Papers & Reports

On March 9, 2023, President Biden submitted a proposed FY 2024 Budget request to Congress. The proposals include increases in corporate rates in order to align the United States with the Pillar II GLoBE rules.

Shay in this paper addresses digital services tax (DST) from the lens of the US’ approach. He argues that although the US Section 301 trade actions against DSTs were strikingly effective in the short term, the provision is nonetheless ill-suited as a process for challenging taxes of other countries and lacks legitimacy. Shay argues that the sovereign power to tax is very broad and that there is no sufficient consensus on tax norms which may form the basis for unilateral action against DST’s. He argues further that the US Trade Representative’s tax policy analysis is weak and unpersuasive and believes that the US’ application of Section 301 to contest taxes of other countries portends longer term consequences such as undermining efforts to achieve a stable and sustainable international tax system.

Murphy analyzes the use of foreign holding companies in their organizational structure by US multinationals and its implication for internal capital markets. Murphy also analyzes the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) which provides for a look-thru rule which reduces the after-tax cost of foreign intercompany financing transactions. Using the TIPRA as a natural experimental setting to test whether a shift in US tax policy that reduces the cost of moving foreign capital increased firms’ reliance on foreign holding company subsidiaries, he opines that multinational companies responded to TIPRA by creating more foreign holding companies.

Murphy also notes that, consistent with the policy objectives of TIPRA, multinational companies that rely on holding companies gained tax efficiencies in their post-TIPRA foreign internal capital markets, reducing domestic taxation on foreign earnings and easing financial constraints.

The authors attempt to quantify the immediate net effect of the TCJA on the tax burden on corporate profits for public US corporations and appears to find similar reductions in effective tax rates for domestic and multinational firms, with the entirety of multinational tax savings stemming from tax savings on their domestic, not foreign, earnings. The authors find no significant change in the federal tax burden on foreign earnings both on average and specifically for firms most likely to be subject to new anti-abuse provisions. They find some evidence that firms not targeted by anti-abuse provisions saw reductions in their federal tax burden on foreign income.

They conclude that while the tax burden on domestic income decreased significantly, their findings suggest that the tax burden on the foreign earnings of US multinationals is largely unaffected despite the overhaul of the international tax system. Additionally, they note that, in relation to the investment decision of US multinationals’, while foreign income was heavily tax-favored prior to tax reform, foreign and domestic incomes are similarly taxed after TCJA enactment.

Prastuti’s policy brief is a contribution to the work of policy makers in the Indonesian Ministry of Finance who are in a quest for the best policy response to the global minimum tax rules agreed upon by 137 countries on the 8th October 2021 - Global Base Erosion Rule (GloBE). Prastuti’s report includes recommendations such as the adoption of a domestic minimum tax to protect domestic tax revenue; the adoption of the GloBE rules to capture top-up tax from another country; the restructuring of investment policy in Indonesia to fit the global minimum tax landscape; simplification of the GloBE reporting system; an amplification of behavioral insights with advanced analytics for ease of administration; the adoption of the Multilateral Cooperative Compliance Framework for the GloBE Rules; and the strengthening of international collaboration and capacity building.

On February 2, 2023, the OECD released Administrative Guidance on the Pillar Two GloBE rules. The Administrative Guidance addresses multiple issues that Inclusive Framework members have identified as needing immediate clarification and simplification.