Key Points
The Tax Cuts and Jobs Act of 2017 (TCJA) taxation of multinationals’ foreign income maintained a similar overall tax burden: both before and after TCJA, multinationals paid an effective U.S. tax rate of around 2 percent on their foreign income.
The House Ways and Means Committee reforms proposed as part of budget reconciliation would more than triple the U.S. tax rate on multinationals’ foreign income, from around 2.1 percent to 7.4 percent, averaged by foreign income across industries. If the U.S. instead adopted the draft OECD proposal, U.S. multinationals would pay a residual U.S. tax rate of 6.1 percent.
The future competitiveness of U.S. multinational firms depends critically on whether other OECD countries also increased their tax rates.
Effective Tax Rates on U.S. Multinationals’ Foreign Income under Proposed Changes by House Ways and Means and the OECD
Effective tax rates (ETRs) reflect the amount of tax paid on a dollar of income, accounting for tax credits, differences between actual income and taxable income, and other factors that cause the true tax burden to differ from the statutory tax rate.1
Prior to passage of TCJA in 2017, all foreign income was notionally subject to tax at the statutory rate of 35% as it was earned. But foreign income was generally not recognized for U.S. tax purposes unless paid out as a dividend to U.S. taxpayers (repatriated), and multinationals could defer U.S. taxes on most foreign income indefinitely by retaining it in foreign affiliates. Under this system, multinationals could minimize or eliminate their U.S. tax liability through judicious timing of repatriations. In aggregate, PWBM estimates that multinationals paid ETRs (excluding Subpart F income) between 1.4% and 2.8%, or less than one tenth of the statutory rate of 35%.
The option to defer taxation indefinitely, combined with the expectation of eventual tax “holidays” on foreign income, led to the accumulation of substantial amounts of un-repatriated income abroad. Though nominally controlled by foreign affiliates, this income was typically deposited in U.S. banks or invested in U.S. assets. Major multinationals could generally access this income through the financial system and use it as though it had been repatriated, including to pay dividends or finance domestic investment. Less financially sophisticated firms, however, faced a choice between paying the statutory rate of 35%, holding a stock of accumulated earnings abroad, or reinvesting such earnings in their foreign operations. In all cases, the tax planning incentives created by deferral resulted in additional complexity and cost.
The pre-TCJA international tax regime is commonly referred to as a worldwide system because foreign income was notionally subject to tax as it was earned. In practice, recognition of most foreign income was deferred with no tax paid, resulting in what was effectively a territorial system for most major multinationals.
The regime introduced by TCJA is generally commonly to as a territorial system because most foreign income is exempt from tax upon repatriation. However, some foreign income is taxed as it is earned, with no option of deferral. While this income is taxed at a preferential rate, mandatory current inclusion of foreign affiliates’ income in U.S. parents’ taxable income results in what is effectively a worldwide system for many multinationals. According to a former House senior tax counsel who played a leading role in the development of TCJA, “Most U.S. [multinationals] believe we moved the system closer to pure worldwide even if we messaged it as moving closer to territorial.”
TCJA introduced a minimum tax on multinationals’ foreign income through the Global Intangible Low-Taxed Income (GILTI) regime. Taxes on GILTI are determined on an aggregate basis, based on a taxpayer’s consolidated global operations. Income from profitable foreign affiliates can be offset by losses from other affiliates, and tax credits from high-tax affiliates can be used to offset liability arising from low-tax affiliates.
This aggregate determination of tax liability is consistent with a multinational operating in multiple countries for business reasons – for example, a manufacturing facility in a low-cost country and a sales office in a market country. However, aggregate determination also allows a multinational to benefit from shifting income to tax havens, as foreign taxes paid in high-tax jurisdictions can be used as a credit against U.S. residual tax on tax haven income.
The U.S. is currently the only OECD country that imposes a minimum tax on the foreign income of its multinationals. A recent proposal from the House Ways and Means Committee would magnify this difference, increasing the tax burden on U.S. corporations’ foreign income to finance increased spending and cuts in other taxes as part of a budget reconciliation package. However, ongoing negotiations through the OECD/G20 Inclusive Framework on BEPS would – if successful – lead to the adoption of a global minimum tax by more than 130 countries, including the home countries of nearly every major foreign multinational.
Both the recent Congressional proposal and the proposed global minimum tax under negotiation through OECD would shift the determination of taxes on foreign income from an aggregate basis to a country-by-country basis. Instead of treating a multinational as single global entity with components in various jurisdictions, its activities in each country would be treated as independent operations. Minimum tax would be imposed separately for each country rather than on a consolidated basis. Under country-by-country determination, tax haven income is taxed at the minimum rate regardless of taxes paid elsewhere.
Table 1 presents estimated ETRs in 2022 and other information under alternative international tax regimes: current law, the pre-TCJA regime, and three proposed reforms that would raise revenue. Row 1 shows the rate of residual tax imposed by the U.S. on foreign income, on top of taxes already paid to foreign governments. Row 2 shows the total ETR, including both U.S. and foreign taxes. Row 3 shows the projected 10-year change in revenue for the three proposed alternatives. Rows 4 to 15 detail the parameters of each international tax regime. These projections are preliminary as they are based on current information available for House and OECD proposals; we will update these estimates as new details.
| Current law | Pre-TCJA equivalent* | House proposal | House proposal without country-by-country | OECD Pillar 2 | ||
|---|---|---|---|---|---|---|
| 1 | Residual US ETR on MNEs' foreign income | 2.1% | 1.4 - 2.8% | 7.4% | 5.1% | 6.1% |
| 2 | Combined US and foreign ETR on MNEs' foreign income | 12.7% | 12 - 13.4% | 18% | 15.7% | 16.7% |
| 3 | Revenue, 2022-2031, changes to GILTI and FDII (billions) | - | - | 256 | 107 | 144 |
| 4 | Corporate tax rate | 21% | 35% | 26.5% | 26.5% | 26.5% |
| 5 | GILTI deduction | 50% | Deferral | 37.5% | 37.5% | 43.4% |
| 6 | FTC haircut | 20% | 0% | 5% | 20% | 0% |
| 7 | GILTI effective statutory tax rate | 10.5 - 13.125% | 35% | 16.6 - 17.4% | 16.6 - 20.7% | 15% |
| 8 | Deduction for return on tangible assets | 10% | 0% | 5% | 5% | 7.5% |
| 9 | Deduction for return on labor | 0% | 0% | 0% | 0% | 7.5% |
| 10 | Country-by-Country | No | No | Yes | No | Yes |
| 11 | NOL carryforwards | No | No | Yes | No | Yes |
| 12 | FTC carryforwards | No | Yes | Yes | No | Yes |
| 13 | Include FOGEI in GILTI | No | Yes | Yes | Yes | Yes |
| 14 | FDII deduction | 37.5% | 0% | 21.875% | 21.875% | 37.5% |
| 15 | FDII effective statutory tax rate | 13.125% | 35% | 20.7% | 20.7% | 16.6% |
Source: PWBM
Notes: Foreign income includes all income of foreign affiliates except Subpart F income.
ETR = effective tax rate; MNE = multinational enterprise.
* Pre-TCJA policy is mapped to approximate post-TCJA-equivalent concepts. ETRs reflect U.S. residual tax paid in a given year on all foreign income (except Subpart F income) and are given as a range to reflect annual variability in the timing of repatriations.
The proposed reforms would lead to substantially higher minimum ETRs than the current GILTI regime. The House proposal would impose a country-by-country minimum tax of between 16.6 and 17.4 percent. PWBM estimates that if this proposal were adopted, the residual U.S. tax rate on multinationals’ foreign income would rise from 2 percent under current law to 7.4 percent.
The draft OECD proposal would impose a country-by-country minimum tax of 15 percent. PWBM estimates that if the U.S. were to conform its minimum tax to the OECD proposal, the residual U.S. tax rate on multinationals’ foreign income would rise from 2 percent under current law to 6.1 percent.
Figures 1, 2, and 3 report estimated country-level ETRs in 2022 for major foreign jurisdictions where U.S. multinationals report income, for current law and the alternative tax regimes. Because U.S. taxes are assessed at the group level and a multinational group may operate in multiple countries, U.S. tax liability is not directly attributable to specific countries. The plotted ETRs reflect an estimate of the additional tax resulting from scaling up global operations such that net income is $1 higher, holding all else constant.
Figure 1 shows ETRs for the recent House Ways and Means proposal. Figure 2 reports an alternative which retains all elements of the Ways and Means proposal except the shift to country-by-country. Country-by-country determination effectively eliminates any benefit of reporting income in a low-tax country. Under aggregate determination, such benefits are reduced but not eliminated.
Note: Foreign income includes all income of foreign affiliates except Subpart F income.
Note: Foreign income includes all income of foreign affiliates except Subpart F income.
Note: Foreign income includes all income of foreign affiliates except Subpart F income.
The U.S. House Ways and Means proposal as part of budget reconciliation would more than triple the U.S. tax rate on multinationals’ foreign income, from around 2.1 percent to 7.4 percent, averaged by foreign income across industries. The House proposal would tax U.S. multinationals at a higher rate than the proposed global agreement currently being negotiated through the OECD. If the U.S. instead adopted the draft OECD proposal, U.S. multinationals would pay a residual U.S. tax rate of 6.1%.
The future competitiveness of U.S. firms depends on whether other countries adopt the OECD proposal.
Case 1 -- U.S. status quo / OECD status quo: If neither the U.S. nor OECD countries changed their tax regimes, U.S. companies would continue to face a small disadvantage, as under current law.
Case 2 -- U.S. status quo / OECD adopts OECD proposal: If the U.S. retained its current minimum tax regime while other countries adopted the OECD proposal, U.S. multinationals would gain an advantage in terms of competitiveness and relative profitability, compared with a small disadvantage under current law.
Case 3 -- U.S. adopts House / OECD adopts OECD proposal: If the U.S. adopted reforms recently proposed by the House Ways and Means Committee while OECD countries adopted the OECD proposal, U.S. multinationals would face a generally level playing field, albeit a small disadvantage similar to current law discussed in Case 1.
Case 4 -- U.S. adopts House / OECD status quo: If the U.S. substantially adopts the House proposal, but OECD countries maintain status quo, U.S. multinationals would face a meaningful competitive disadvantage. Notably, foreign multinationals could continue to exploit tax havens to increase their profitability, while U.S. multinationals would not be able to take full advantage of such tax planning opportunities.
Students of economics will quickly recognize these potential “payoffs” as being consistent with the classic Prisoner’s Dilemma game from the field of game theory. In that setting, Case 1 is the “dominant strategy equilibrium” if the game is played only once. However, Case 4 can emerge if the game is (i) repeated many times and (ii) international sanctions are created to punish countries that “cheat” by lowering their tax rate. However, Case 4 also requires substantial cooperation across many countries, including from traditional tax havens like Ireland that have not yet agreed to the OECD proposal.
This analysis was conducted by Alexander Arnon and Zheli He. Prepared for the website by Mariko Paulson.
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We calculate the ETR on foreign income as the ratio of income taxes paid or accrued to foreign financial (book) income. Taxes paid or accrued include both foreign and U.S. taxes, except taxes on Subpart F income. Foreign income includes all income earned by U.S. multinationals outside of the U.S., except Subpart F income. We exclude Subpart F income because it is treated separately from other foreign income and is generally taxed as though it were domestic income. ↩
Country Income Foreign Tax Rate Current law House proposal Ghana 1355.51643 0.115325685 0.11532568 0.15952905 Mauritius 1237.56934 0.043631777 0.08556444 0.16285396 Morocco 190.83765 0.18903286 0.18903286 0.18903286 Zambia 63.39351 0.194823714 0.19482371 0.19482371 Americas, other countries 7395.16145 0.078571036 0.0964527 0.14014102 Barbados 12324.80676 0.002970986 0.04293114 0.13870565 Bermuda 98565.34496 0.004736657 0.05465741 0.16273773 Canada 41769.94638 0.174866555 0.17486656 0.17486656 Cayman Islands 54175.10102 0.003534074 0.05046987 0.15824116 Chile 4778.32239 0.14400062 0.14400062 0.16554434 Costa Rica 3425.88037 0.044960692 0.07358952 0.15753748 Dominican Republic 821.12811 0.082448455 0.09504668 0.15588432 Honduras 591.11677 0.062910988 0.08095641 0.15776821 Panama 854.30937 0.096888637 0.0991185 0.14921294 Paraguay 65.84264 0.18548275 0.18548275 0.18548275 Puerto Rico 37772.64162 0.014707921 0.0660176 0.16001947 Uruguay 429.15189 0.11135807 0.11936275 0.13576371 Venezuela 154.26724 0.072221995 0.07885071 0.072222 Virgin Islands 91.69348 0.040924153 0.05488719 0.04092415 Hong Kong 16575.59765 0.10060311 0.10933452 0.16302571 Israel 4495.09826 0.181981657 0.18198166 0.18198166 Korea, Republic of (South) 6350.49203 0.069271136 0.08316088 0.14413581 Lebanon 78.03946 0.090618678 0.10948854 0.15802542 Macau 3422.71504 0.002646866 0.01163956 0.12328866 Malaysia 4984.79394 0.182903271 0.18290327 0.18290327 Saudi Arabia 886.67825 0.143385092 0.14338509 0.15794799 Singapore 83516.10849 0.038878254 0.07844948 0.16167993 Sri Lanka 82.70645 0.112415991 0.11806252 0.16389572 Taiwan 3866.93197 0.185892368 0.18589237 0.18589237 United Arab Emirates 2771.042 0.023439127 0.02343913 0.13444375 Vietnam 882.76132 0.125048538 0.12530709 0.1614352 Bosnia-Herzegovina 16.8933 0.067686969 0.08492034 0.12604761 Bulgaria 236.63203 0.085856974 0.08585697 0.13028817 Croatia 163.77816 0.141755319 0.14175532 0.16776315 Cyprus 885.11437 0.027792182 0.07557491 0.11357672 Czech Republic 1503.33125 0.169035161 0.16903516 0.17276054 Europe, other countries 58271.78789 0.002712607 0.06417058 0.16072517 Finland 1058.67332 0.172666757 0.17266676 0.17349708 Hungary 2092.03151 0.164715982 0.16471598 0.17245691 Ireland 59233.74438 0.126989394 0.12698939 0.16619275 Latvia 20.76769 0.097200984 0.10330712 0.14432122 Lithuania 260.11509 0.147995042 0.14799504 0.1689853 Luxembourg 61562.14742 0.016137711 0.05241533 0.12058346 Netherlands 71284.42167 0.055969925 0.07337806 0.13964113 Norway 2970.51569 0.123836908 0.12383691 0.13840958 Poland 3268.15107 0.178390336 0.17839034 0.17839034 Romania 726.27897 0.155020318 0.15502032 0.16562806 Serbia 145.06398 0.155832761 0.15583276 0.16725614 Slovenia 73.25819 0.160669432 0.16066943 0.16882458 Switzerland 63062.55897 0.065565083 0.08548436 0.15575803 United Kingdom 92380.82052 0.112680824 0.1132009 0.13523282
Country Income Foreign Tax Rate Current law House proposal ex. country-by-country Ghana 1355.51643 0.115325685 0.11532568 0.14802728 Mauritius 1237.56934 0.043631777 0.08556444 0.12124486 Morocco 190.83765 0.18903286 0.18903286 0.19547769 Zambia 63.39351 0.194823714 0.19482371 0.2004525 Americas, other countries 7395.16145 0.078571036 0.0964527 0.13848127 Barbados 12324.80676 0.002970986 0.04293114 0.08083532 Bermuda 98565.34496 0.004736657 0.05465741 0.1010227 Canada 41769.94638 0.174866555 0.17486656 0.18479512 Cayman Islands 54175.10102 0.003534074 0.05046987 0.09902639 Chile 4778.32239 0.14400062 0.14400062 0.16238459 Costa Rica 3425.88037 0.044960692 0.07358952 0.11522604 Dominican Republic 821.12811 0.082448455 0.09504668 0.13126777 Honduras 591.11677 0.062910988 0.08095641 0.12129074 Panama 854.30937 0.096888637 0.0991185 0.12492331 Paraguay 65.84264 0.18548275 0.18548275 0.18901074 Puerto Rico 37772.64162 0.014707921 0.0660176 0.10200605 Uruguay 429.15189 0.11135807 0.11936275 0.1531487 Venezuela 154.26724 0.072221995 0.07885071 0.13142153 Virgin Islands 91.69348 0.040924153 0.05488719 0.09606805 Hong Kong 16575.59765 0.10060311 0.10933452 0.14540572 Israel 4495.09826 0.181981657 0.18198166 0.18977868 Korea, Republic of (South) 6350.49203 0.069271136 0.08316088 0.11834367 Lebanon 78.03946 0.090618678 0.10948854 0.14499134 Macau 3422.71504 0.002646866 0.01163956 0.05499369 Malaysia 4984.79394 0.182903271 0.18290327 0.19044808 Saudi Arabia 886.67825 0.143385092 0.14338509 0.16423854 Singapore 83516.10849 0.038878254 0.07844948 0.11480181 Sri Lanka 82.70645 0.112415991 0.11806252 0.15312464 Taiwan 3866.93197 0.185892368 0.18589237 0.19020659 United Arab Emirates 2771.042 0.023439127 0.02343913 0.09226985 Vietnam 882.76132 0.125048538 0.12530709 0.15284252 Bosnia-Herzegovina 16.8933 0.067686969 0.08492034 0.11875091 Bulgaria 236.63203 0.085856974 0.08585697 0.10181747 Croatia 163.77816 0.141755319 0.14175532 0.16595053 Cyprus 885.11437 0.027792182 0.07557491 0.1122699 Czech Republic 1503.33125 0.169035161 0.16903516 0.18025793 Europe, other countries 58271.78789 0.002712607 0.06417058 0.1006466 Finland 1058.67332 0.172666757 0.17266676 0.18022512 Hungary 2092.03151 0.164715982 0.16471598 0.18066518 Ireland 59233.74438 0.126989394 0.12698939 0.15951819 Latvia 20.76769 0.097200984 0.10330712 0.13210296 Lithuania 260.11509 0.147995042 0.14799504 0.17090362 Luxembourg 61562.14742 0.016137711 0.05241533 0.10382299 Netherlands 71284.42167 0.055969925 0.07337806 0.12286053 Norway 2970.51569 0.123836908 0.12383691 0.1519035 Poland 3268.15107 0.178390336 0.17839034 0.18528795 Romania 726.27897 0.155020318 0.15502032 0.16806311 Serbia 145.06398 0.155832761 0.15583276 0.17009388 Slovenia 73.25819 0.160669432 0.16066943 0.17165095 Switzerland 63062.55897 0.065565083 0.08548436 0.12765698 United Kingdom 92380.82052 0.112680824 0.1132009 0.13790547
Country Income Foreign Tax Rate Current law OECD Pillar 2 Ghana 1355.51643 0.115325685 0.11532568 0.13598073 Mauritius 1237.56934 0.043631777 0.08556444 0.14501386 Morocco 190.83765 0.18903286 0.18903286 0.18903286 Zambia 63.39351 0.194823714 0.19482371 0.19482371 Americas, other countries 7395.16145 0.078571036 0.0964527 0.10975335 Barbados 12324.80676 0.002970986 0.04293114 0.1176146 Bermuda 98565.34496 0.004736657 0.05465741 0.15003759 Canada 41769.94638 0.174866555 0.17486656 0.17486656 Cayman Islands 54175.10102 0.003534074 0.05046987 0.14482432 Chile 4778.32239 0.14400062 0.14400062 0.14553155 Costa Rica 3425.88037 0.044960692 0.07358952 0.13583716 Dominican Republic 821.12811 0.082448455 0.09504668 0.1335238 Honduras 591.11677 0.062910988 0.08095641 0.13870412 Panama 854.30937 0.096888637 0.0991185 0.13360405 Paraguay 65.84264 0.18548275 0.18548275 0.18548275 Puerto Rico 37772.64162 0.014707921 0.0660176 0.14250606 Uruguay 429.15189 0.11135807 0.11936275 0.11135807 Venezuela 154.26724 0.072221995 0.07885071 0.072222 Virgin Islands 91.69348 0.040924153 0.05488719 0.04092415 Hong Kong 16575.59765 0.10060311 0.10933452 0.14441102 Israel 4495.09826 0.181981657 0.18198166 0.18198166 Korea, Republic of (South) 6350.49203 0.069271136 0.08316088 0.11722558 Lebanon 78.03946 0.090618678 0.10948854 0.12752409 Macau 3422.71504 0.002646866 0.01163956 0.0903694 Malaysia 4984.79394 0.182903271 0.18290327 0.18290327 Saudi Arabia 886.67825 0.143385092 0.14338509 0.14338509 Singapore 83516.10849 0.038878254 0.07844948 0.14257399 Sri Lanka 82.70645 0.112415991 0.11806252 0.1341934 Taiwan 3866.93197 0.185892368 0.18589237 0.18589237 United Arab Emirates 2771.042 0.023439127 0.02343913 0.10469953 Vietnam 882.76132 0.125048538 0.12530709 0.13607751 Bosnia-Herzegovina 16.8933 0.067686969 0.08492034 0.09120403 Bulgaria 236.63203 0.085856974 0.08585697 0.0952493 Croatia 163.77816 0.141755319 0.14175532 0.14536429 Cyprus 885.11437 0.027792182 0.07557491 0.09380441 Czech Republic 1503.33125 0.169035161 0.16903516 0.16903516 Europe, other countries 58271.78789 0.002712607 0.06417058 0.14529259 Finland 1058.67332 0.172666757 0.17266676 0.17266676 Hungary 2092.03151 0.164715982 0.16471598 0.16471598 Ireland 59233.74438 0.126989394 0.12698939 0.14664428 Latvia 20.76769 0.097200984 0.10330712 0.10892119 Lithuania 260.11509 0.147995042 0.14799504 0.14799504 Luxembourg 61562.14742 0.016137711 0.05241533 0.10945952 Netherlands 71284.42167 0.055969925 0.07337806 0.12304335 Norway 2970.51569 0.123836908 0.12383691 0.12383691 Poland 3268.15107 0.178390336 0.17839034 0.17839034 Romania 726.27897 0.155020318 0.15502032 0.15502032 Serbia 145.06398 0.155832761 0.15583276 0.15583276 Slovenia 73.25819 0.160669432 0.16066943 0.16066943 Switzerland 63062.55897 0.065565083 0.08548436 0.13503922 United Kingdom 92380.82052 0.112680824 0.1132009 0.11268082