Preserving U.S. Economic Competitiveness Through International Tax Reform

October 01, 2021

Foreign direct investment is a key economic engine for American prosperity, responsible for millions of American jobs and trillions of dollars in economic impact. Foreign-headquartered companies employ nearly 8 million U.S. workers, and U.S. workers at these companies earn an average of $83,705 annually, 18 percent more than the average private-sector job.International companies pay a wide range of U.S. federal, state and local taxes, including 25 percent of all federal corporate income taxes.International companies are invested in almost every industry and in every state across the United States, but they are especially concentrated in the manufacturing sector – responsible for employing 22 percent of America’s manufacturing workforce and for creating 69 percent of new U.S. manufacturing jobs in the past five years.

GBA believes it is critical that America remains the world’s premier destination for international investment, and that stable U.S. tax policy is a key component of U.S. competitiveness. Currently, two provisions of the House Legislation disproportionately burden employers that have made a deliberate decision to invest in the United States and maintain and create high-quality U.S. jobs.

Proposed Global Interest Limitation Will Hurt Americas Economic Recovery and Would Make the U.S. an International Outlier

The proposed Section 163(n) limitation would create a global interest limitation that would have a chilling effect on foreign direct investment. This additional limitation will significantly increase the cost of capital for employers interested in growing and maintaining operations in the United States and could push future investment abroad. Further, its application is out of step with the accepted norms of ordinary business financing as to what are appropriate levels of debt and interest. The 163(n) provision would add yet another interest limitation and apply concurrently with the existing interest limitations.

The proposed 163(n) limitation would apply in addition to the Section 163(j) limitation, which limits a company’s net interest expense to 30 percent of the company’s adjusted taxable income. As proposed, whichever provision allows the lower deductible amount of interest would be applicable. This would immediately make the United States an international outlier. The OECD/G20 Inclusive Framework, Action 4 recommends that countries which impose both types of limitations allow for a tax deduction for interest equal to the greater of the “163(j)-type” allowable amount or proposed “163(n)-type” allowable amount. All countries that have implemented both limitations have followed that recommendation allowing a deduction for the greater of the two limitations.

As an association representing investors and job creators in the U.S. economy, GBA strongly believes the proposed Section 163(n) limitation would make the United States less competitive and attractive for investment, have unintended consequences, create an unnecessary additional limitation that would unfairly penalize companies interested in expanding their operations in the United States, and should not be implemented.

Tailor the BEAT to Address Clear Base Erosion and Maintain Existing Exemptions

It is critical that the legislative rules for determining the Effective Tax Rate (ETR) of foreign income tax be prescribed carefully, accurately and fairly given the many complexities that factor into an ETR calculation, such as timing differences, participation exemptions and operating losses. Properly addressing the ETR calculation is of paramount importance to companies to ensure only actual base eroding payments are captured by the BEAT and that the applicable ETR is not unduly vulnerable to uneven interpretation. The U.S. rules for determining a foreign affiliate’s ETR should be directly tied to the conclusion of the OECD regarding the ETR calculation, and should have a similar proportionate impact instead of the currently proposed cliff effect.

GBA also recommends reconsidering the House Legislation’s approach to entrapping legitimate and essential business activity within the BEAT. Specifically, the proposal limits the cost-of-goods sold (COGS) and related protections as part of the BEAT.

COGS represent necessary business activity – not exotic tax planning. By eliminating the COGS exception, the same profits may be subject to tax in the United States and one or more jurisdictions if not covered by the ETR exception. Additionally, amounts in excess of profits may even be subject to U.S. tax with the treatment of legitimate, indirect costs as base erosion payments. Accordingly, the COGS and other 5 COGS-like exceptions (e.g., services cost method, qualified derivative payments, TLAC, etc.) should be maintained.