Academic journal article AEI Paper & Studies

The Impact of GILTI and FDII on the Investment Location Choice of U.S. Multinationals

Academic journal article AEI Paper & Studies

The Impact of GILTI and FDII on the Investment Location Choice of U.S. Multinationals

Article excerpt

I. Introduction

In this paper, we focus on two new provisions addressing the taxation of income from mobile capital, that were passed as part of Public Law 115-97 (popularly known as the Tax Cuts and Jobs Act or TCJA) in December 2017. The provision on "global intangible low taxed income" (GILTI), which is set forth in new section 951 A, is intended to make mobile capital, and the taxable income attributable to such capital, less sensitive to tax rate differentials between the United States and other jurisdictions vying for such capital. To achieve that goal, the provision taxes U.S. taxpayers' "mobile income" reported outside the United States when the foreign tax rate on the income falls below a minimum threshold.

While the GILTI provision is intended as the proverbial stick, the provision known by its (less catchy) acronym "FDII" is the accompanying carrot. The provision on FDII--which stands for "foreign derived intangible income," , set forth in new section 250, is intended to motivate (both U.S. and foreign) multinationals to locate within the United States the mobile income generated from the supply of goods, services, or intangible property that is ultimately used or consumed outside the United States.

The reactions of foreign governments and commentators to the international tax provisions of the TCJA suggest that these provisions (together with the lower corporate tax rate) make the United States more competitive for investment. Some European Union governments have signaled concern that the U.S. provisions may undermine the international system shaped by the OECD's Base Erosion and Profit Shifting (BEPS) project. Similarly, European commentary points out the U.S.'s improved attractiveness as an investment location relative to European countries, particularly high-tax-rate countries like Germany. (3) In contrast, the commentary on such provisions in the United States has been mixed. In particular, some have criticized the GILTI provision as not being punitive enough to achieve the desired deterrence and the FDII provision as not providing a strong enough incentive for companies to retain mobile investments in the United States (Kamin et al., 2017). Critics have also claimed that the provisions create incentives to locate new investments in tangible assets overseas. In particular, and at least on the surface, the design of the two provisions appears to leave open a tax arbitrage opportunity for companies to pursue. Given

this, it appears also to have left open an incentive for competing governments to offer (even lower) corporate income tax rates to attract investment.

In this paper, we analyze the effect of the two provisions on the incentives for the location of new investment by U.S. multinational corporations (MNCs). In order to do so, we discuss the policy goal of the provisions and how the design of the provisions intends to achieve their policy goals in an environment that has been shaped by the OECD's BEPS project. (4) Our analysis suggests that U.S. MNCs may have strong incentives to locate new investments in intangible capital in the United States. Further, the provisions do not necessarily significantly sway the location choice for new investments in tangible capital away from the United States.

The article is organized as follows. Section II lays out a basic framework to understand the taxation of capital income and its different components. Section III describes GILTI and FDII and identifies the underlying policy intent by reference to the framework introduced in Section II. The implications of the post-BEPS international tax system are discussed in this section as well. In particular, we highlight how non-tax "transaction costs" associated with the location of mobile capital in tax-advantaged jurisdictions have increased post-BEPS and how this can influence the cost-benefit calculus underlying firms' investment location decisions. Section IV analyzes the GILTI and FDII provisions' effects on investment location decisions of U. …

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