Asset Shifting To Low Tax Countries Could Result From The Reconciliation Bill According to Wharton Model

According to Law360, significant changes to international tax policy included in the $3.5 trillion budget reconciliation bill containing President Joe Biden's top legislative priorities could encourage multinational companies to shift intangible assets abroad, according to a Penn Wharton Budget Model report released October 1, 2021.

Proposed changes to the foreign-derived intangible income regimes and an increase in corporate taxes contained in the Build Back Better Act could make foreign countries more attractive to multinational firms and encourage the shifting of intangible assets to low-tax locales, the analysis said. The bill is making its way through the House of Representatives.

Specifically, reducing the FDII deduction to roughly 22% next year rather than 2026 and increasing the corporate tax rate from 21% to 26.5% would result in a nearly 21% tax rate for such income, according to the analysis. Countries with tax rates below that threshold could attract more multinationals and encourage profit or asset shifting, Penn Wharton said.

"Putting These Pieces Together, The U.S. Would Become An Even More Tax-Disadvantaged Location For A Multinational's Intangible Investment Compared To A Foreign Country With A Tax Rate Below 20.7 Percent Under The House Proposal,"
 The Report Said.

The analysis detailing the potential disadvantages of changing the international tax provisions under the 2017 Tax Cuts and Jobs Act comes as progressive and moderate Democrats squabble over the size of the reconciliation bill, which contains some of Biden's top priorities. Those priorities include enhanced child care and extensions of the supercharged child tax credit, which the Internal Revenue Service is currently issuing to some families on a monthly advance basis.

Under the TCJA, global intangible low-taxed income, or GILTI, is intended to behave like a global minimum tax for U.S. corporations by allowing companies to claim a 50% deduction for such income subject to a 21% rate. A 37.5% FDII deduction, meanwhile, effectively reduces the tax rate for multinational intangible income to 13.125%.

The reconciliation bill would change those regimes by lowering the FDII deduction to 21.875% in 2022 instead of 2026, when it was originally set to decrease, and by lowering the GILTI deduction to 37.5%. The Penn Wharton analysis found that the lowered FDII deduction, combined with increased corporate taxes, would effectively increase the FDII tax rate to 20.7%.

This increased rate would likely encourage multinational corporations with intangible assets to locate those assets elsewhere, the analysis said.

Representatives of the chairman of the House Ways and Means Committee, Rep. Richard Neal, D-Mass., and its ranking member, Rep. Kevin Brady, R-Texas, did not respond to requests for comment Friday. But one of the moderate Democrats withholding his support for the reconciliation bill, Sen. Joe Manchin, D-W. Va., criticized the changes to international tax included in the legislation in a statement Wednesday. 

"Our tax code should be reformed to fix the flaws of the 2017 tax bill and ensure everyone pays their fair share, but it should not weaken our global competitiveness or the ability of millions of small businesses to compete with the Amazons of the world," Manchin said in the statement.

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