US Treasury Secretary Janet Yellen has voiced US support for a global minimum corporate tax. At the same time, President Biden is proposing to increase US corporate tax rates to 28% and overhaul some of the controversial international provisions passed by the Trump Administration in 2017.
A cynic may say that the current rhetoric of a global minimum tax, likely many years away from being a reality, is conveniently timed to coincide with attempts to push through higher domestic tax rates. However, it is important that the US are recognising that they can no longer go it alone, as perhaps they have done in the past when passing punitive tax rules on US taxpayers with non-US business interests.
The US has historically taxed taxpayers on their worldwide income and passed complex laws in respect of how US owners of foreign companies are taxed. FTC, PFIC, CFC, Check-the-box, GILTI and many more are all acronyms US owners of non-US businesses have become accustomed to and had to navigate.
It is the last of those, GILTI, which is a focus of the proposed international overhaul. Global Intangible Low-Taxed Income was created as a way for the US to ensure that active non-US companies controlled by US taxpayers paid a minimum amount of tax. It was intended to target non-US companies who made their profits from intangibles, such as intellectual property rights rather than using their own tangible fixed assets to produce goods.
Due to the way the rules were designed, it affects many companies who do not hold substantial tangible fixed assets on their balance sheets. Providers of consultancy services, operating companies who rent or lease their assets and tech developers have all found themselves routinely subject to GILTI. As it applies to US taxpayers who control non-US companies, this includes individuals. For many US business owners who live outside the US, particularly with smaller non-US businesses, this has added disproportionate reporting and complexity to the already complicated balance of their US and local taxes.
In very basic terms, the existing and complex GILTI rules impose a 13.125% minimum tax on annual non-US profits considered GILTI. The proposals are to increase this to 21% and to apply to a country-by-country system. Therefore, if you are a US taxpayer and you own a non-US company that has GILTI, unless you have local corporate taxes of at least 21%, you may have additional US tax to pay.
With UK Corporation Taxes rising from 19% to 23% in April 2023, US owners of UK companies may be eventually protected from the proposed GILTI tax increase to 21%. However, two fundamental problems remain.
Firstly, GILTI affects US owners of non-US companies. There is no minimum level for GILTI. Therefore, all US taxpayers subject to GILTI will need to address, plan and comply with the reporting and calculations required to work out the GILTI amount and then whether they can mitigate the GILTI tax. For US citizens overseas, this makes the tax rules of starting a business complex and requiring upfront advice to balance US and local tax rules.
Secondly, GILTI as a global minimum tax is currently fundamentally flawed. It considers GILTI annually, with no carryover of company losses. Therefore, for non-US companies located in countries with high corporate taxes, the US owner of that company may still have US tax on GILTI if their non-US corporate tax was reduced for a particular year due to prior company losses. Equally, the incentive of taking local tax reliefs, such as annual investment allowances or R&D credits, may be reduced for companies with US owners having to worry about US tax exposure on GILTI.
As more businesses work across borders, the concept of a global minimum tax is in the interests of the bigger countries to enable them to stay competitive and protect their tax base. However, for the US owners of these businesses, they already have an imperfect global US tax regime affecting them. If the US is serious about a global minimum tax, it can lead this by enacting fundamental, sensible changes to the international tax rules rather than just increasing tax rates.
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