One of the selling points for the Republican tax overhaul has been that it would put an end to U.S. companies moving overseas in order to reduce their tax bills. The argument is simple: Reducing the top corporate tax rate from 35 percent to 21 percent will reduce the financial incentive for companies to relocate.
Richard Rubin of The Wall Street Journal took a look at whether the bill as passed will work to end the practice, and his answer is a qualified yes: “Will it work? Yes, tax experts say—but with limitations and caveats,” Rubin wrote Monday.
The problem, as more mathematically astute readers may have noticed already, is that 21 percent is still higher than the rates in many low-tax jurisdictions such as Ireland and Bermuda. Foreseeing this issue, lawmakers moved toward a territorial tax system with a minimum tax on earnings in each country in which a company operates, the Global Intangible Low-Taxed Income tax, or GILTI, ranging from 10.5 percent to 13.125 percent.
However, that solution creates a new problem: Companies may now have a reason to build new facilities and expand their businesses overseas. Under the new rules, U.S. companies can claim tax-exempt earnings overseas based on the value of the assets owned in a given country. Companies could game the system by building new facilities overseas in order to increase the value of their exemptions while spreading profits around from country to country in order to reduce their tax bill in the U.S.
Rebecca Kysar, a Brooklyn Law School professor who has been critical of the tax overhaul, told the Journal, “The more assets you have abroad, the more income that’s exempt from the minimum tax. Everyone’s trying to get their taxes as low as possible. If you can eliminate the 13% tax, then I think corporations are going to do that.”
Other experts, however, doubt that the loophole will attract many companies. Building new facilities, rather than simply changing an address and shuffling some paper around, is a considerably higher hurdle for senior executives. “Once you start talking about real people and hard assets, then senior management at a company is much less eager to do something for tax purposes,” one tax expert told the Journal. And, Rubin notes, some European countries are starting to require more local employment from new companies moving in, increasing the cost of relocating.
Martin Sullivan, chief economist at Tax Notes, supported Rubin’s assessment Monday, saying that there may be companies that still find it profitable to move, but probably not very many.