Sound tax policy helps to drive economic growth, research and development (R&D), and innovation. These factors are essential to ensuring the global competitiveness of companies doing business in the United States, including leading innovative firms across the technology sector. ITI supports a U.S. tax system that fuels growth and a global tax system that provides much-needed certainty for companies to innovate, expand operations, and provide essential goods and services to individuals and businesses worldwide. With these aims in mind, below we unpack some of the factors that contribute to promoting U.S. technological leadership through the United States' tax policies.
The competitiveness of the U.S. tax system relies on an ecosystem of interacting policies, including a competitive corporate rate and international tax system. For example, the Tax Cuts and Jobs Act paired significant increases in the amount of global earnings of U.S. companies that are subject to current U.S. taxation with overall tax rate reductions. In doing so, it placed U.S. companies on a more level playing field with global competitors while encouraging investments in the U.S. economy. Because of the ways in which the many provisions interact, a change to one aspect can undermine the intended impact or effectiveness of another aspect and lead to an unintended – even undesirable – outcome. Any proposed changes to the U.S. tax system must therefore be considered in a comprehensive and thoughtful manner that reflects the benefits to the United States of globally engaged companies and foreign direct investment.
U.S. International Tax Provisions
Companies in the United States lead in the delivery of goods and services to markets worldwide, often innovating at home to develop products used in the U.S. and by the 95 percent of consumers that live outside of the United States. Core elements of the U.S. international tax system currently operate in concert to support the U.S. technology industry's global leadership. Our goal is to ensure that any changes being contemplated continue to prioritize U.S. leadership and reinforce the United States’ competitiveness for making job-creating and -retaining investments, advancing R&D, and holding intellectual property (IP).
The deduction for foreign-derived intangible income (FDII) sits right at the center of encouraging R&D, economic growth, and high-paying U.S. jobs by encouraging companies to invest in jobs and IP in the U.S. to serve customers in foreign markets. It does so largely through equalizing the tax rate on the income from those investments as compared to those investments being made overseas. In practice, this means companies receive benefits for realizing successful research and then selling products derived from that research abroad. For example, FDII provides key support to U.S. companies who develop advanced technologies like 5G wireless technology and advanced semiconductors. From the perspective of the U.S. tax base, when companies hold their IP in the United States, the United States has the first right to tax the income the IP generates. Any proposed amendments to FDII should take into account the benefits accrued by encouraging the location and further development of IP in the United States, including but not limited to the benefits for U.S. employment opportunities, investment, and the U.S. tax base.
The U.S.’s global intangible low-taxed income (GILTI) regime was designed to work with the FDII provision as a cohesive system to help encourage investment and jobs in the United States and to support U.S. companies against global competition for selling products and services throughout the world. While FDII acts as the carrot by encouraging foreign sales of products connected to U.S.-held IP, GILTI acts as the stick by applying a minimum tax to the foreign earnings of U.S. multinational companies from intangible assets. Under GILTI, the United States is the only advanced economy that taxes the active foreign business income of its multinational companies on a current basis, as opposed to other jurisdictions that maintain territorial systems. Any consideration of proposed changes to GILTI should therefore bear in mind that the United States is already an outlier in its treatment of foreign business income earned by domestic companies. This is especially true when you consider that GILTI only allows companies to apply foreign tax credits to 80% of the income already taxed by other jurisdictions (sometimes referred to as a haircut) and introduces certain distortions from the absence of multi-year averaging of profits and loss or a carryforward of excess foreign tax credits. The current “aggregate” approach for calculating GILTI reflects the integrated nature of the foreign operations of companies, reduces the complexity of the GILTI calculation, and helps, in part, to mitigate those distortions.
Base erosion has been a longstanding concern in U.S. tax policy circles and globally. These concerns drove participation by the United States and other jurisdictions in the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project, which broadly speaking was intended to limit unilateral action by countries and curtail the use of complex, hybrid arrangements. The Tax Cuts and Jobs Act included the introduction of a base erosion and anti-abuse tax (BEAT) designed to address what were viewed as excess base-eroding payments to foreign related parties. In practice, BEAT has been a fairly blunt instrument as it frequently applies to day-to-day business transactions and does not permit the use of domestic tax credits that lawmakers had intended to further specific policy objectives. It is worth re-visiting the BEAT so that the regime is more precise in its application and better tailored to addressing base erosion.
The U.S. tax system is a complex and comprehensive system with interacting levers intended to incentivize equitable domestic growth and innovation, and, in conjunction with domestic provisions, provide revenue for the federal government. As the United States advances its domestic and international agendas, it should do so in a way that considers U.S. competitiveness vis-à-vis its international partners. After all, the United States benefits both from globally engaged U.S. multinational companies and from international companies making investments in the United States. ITI looks forward to engaging with policymakers as they consider reforms to the U.S. tax system.