It will make the eyes of many lawmakers shine.
Most members of Congress don’t understand the first thing about the international corporate tax system and won’t have the bandwidth to figure it out – which should make it easier for Democrats’ proposals to approve.
“A lot of members don’t understand this and won’t be interested in knowing more – they’ll just defer to caucus members they see as experts,” predicts Rohit Kumar, former senior aide to the Republican Senate leader, Mitch McConnell. now at the consulting firm PwC.
The complexity of the proposals and lawmakers’ ignorance of the international tax system also pose a challenge for opponents of the plans, including lobbyists who seek to kill or blunt the provisions.
Lawmakers have long complained that their rivals are voting for bills they haven’t read or understand. But that may never be more true with the Democrats’ international tax changes.
The section of the code dealing with companies operating in multiple countries is notoriously baroque among tax professionals. Companies often have ornate structures, with subsidiaries around the world, and it can be difficult to determine where they made their money, how much they owe in taxes, and which government they should pay.
“This stuff is enough to blow your head off, even if you’re a tax lawyer,” said one tax lobbyist, speaking on condition of anonymity. “It’s impiuously complicated.”
President Joe Biden has proposed a series of changes to the international tax system. On Monday, a trio of Senators, including Finance Committee Chairman Ron Wyden (D-Ore.), Presented their own international proposal that builds and expands the administration’s plans. Senate Budget Committee Chairman Bernie Sanders (I-Vt.) Released another set of possible changes.
Democrats could end up raising more money from these international arrangements than from their much more well-known plan to corporate tax rate, especially if Congress balks at Biden’s proposal to raise that rate from 21% to 28%. If lawmakers raise the corporate rate, many expect them to settle for something in the mid-twenties – which could force Democrats to look even further into reviving the overseas operations of the companies to run their budget numbers.
Many of their proposals revolve around strengthening a special tax known as the GILTI Republicans, created in 2017 to target so-called intangible income – the money companies make from things like patents. and royalties and other types of intellectual property.
Democrats also want to revamp or remove an export incentive known as foreign-sourced intangible income or IDEI, sometimes referred to as “Fiddy.”
And Democrats are proposing to rewrite or remove another special tax called BEAT, which was designed to tackle companies that lower their tax bills by reserving many deductions in the United States while claiming to have made most of their profits. in foreign subsidiaries located beyond the jurisdiction. from the IRS. BEAT, or Base Erosion and Anti-Abuse Taxation, has not worked as lawmakers intended, increasing a fraction of the revenue predicted by policymakers.
The administration on Wednesday proposed replacing it with a new tax dubbed SHIELD which Treasury officials said would do a better job of tackling offshore tax evasion.
The proposals will require a major education campaign on Capitol Hill just to get the basic concepts across, and lawmakers from both parties have started to prepare for the debate on the provisions. Each vote will potentially matter due to the small majority of Democrats in the House and Senate.
Democrats recognize the complexity of their proposals but say they are trying to give colleagues enough time to get up to speed on the issues.
“It’s really Byzantine and you have to reconcile this section and this section and that’s why we start early and we start with pretty simple concepts,” Wyden said.
Their easier-to-understand message on the proposals comes down to one word: outsourcing.
Highlighting the fact that companies may pay lower tax rates on their overseas profits compared to their domestic income – the GILTI tax rate is half of the standard 21% corporate tax rate – the Democrats say the provisions are pushing companies to move their businesses and jobs overseas.
“Republicans in Congress gave companies a 50% off tax coupon if they shifted production overseas,” said Sen. Sherrod Brown (D-Ohio), another tax writer.
Experts call that oversimplification, and the evidence that companies have gone overseas because of the provisions, which were part of the GOP’s 2017 tax overhaul, is slim. Investment and jobs in the United States actually increased in 2018, according to an analysis by the Non-partisan Joint Committee on Taxation.
Some say there is no point in trying to pressure lawmakers over the details of the proposals because they are too complicated. Better to focus on fundamental issues like the burden this would place on employers. Republican lawmakers, for example, warn that the provisions will encourage companies to move their headquarters overseas in order to evade the IRS, and lead to more foreign takeovers of U.S. companies.
“It won’t be productive to go up there and talk about the technicalities of this stuff – that would be a total waste of time,” the lobbyist said. “They’ll have no idea what you’re talking about.”
At the same time, the complexities will give a very small group of lawmakers, staff, treasury aides and lobbyists trained in the international tax system disproportionate influence in the debate over the Democrats’ plans.
There will also likely be lawmakers unfamiliar with the issues who take a bit to convince, Kumar said – in which case the density of the proposals could prove to be a headache for Democrats trying to lead the proposals through. the House and the Senate.
“There are always members who are against risk and who will worry about voting for something that is extremely complicated,” he said. “For these members, the easiest thing to do is vote ‘no’.”
“And in this environment, a ‘no’ vote is potentially fatal” for the Democrats.