The Biden administration and many Democrats in Congress are trying to enact some very worthy “human infrastructure” proposals. There can be legitimate debate as to the size and scope of the benefits as well as the degree of tax increases that should be enacted.
While I voice no opinion herein on these important matters, what I am advocating is that Democrats should not be adding unnecessary complexity with questionable efficiency to the nation’s federal income tax laws, nor including tax provisions targeted to benefit campaign contributors. America should have had enough of that when the Republicans in Congress passed the so-called Tax Cuts & Jobs Act (“TCJA”) in 2017. It added few if any jobs outside those in the tax field, but certainly helped many who generously contributed to the election of those responsible for its enactment.
On Sept. 15, the House Ways & Means Committee approved its version of the legislation, titled the “Build Back Better Act” (BBBA). Democrats in the House and Senate should, among other things, consider revising the international tax provisions contained in the act.
The Tax Cuts and Jobs Act added a new section to the Internal Revenue Code, Section 245A, which, in general, permitted United States parent companies to exclude foreign source dividends paid by foreign subsidiaries from federal income taxation. It had legitimate objectives of avoiding tax barriers to repatriation of offshore profits and to prevent U.S. taxation from making U.S. companies noncompetitive with their foreign rivals.
In order to help prevent this provision from further incentivizing the shifting of American jobs and earnings from going abroad, the act added two additional provisions: Global Intangible Low-Tax Income (GILTI) and Foreign Derived Intangible Income (FDII). The first essentially deems the foreign subsidiary, under certain circumstances, to cause a taxable inclusion of some or all of its earnings to the U.S. parent company. The latter provides tax incentives for U.S. companies to export goods, furnish services and license intangibles abroad. They collectively failed to stop the offshoring of jobs abroad, and this should be dealt with by the Build Back Better Act.
Instead of repealing section 245A, GILTI and possibly FDII, and addressing the rightful goals of tax laws that keep American companies competitive with their foreign rivals and discourage them from trapping their earnings offshore, the House bill tweaks these provisions. Tweaks will not adequately and fairly address these problems and, at the same time, discourage job migration from the United States. Furthermore, they will make our tax laws even more convoluted.
Section 245A and GILTI should be replaced with a revamped worldwide tax system, wherein profits of foreign subsidiaries of U.S. corporations are taxed immediately to the U.S. corporate parent when they are earned. This should be coupled with both a U.S. corporate tax rate for most foreign subsidiary earnings a few points lower than that of domestic profits (excluding something known as Subpart F, which includes “bad” earnings like dividends and interest), as well as including the reenactment of an indirect foreign tax credit for foreign income taxes paid by a subsidiary. This is different from what existed prior to 2018, when foreign subsidiary earnings would generally not be subject to U.S. tax until they were repatriated back to the U.S. parent company. It is not a perfect solution, but certainly better than what we have today or what is proposed in the Build Back Better Act.
Finally, why does the BBBA contain a provision drastically eviscerating long-standing rules concerning Subpart F? What does allowing some U.S. companies to minimize immediate U.S. taxation of traditional Subpart F income taxation have to do with the progressive values? This is what one would expect from those enacting the Tax Cuts and Jobs Act.
There is an opportunity to address some real needs of the American people, but tax changes need to be accomplished in a manner that is effective, relatively simple and without enriching a few campaign contributors under the guise of reform.
Philip G. Cohen is a professor of Taxation, Pace University’s Lubin School of Business, and a retired vice president-Tax & General Tax Counsel at Unilever United States, Inc. The views expressed herein don’t necessarily represent any organization to which he is or was associated with.