O ne of the major motivations for the 2017 tax revision was concern about the international tax system. Issues associated with these rules involved the allocation of investment between the United States and other countries, the loss of revenue due to the artificial shifting of profit out of the United States by multinational firms (both U.S. and foreign), the penalties for repatriating income earned by foreign subsidiaries that led to the accumulation of deferred earnings abroad, and inversions (U.S. firms shifting their headquarters to other countries for tax reasons). In addition to changes in a variety of rules determining the degree to which foreign income of U.S. persons is subject to U.S. tax, the tax change lowered the corporate tax rate from 35% to 21%. The provisions that introduced territorial features into a system that was nominally a worldwide system were deferral of income of foreign subsidiaries and cross-crediting of foreign taxes. Foreign Tax Credits

The U.S. tax system allowed a credit against U.S. tax due on foreign-source income subject to tax for foreign income taxes paid. Foreign-source income is also affected by deductions. The system nevertheless remains a hybrid, albeit a different one, of worldwide and territorial approaches. With respect to other income (primarily income from intangible assets) the system moves toward a current inclusion in income but at a lower rate, a minimum worldwide tax. Foreign-Derived Intangible Income (FDII)

The new law also allows a deduction aimed at providing a lower tax rate on intangible income produced in the United States but derived from abroad. New Law: BEAT, Modifications to Subpart F, Transfer Pricing Changes, Stricter Thin Capitalization Rules

				Base Erosion and Anti-Abuse Tax (BEAT)

The new law introduces a general anti-abuse provision whose focus is primarily on U.S. subsidiaries of foreign parents, although it applies in general to related parties (although as noted below, it may also affect U.S. multinationals with foreign-source income from higher-tax locations). Although BEAT appears to be aimed at profit shifting out of the United States through royalty payments and interest payments, presumably to a foreign parent, BEAT is calculated in a way that allows the tax to be reduced by the research credit and 80% of the sum of three credits (the low-income housing credit, the renewable electricity production credit in Section 45(a) of the code, and credits for renewable energy, such as wind), but not other credits. U.S. Tax Rates Compared to Other Countries Before the Revision

The U.S. corporate tax rate (combining federal and average state and local taxes, and accounting for the deductibility of state and local taxes) of 39% was higher than the statutory rate in any other major country, including the countries in the Organization for Economic Cooperation and Development (OECD) and the G-20. The tax on tangible investment is much larger than the tax on intangible investment. Equity investment in tangible assets, especially the temporary investments for equipment, could increase. Moreover, it is not clear that the capital stock in the United States would increase. Effects on Efficiency and Optimality

Will the tax change lead to a more efficient or optimal system? Profit shifting would likely be reduced with a lower tax rate. Overall, it appears the new provisions have taken significant steps to reduce the incentives for profit shifting. Other provisions in the new law would also make U.S. headquarters more attractive, including the lower corporate rate, the move to a territorial tax to the extent of the dividend exclusion, and FDII, although GILTI and BEAT would make a U.S. location less attractive. According to Douglas Poms, Treasury's international tax counsel, the OECD's Forum on Harmful Tax Practices will soon assess whether FDII violates the minimum standard for preferential regimes. Some other, more technical issues have also been raised about GILTI. Thus, royalties will be taxed only if separated, or for firms that do not keep inventory.
One of the major motivations for the 2017 tax revision (P.L. 115-97) was concern about the international tax system. Issues associated with these rules involved the allocation of investment between the United States and other countries, the loss of revenue due to the artificial shifting of profit out of the United States by multinational firms (both U.S. and foreign), the penalties for repatriating income earned by foreign subsidiaries that led to the accumulation of deferred earnings abroad, and inversions (U.S. firms shifting their headquarters to other countries for tax reasons). In addition to lowering the corporate tax rate from 35% to 21% and providing some other benefits for domestic investment (such as temporary expensing of equipment), the 2017 tax bill also substantially changed the international tax regime.
The tax change moved the system from a nominal worldwide tax on all foreign-source income, with a credit against U.S. tax for foreign taxes due, to a nominal territorial system that does not tax foreign-source income. Nevertheless, both systems could be considered a hybrid of a worldwide and territorial system. Prior law reduced the tax on foreign-source income by allowing deferral (taxing income of foreign subsidiaries only if it was repatriated, or paid as a dividend to the U.S. parent) and cross-crediting of foreign taxes (so the credit for high taxes paid in one country could offset U.S. tax on income from a low-tax country). The new system exempts dividends, but also imposes a current worldwide tax on global intangible low-taxed income (GILTI), but at a lower rate. It also introduces a corresponding lower rate on intangible income derived from abroad from assets in the United States (foreign-derived intangible income, or FDII). The new law adds the base erosion and anti-abuse tax (BEAT) to existing anti-abuse measures aimed at artificial profit shifting. BEAT imposes a minimum tax on ordinary income plus certain payments to related foreign companies.
Despite the lower corporate tax rate, it is not clear that capital will be shifted into the United States from abroad; although a lower rate reduces the tax rate on equity-financed investments, it decreases the subsidy to debt-financed investments. Whether the capital stock increases or decreases depends on the magnitude of the tax changes (which appear largely offsetting) and the international mobility of debt versus equity. It is also not clear whether the capital stock will be allocated more efficiently or in a way more optimal for U.S. welfare, although economic theory suggests that reducing the tax subsidy for debt is a clear improvement.
Although a territorial tax may make profit shifting more attractive, overall, given other elements of the new system, it appears to make profit shifting less important. GILTI and FDII bring the tax treatment of income from intangibles in the United States and abroad closer together, and BEAT and stricter thin capitalization rules (rules limiting interest deductions) also limit profit shifting, including shifting through leveraging.
The new system ends the penalties (except for portfolio investment in foreign firms) for repatriating earnings and thus eliminates the prior incentives to retain earnings abroad. A series of measures aimed at inversions appears to make inversions much less attractive.
Some of the measures may violate international agreements such as the World Trade Organization (WTO), bilateral tax treaties, and Organization for Economic Cooperation and Development (OECD) minimum standards to prevent harmful tax practices.
There have been a number of concerns about design features in the new regime, including the dividend deduction, GILTI, FDII, BEAT, and other features. A variety of options might be considered to address these issues.