Former US Treasury Official Advises Against Minimum Tax

President Barack Obama’s proposal to impose a minimum tax on the foreign income of US companies would place them at a substantial competitive disadvantage in global markets, Pamela Olson, former assistant secretary for tax policy at the US Department of Treasury, has said.

As well as including proposals for a 14 percent one-time tax on previously untaxed foreign income accumulated overseas, Obama’s 2016 Budget proposed a 19 percent minimum tax on the foreign income of US multinational companies, reduced by 85 percent of the effective foreign tax rate imposed on that income, resulting in an effective tax rate of at least 22.4 percent in every foreign jurisdiction in which the US company has operations.

In her testimony before a recent Senate Finance Committee hearing, Olson, who worked for the Treasury between 2002 and 2004, said that the United States should instead be looking at “a territorial system similar to those in other advanced economies, [which] would allow US companies to invest their foreign earnings in the US on the same basis as they invest them abroad and on the same basis as foreign companies invest in the US.”

She pointed out that the high US statutory corporate income tax rate in combination with the worldwide income tax system has negative consequences for American businesses and workers. “First, it discourages both US and foreign companies from locating their more profitable assets and operations inside the United States; second, it encourages both US and foreign companies to locate their borrowing in the United States, as the value of interest deductions is greater against a higher corporate tax rate; and, third, it discourages US companies from remitting foreign profits to the United States.”

“Evidence of the competitive disadvantage created by our international tax rules can be seen in the increase in foreign acquisitions of US multinationals and in the number of cross-border merger and acquisitions in which the combined company has chosen to be headquartered outside the United States. The current system tilts the playing field against US companies competing for acquisitions of foreign companies and US companies with foreign operations. If the ultimate parent company were incorporated in the United States, distributions of foreign income to the ultimate parent company would be subject to the US repatriation tax – a tax that would not apply (or could be mitigated) if the parent company were headquartered in a country with a territorial tax system. The tax system should create a level playing field that does not favor one owner over another. Our worldwide tax system essentially places a premium on the value of US companies’ assets in the hands of a foreign bidder.”

She pointed out that “other developed countries with territorial systems have adopted a variety of anti-abuse rules to discourage income shifting without imposing a minimum tax rate. Those anti-abuse rules are aimed at preventing the erosion of the domestic tax base, not at imposing a global minimum tax rate that would handicap their globally engaged companies with operations in lower tax jurisdictions.”

“Some countries have chosen not to extend territorial tax treatment to foreign affiliates in specific tax haven jurisdictions. But no other country imposes a minimum tax on active business income such as proposed by the Obama Administration,” Olson continued. She also noted that the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) has featured proposals from the United States for a foreign minimum tax as a special measure “to backstop transfer pricing rules.” She warned the Administration that “if the United States were to enact a minimum tax while the rest of the world rejects the concept, it would push the United States even further from international norms to the disadvantage of US companies and their employees.”

Last, Olson argued that the Obama Administration’s recent budget proposals on interest expense deductions would again establish limitations “beyond international norms” and “will further tilt the playing field against investment in the US to the detriment of the American worker – a result that should be avoided.”