Some Democratic lawmakers want to know what Treasury and the IRS are doing to discourage companies from shifting assets offshore, now that the global intangible low-taxed income tax and other aspects of the Tax Cuts and Jobs Act have encouraged the practice — but the administration might’ve already made its position clear.
On September 9 Sens. Amy Klobuchar, D-Minn., Chris Van Hollen, D-Md., and Tammy Duckworth, D-Ill., along with Rep. Peter A. DeFazio, D-Ore., wrote to Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig to ask what specific measures were being taken to monitor and mitigate the relative incentives created by the TCJA, especially under the new GILTI regime, for corporations to offshore jobs and physical operations.
Klobuchar’s news release on the letter included a reference to the Removing Incentives for Outsourcing Act (S. 1610), reintroduced in May by Klobuchar, Van Hollen, and Duckworth, which would require the GILTI minimum tax to be determined on a per-country basis and remove the exemption for “supranormal” returns on overseas earnings. It also referred to the Disclosure of Tax Havens and Offshoring Act (S. 1609), sponsored by Van Hollen and Finance Committee member Sheldon Whitehouse, D-R.I., which would require corporations to disclose their financial reporting on a country-by-country basis to expose corporations that are abusing tax havens. In 2018 DeFazio introduced the Per-Country Minimum Act (H.R. 6015), which would also require companies to determine their GILTI inclusions on a per-country basis. While that proposed legislation seems to include the specific measures the lawmakers would suggest to address their concerns on outbound transfers of physical operations and job relocations, has Treasury already responded to these issues?
On June 3, during the OECD International Tax Conference in Washington, Lafayette G. “Chip” Harter III, Treasury deputy assistant secretary for international tax affairs, said, “It is complicated to track separate foreign tax pools and rates” on a country-by-country basis. In August 2015 Treasury issued Notice 2015-54, 2015-34 IRB 210, which stated that “in 1997 Congress recognized that taxpayers might use a partnership to shift gain to a foreign person and consequently enacted sections 721(c) and 367(d)(3).”
In January 2017 Treasury and the IRS issued temporary (T.D. 9814) and proposed (REG-127203-15) regulations permitting tax-free outbound transfers of appreciated property to partnerships using the remedial method and meeting other criteria. Those regulations remain in effect, despite the underlying goals of the TCJA to prevent the offshoring of business assets that generate jobs. Thus, Treasury already seems to have indicated that it opposes a per-country approach because of its administrative burden on corporations and, to date, hasn't aligned its regulations with the TCJA's goals by modifying the section 721(c) regulations to mitigate that offshoring. If Treasury won’t exercise its much clearer authority to prevent outbound transfers, would it attempt to do so for the global intangible low-taxed income statutory provisions that are based on net CFC tested income?
Klobuchar and her fellow GILTI reform advocates on Capitol Hill aren’t the only ones questioning whether the GILTI provisions are best suited to meet the apparent goals of a minimum tax and preventing offshoring. The OECD member countries seem inclined to adopt a minimum tax calculated on a per-country, instead of global, basis.
While GILTI was intended to encourage tax havens to increase low tax rates, countries continue to believe their lower rates will attract additional jobs and help expand their base so the rates can remain low. And although the incentives for outbound planning have weakened under the TCJA, with its 40 percent reduction in the maximum corporate tax rate, they still exist. Inclusions under GILTI, which focuses on intangibles, decrease when CFCs have tangible business assets. GILTI also violates the tenets of the territorial tax regime, a stated goal of the TCJA, in taxing offshore earnings, especially because a narrower exception to a territorial regime would place a minimum tax solely on the targeted tax haven countries, but GILTI looks to the global average.
While the TCJA’s goals may conflict with the statutory language, it's not up to Mnuchin or Rettig to alter that language. And the overarching goal of the TCJA was to reduce taxes for Americans. Will abuse concerns trump tax cuts? Will asking Treasury officials to ensure that the Trump administration's policy goals are being implemented while they’re drafting regulations in line with the conflicting statutory language provide the desired answers? It appears that almost any answer would support Klobuchar’s proposed legislation. Perhaps the real question is whether the administration would compromise to promote tax legislation that could help all parties. The concerns raised earlier this week may help produce those answers.