered in the House and Senate. In addition, it will also be important to see how any eventual US changes align with the OECD’s Base Erosion and Profit Shifting (BEPS) Pillar 2 proposal for worldwide minimum corporate income taxation.
It is noted that while the OECD BEPS Pillar 2 initiative is still under discussion, it appears likely to set a minimum tax rate of about 12.5% and would exclude a normal rate of return on foreign investment. As a result, Biden’s proposal could put US MNEs at a competitive disadvantage and reignite corporate inversions (transactions where US MNEs become foreign MNEs).
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