Over the weekend, the Senate pulled its support for ‘Worldwide Combined Reporting,’ a terrible idea that would have massively increased the cost of tax compliance for businesses and enforcement for the state government, and all based on a number that was added up wrong. The idea is, we hope, dead for this session at least. But, even with a forecast surplus of $18 billion, the state government is desperately grubbing around to try and get its hands on more money. One of these ideas is GILTI.

‘Global Intangible Low Tax Income,’ (GILTI) was introduced as part of the 2017 Tax Cuts and Jobs Act. As Kyle Pomerleau of the Tax Foundation explains:

GILTI is a newly-defined category of foreign income added to corporate taxable income each year. In effect, it is a tax on earnings that exceed a 10 percent return on a company’s invested foreign assets. GILTI is subject to a worldwide minimum tax of between 10.5 and 13.125 percent on an annual basis…

The primary purpose of GILTI is to reduce the incentive for U.S.-based multinational corporations to shift profits out of the United States into low- or zero-tax jurisdictions. This is done by placing a floor on the average foreign tax rate paid by U.S. multinationals of between 10.5 percent and 13.125 percent. The incentive to shift profits from one jurisdiction to another is the function of the difference between the countries’ statutory tax rates. That difference is the tax savings a company receives per dollar shifted. Companies subject to GILTI would compare a 21 percent domestic rate with a 10.5 to 13.125 percent rate rather than a zero rate.

The devil is in the detail. The indispensable Minnesota Center for Fiscal Excellence (MCFE) quotes Martin Sullivan, former U.S. Treasury staff economist, chief economist and contributing editor of Tax Analysts:

In general, a minimum tax on foreign profits is an excellent disincentive to profits shifting. Unfortunately, the all-important details of the GILTI provisions, which are overlaid in existing complex rules, are mind-numbingly complex and arbitrary.  And the economics stink too.  In some cases, GILTI provides negative marginal tax rates on foreign investment. In other cases, it provides marginal tax rates well in excess of the US or foreign statutory rate. Major reforms and simplifications of GILTI must be undertaken by Congress passing new law. Treasury cannot fix the major problems by regulation.

MCFE notes that:

…according to recent statements by Treasury Secretary Janet Yellen, the U.S. will adopt a more cooperative approach to working with the Organization for Economic Cooperation and Development (OECD) in its ongoing initiative to develop and implement a global minimum tax. Depending on the progress of this initiative, the GILTI provisions would undergo substantial change if not repealed altogether.

So if Minnesota’s state government does choose to go down this route, it may have to embark on a whole new journey in the near future.

And, again, for what? MCFE notes that:

…no public testimony was given by the Department of Revenue on the additional staffing and resources needed to handle compliance activities, auditing activities, enforcement activities, taxpayer appeals, legal support, return processing, outreach efforts, internal education and training initiatives, and other administrative matters to support a foray into GILTI taxation and worldwide combined reporting.  No fiscal note was prepared by the Legislative Budget Office on these matters. 

As with worldwide combined reporting, then, we could be imposing significant compliance burdens on businesses and enforcement burdens on the government without very much in the way of extra revenue to show for it. But, again, as with worldwide combined reporting, maybe this whole thing isn’t actually about raising revenue.