By Richard Rubin
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (March 28, 2019).
WASHINGTON -- When Republicans rewrote the international tax
system in 2017, they were trying to help U.S. companies like
Procter & Gamble Co. compete in foreign markets and create
domestic jobs. Fifteen months later, the Ohio-based consumer
products maker and other U.S.-based multinationals warn the new law
could instead put them at a disadvantage globally and reduce their
incentive to invest at home.
P&G pays about 18% to 19% of its non-U.S. income in foreign
taxes. That is high enough that executives thought they would avoid
paying a new U.S. minimum tax designed to prevent companies from
shifting profits to low-tax countries.
Instead, P&G now expects to pay the U.S. $100 million
annually because of that minimum tax, raising its tax rate on
foreign profits to 21%. Some non-U.S. competitors, such as Unilever
PLC, generally don't pay home-country taxes on global earnings.
P&G executives say the tax rules could hurt the company's
ability to compete for acquisitions. And, paradoxically, the
easiest way for P&G to respond would be by shifting some
research and headquarters expenses out of the U.S.
"It's kind of dawning on everybody at about the same time that
this is going to be an issue," Jon Moeller, P&G's chief
financial officer, said in an interview. "On the margin, it
disincents local job creation."
P&G is part of the Alliance for Competitive Taxation, a
40-company coalition that advocated international tax changes in
2017 and cheered the tax law's passage. Now, the coalition is
highlighting what it sees as flaws of the law's minimum tax --
using the same arguments about unlevel playing fields and
disadvantages that companies once used to describe the old tax
system.
According to a survey of alliance members, at least 60% have
foreign tax rates above 13.125%, the level many of them thought
would exempt them from U.S. taxes on foreign earnings. More than
one-quarter have foreign tax rates at or above the new U.S. tax
rate of 21%. Yet nearly all are paying the minimum tax, known as
the Global Intangible Low-Taxed Income tax, or GILTI.
The new system's incentives, while perhaps not favoring foreign
investment as sharply as the old rules did, could encourage
companies to put factories, research jobs and headquarters outside
the U.S. That's partly because arcane rules that Congress didn't
change in 2017 force some companies to count some domestic U.S.
expenses toward foreign operations. These expense allocations
shrink foreign tax credits that could otherwise be used to offset
GILTI. To lower the tax, they could move the expenses out of the
U.S.
Treasury officials have expressed openness to adjustments as
they implement the law. They have already proposed some regulations
that soften the law by limiting how much interest expenses get
allocated to foreign income.
"That helped, but it didn't kill the issue. The high-tax people
are still somewhat screwed," said Patrick Driessen, a former
economist at the Joint Committee on Taxation.
To be sure, most U.S. multinational companies pay significantly
lower overall taxes than they did under the old law. The new law's
centerpiece -- cutting the corporate tax rate to 21% from 35% --
put the U.S. closer to the middle of the pack internationally,
reducing the benefits of shifting income to low-tax countries
abroad.
But a core promise of 2017 -- the U.S. won't impose its own
taxes on top of substantial foreign taxes -- has proven
elusive.
Under the old system, U.S. companies owed the full 35% rate on
world-wide earnings. They got tax credits for payments to foreign
countries and didn't pay the residual U.S. tax until they
repatriated profits.
Those rules encouraged companies to push profits into low-tax
countries and park them there, a strategy that was especially
attractive for companies with profits from patents and trademarks
that were easily shifted to low-tax countries. The old system also
created incentives for inversions, deals where U.S. companies took
foreign addresses and escaped some U.S. tax restrictions.
The new system was supposed to realign those incentives.
Lawmakers wanted to exempt foreign income from U.S. taxes -- but
not all of it. The idea: If U.S. companies didn't pay substantial
foreign taxes and instead packed profits into low-tax jurisdictions
like Bermuda or Ireland, they would face a backstop in a new
minimum U.S. tax: GILTI.
Under GILTI, companies calculate their tangible foreign assets
and don't have to pay taxes on 10% of that total. Above that
allowance, GILTI creates a 10.5% floor on what U.S. companies pay
in foreign taxes and lets them get some foreign tax credits. If a
company paid just 2.5% in foreign taxes, GILTI would effectively
push its total to about 10.5%, creating a rough cap at half of the
U.S. domestic tax rate.
"They're continuing to get a very sweet deal," Mr. Driessen
said.
For companies with higher foreign tax rates, those operating in
Europe and Asia with less mobile profits, the story is different.
At the simplest level, companies paying at least 13.125% in foreign
taxes theoretically shouldn't pay GILTI at all.
But there is a wrinkle: When U.S. companies calculate their
foreign tax credits, they have to follow rules designed to match
the location of income and expenses. They must assign some domestic
costs -- such as research and development or interest on debt -- to
foreign income.
When domestic expenses are allocated abroad, a company's foreign
tax credits get limited. In the eyes of the U.S. tax system, that
effectively pushes companies' foreign tax rates below the 13.125%
threshold, triggering GILTI taxes.
Consider a company with a 25% foreign tax rate, $10 million of
foreign income and $1 million of domestic expenses that must be
allocated to calculate the foreign tax credit. That company faces
$210,000 in GILTI, beyond its $2.5 million in foreign taxes,
according to an example being circulated by the Alliance for
Competitive Taxation.
Congress left the expense allocation provisions in the law in
part because eliminating them would have made the tax overhaul more
expensive, pushing it above the $1.5 trillion tax-cut limit
Republicans set. Companies point to a conference committee report
suggesting no GILTI for companies with foreign rates above 13.125%,
but that was a simplified example that ignored expense allocation.
In effect, this tax was there all along.
United Technologies Corp. pays foreign taxes above 21%. With
GILTI and those expense allocation rules intact, it faces a $120
million annual bill above that, said Akhil Johri, the CFO of the
company, which is splitting into three parts. The Otis elevator
business doesn't get much benefit from the 10% allowance for
tangible assets because it makes much of its money providing
services. Otis operates in high-tax foreign countries, such as
France and Japan. Because of GILTI, it could be more profitable if
owned by a non-U.S. company.
"I would be jumping up and down with my CEO and saying we are
not operating on a level playing field," said Mr. Johri, describing
what he would do if he were finance chief of Otis after the split
is complete. "It would definitely make it a little easier for a
foreign entity to make a play for a prized U.S. entity like
Otis."
Republicans such as Sen. Rob Portman (R., Ohio) are sympathetic
to companies' complaints and are working with the Treasury, but it
is unlikely Congress will change anything in the law related to
foreign income. That is in part because Democrats complain that the
playing field is tilted the other way and that the foreign tax
provisions keep corporate overseas taxes too low.
Sen. Sherrod Brown (D., Ohio) describes the 10.5% rate in GILTI
as a huge discount from the 21% U.S. rate and an incentive for
companies to earn profits outside the U.S. Rep. Lloyd Doggett (D.,
Texas) and Sen. Sheldon Whitehouse (D., R.I.) have introduced a
bill to tax foreign and domestic income at the same rates.
"We're definitely better off [after the tax law.] That is
definitely true," says P&G's Mr. Moeller. "But remember.
Everyone else is better off, too, including our foreign
competitors. What matters in the long term is that relative
position."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
March 28, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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