When the Trump administration issued its framework for tax reform in September, it emphasized the need to build in protections to stop U.S. multinational corporations from “shipping jobs and capital overseas.” These protections were needed because the framework proposed that the United States move from a system of taxing the global profits of U.S. firms to a territorial system, under which their profits would be taxed only in the country where they were earned. In a territorial system, U.S. corporations would have a strong incentive to move jobs and capital to low or no tax jurisdictions, as compared to a proposed corporate tax rate of 20 percent on U.S. profits.

Now the House has passed a bill with a territorial tax system, and so has the Senate Finance Committee. Both bills purport to build in protections against U.S. multinationals “shipping jobs and capital overseas” by adopting a minimum U.S. tax, which would be imposed on these firms if their foreign taxes dropped below 10 percent of their foreign profits. However, as explained below, this minimum tax is like Swiss cheese. It has so many holes that it would rarely be paid by U.S. firms. In fact, the proposed territorial system would encourage U.S. multinationals to relocate to foreign countries more of their U.S. factories and U.S. intellectual property such as patents and trademarks.

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A minimum tax would be effective only if it applied to the foreign taxes paid by U.S. multinationals on a country by country basis, rather than on an aggregate basis across all foreign countries. If the legislation allowed U.S. firms to aggregate their taxes from all foreign jurisdictions, it would be very easy for U.S. firms to avoid the minimum tax by offsetting their taxes in high tax countries against their taxes in low tax countries. Nevertheless, both the House and the Senate bill allow U.S. multinationals to utilize an aggregate approach.

Let’s illustrate the problems with the aggregate approach by a simple example. Suppose a U.S. multinational had an aggregate tax rate of 24 percent per year on $1 billion of foreign profits, since they were derived primarily from high tax countries like France and Japan. After this tax bill is enacted into law, the U.S. multinational decides to build factories in Singapore producing $500 million profits per year subject to a tax of 8 percent, and to generate $500 million in profits from intellectual property in Bermuda where they would not be taxed at all.

With a country by country approach, the U.S. multinational would pay a U.S. minimum tax of $10 million on its profits in Singapore and a U.S. minimum tax of $50 million on its profits in Bermuda. Under an aggregate approach, by contrast, the U.S. multinational would pay no U.S. minimum taxes. That’s because its aggregate tax rate on its foreign profits would be 14 percent, or total foreign taxes of $280 million divided by total foreign profits of $2 billion.

But the House and Senate bills are actually worse because they do not apply the 10 percent minimum U.S. tax to the total profits of U.S. multinationals from all their foreign activities. Instead, both bills use complex formulas to construct a concept called “routine” returns, which are subtracted from total foreign profits of U.S. multinationals before applying the U.S. minimum tax. Thus, the proposed 10 percent minimum tax is applied only to what might be thought of as the excess profits of U.S. multinationals, which is above what the tax bills have arbitrarily deemed to be “routine” returns.

Again a simple illustration is helpful. Suppose a U.S. multinational has $1 billion in profits from all its foreign activities, based on $4 billion in plant and equipment abroad, and pays a total of $80 million in foreign taxes on those profits. Even under the aggregate approach, it would seem that a U.S. minimum tax of 10 percent would be assessed, since $80 million in total foreign taxes equals 8 percent of $1 billion in total foreign profits.

Yet, the 10 percent U.S. minimum tax would be ineffective because the $1 billion in total foreign profits of the U.S. multinational would be reduced by $400 million in what the Senate Finance Committee bill deems to be “routine” returns of roughly $400 million. In other words, the 10 percent minimum U.S. tax would not be effective because the $80 million in foreign taxes paid by the U.S. multinational would constitute over 13 percent of its excess profits of $600 million, rather than 8 percent of its actual profits of $1 billion.

Moreover, the formulas used by both the House and Senate bills for computing “routine” returns would create perverse incentives for U.S. multinationals to shift more of their plant and equipment to foreign countries. These formulas compute “routine” returns as a fixed percentage of the tangible capital employed by a U.S. firm in its foreign activities. Tangible capital means factories, equipment and similar physical property. Thus, by moving more of their tangible capital abroad, U.S. firms can increase the amount of “routine” returns subtracted from their actual foreign profits and decrease their exposure to the U.S. minimum tax.

The U.S. minimum tax in both the House and Senate bills is very poorly designed to meet their stated objectives of deterring U.S. multinationals from moving jobs and capital abroad. If Congress wanted to implement that objective together with a U.S. corporate rate of 20 percent, it would enact a U.S. minimum tax that applied to any U.S. firm to the extent that it paid corporate taxes of less than 15 percent of its actual profits in any foreign country, without regard to the firm’s aggregate taxes in all foreign countries or its “routine” returns on its foreign tangible capital.

Robert Pozen is a senior lecturer at the MIT Sloan School of Management. Steven Rosenthal is a senior fellow at the Urban Brookings Tax Policy Center. The views expressed are solely those of the authors and not those of the Tax Policy Center, the Urban Institute, pr the Brookings Institution.