The Tax Cuts and Jobs Act (TCJA) introduced several new rules for taxing the foreign profits of U.S. multinationals, including rules related to Global Intangible Low Tax Income (GILTI) that result in a minimum tax on foreign profits. Both the Biden campaign and some Democratic members of Congress have recommended changes to GILTI, but before doing that, policymakers should consider how GILTI’s design can have ramifications for many U.S. companies and their tax burdens.
GILTI is generally defined as profits above a 10 percent return on foreign tangible assets like equipment, buildings, and machinery. Companies whose foreign profits are mainly from intellectual property (IP) are not likely to have many tangible assets and are thus more likely to have their income taxed under GILTI. The tax burden on GILTI was intended to fall on profits from intangible assets, such as patents, that U.S. companies hold abroad, but the policy has come to have much wider implications—affecting not just information technology businesses but also multinational companies in the manufacturing industry and other non-agricultural industries.
Businesses in the services industry where employees are value drivers (rather than factories or equipment) or industries with foreign tangible assets that have little value for tax purposes are also likely to be caught by GILTI.
Data has not yet been released that would provide insights into actual GILTI tax liability since passage of the TCJA in December 2017. However, IRS data from years prior to the TCJA can provide an idea of where the impact of GILTI may lie for different industries.
U.S. multinationals with more than $850 million in revenue are required to report information on their operations, assets, employees, revenues, and taxes for the countries in which they operate. These are known as country-by-country reports. Using this data, it is possible to measure how much an industry’s foreign profits are above a 10 percent return on tangible assets.
In 2017, this metric shows the information industry was the most exposed to GILTI with 94 percent of foreign profits being in excess of a 10 percent return on foreign tangible assets. This makes sense because (when compared to other industries in the country-by-country reports) the information industry has relatively little in tangible assets, particularly in foreign jurisdictions. Just 13 percent ($68 trillion) of the information industry’s tangible assets are in foreign jurisdictions.
The information industry includes sectors like telecommunications, broadcasting, data processing, and motion pictures and recording.
The manufacturing industry’s profits in excess of a 10 percent return on foreign tangible assets were 71 percent in 2017. By contrast with the information industry, manufacturing has the largest total amount of domestic and foreign tangible assets reported in this data at $2.735 quadrillion ($2,735 trillion). Among manufacturing companies, 47 percent ($1.293 quadrillion) of their tangible assets were in foreign jurisdictions in 2017. Even with such a heavy foreign footprint in factories and equipment, a majority of the manufacturing industry’s foreign profits could be caught by GILTI.
In this data, some industries are negative on this measure. This means that their foreign profits were below a 10 percent return on foreign tangible assets, and thus are recorded as 0 percent in Table 1.
|Agriculture, forestry, fishing and hunting, mining, quarrying, oil and gas extraction, utilities, and construction||0%||11%|
|Finance and insurance, real estate and rental and leasing||65%||83%|
|Management of companies and enterprises, all other services (except public administration)||88%||83%|
|Professional, scientific, and technical services||88%||92%|
|Wholesale and retail trade, transportation, and warehousing||64%||0%|
Note: Foreign profits above a 10 percent return to tangible assets is calculated first by identifying foreign profits and tangible assets by subtracting U.S. profits and tangible assets from profits and tangible assets reported in all jurisdictions. The share of foreign profits above a 10 percent return on foreign tangible assets is then identified.
Source: IRS, “SOI Tax Stats – Country by Country Report: Major Industry Group, Geographic Region, and Selected Tax Jurisdiction,” accessed Mar. 9, 2021, https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report.
Shifts from year-to-year show how GILTI may be significant in some years, but not as much in other years.
Another angle to explore with GILTI is the importance of foreign tax credits to different industries. Because of U.S. rules for expense allocation and GILTI’s 80 percent limit on foreign tax credits, industries that rely more on foreign tax credits could be more exposed to the impact of GILTI and potential double taxation. GILTI also does not allow foreign tax credits in excess of U.S. tax liability to offset future U.S. tax liability.
Businesses claim foreign tax credits so that their income is not taxed twice. If a company pays a tax abroad and then also owes additional taxes to the U.S. government, this can result in double taxation. Foreign tax credits are not a loophole, but rather serve to limit the layers of taxes on business income. However, foreign tax credit rules and their link to GILTI mean that the U.S. tax burden on GILTI can be high and volatile from year-to-year.
The IRS reports data on foreign tax credits of U.S. multinational companies. One way to measure reliance on foreign tax credits is to compare U.S. tax liability before and after the impact of foreign tax credits. According to 2017 data, foreign tax credits claimed by businesses in the mining industry served to decrease U.S. tax liability for that industry by 88 percent. This suggests that mining companies paid high foreign taxes in foreign jurisdictions. This corresponds with the special tax regimes some countries have for extractive industries.
The foreign tax credit data is prior to the TCJA’s provisions, which changed rules for deferral of tax liability on foreign profits and lowered the corporate tax rate. Both policies influenced the ways businesses utilized the foreign tax credit prior to the TCJA. More recent data would provide insight into the impact of those changes.
The available data shows manufacturing relied on foreign tax credits to receive a 40 percent reduction in U.S. tax liability in 2017.
|Agricultural, forestry, fishing, and hunting||NA||-8%|
|Finance, insurance, real estate, and rental and leasing||-28%||-24%|
|Transportation and warehousing||-7%||-12%|
|Wholesale and retail trade||-19%||-20%|
Note: Data for the agricultural industry is not reported for 2016.
Source: IRS, “SOI Tax Stats – Corporate Foreign Tax Credit Table 1,” accessed Mar. 9, 2021, https://www.irs.gov/statistics/soi-tax-stats-corporate-foreign-tax-credit-table-1.
The industry categories for the country-by-country reports and the foreign tax credits data do not perfectly line up. While the country-by-country data includes the mining industry in the same category as agriculture and related industries, the foreign tax credit data separates those two categories. The same is true with the classification of wholesale and retail and transportation and warehousing.
As policymakers consider potential changes to GILTI it is important to keep in mind that the intent behind the policy was to tax foreign profits from intangible assets that faced low levels of tax. In reality, the policy applies much more broadly. While these data are from prior to the TCJA, they can shed some light on the industry burdens of GILTI.
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