WASHINGTON—Democrats are close to passing significant changes to international corporate taxation, moving toward a system that would reduce the gaps between nations’ tax rates and—if it all works as planned—making taxes a less important consideration for where companies put investments, profits and headquarters.


Treasury Secretary Janet Yellen, who joined President Biden to meet with business leaders in Washington last month, wants a global floor on tax rates. PHOTO- KEVIN LAMARQUE:REUTERS.jpeg

Treasury Secretary Janet Yellen, who joined President Biden to meet with business leaders in Washington last month, wants a global floor on tax rates./PHOTO: KEVIN LAMARQUE/REUTERS


The international tax changes are included in the social-spending and climate-change bill passed by the House last week. They mark the U.S. contribution to the global tax talks that Treasury Secretary Janet Yellen accelerated this year and that culminated in October’s agreement for a 15% global minimum tax.

The Democratic plan, which builds on the 2017 GOP tax law, would help push tax rates into a narrower band, reducing companies’ opportunities to exploit gaps across borders. The higher taxes on U.S.-based companies would take effect in 2023, and the impact on companies would depend on whether and when other countries follow through on their promises to impose similar taxes.

In theory, if all contemplated changes go into effect, taxes would become a less important part of decision-making for multinational corporations. The resulting tax system would have significantly smaller incentives for them to enter deals that turn U.S. companies into foreign ones and start transactions that push profits from the U.S. into low-tax countries.

“The playing field is still tilted,” said Marty Sullivan, chief economist at Tax Analysts, the nonprofit publisher of Tax Notes. “It’s not a 70-degree angle any more.”

U.S.-based companies would face a 6-percentage-point gap between earning income at home or abroad, down from as much as 35 points a decade ago. U.S. companies and foreign-based companies competing in a third country would face similar tax rates; now the U.S. company has a potential tax at home the other firm doesn’t. U.S. companies choosing where to put investments and profits would face a smaller spread of tax rates in various countries, because they would likely have a 15% minimum tax no matter where they go.

The U.S. piece stems from Ms. Yellen’s push for a global floor on tax rates and Sen. Kyrsten Sinema’s (D., Ariz.) insistence on a domestic ceiling on tax rates. This convergence means Democrats are likely to leave the GOP’s 21% corporate tax rate in place and create a system in which U.S. companies pay between 15% and 21% of their earnings in taxes no matter where they put jobs and profits.

“It’s a potential sea change in the landscape,” said Rosanne Altshuler, a Rutgers University economist and co-author of an influential 2013 paper outlining the benefits of minimum taxes on foreign profits. “It basically unwinds the incentive to put the profits in havens, because you’re going to have to pay 15” percent.

Getting there is no sure thing, and implementation is bound to be messy.

The U.S. changes are wrapped up in the broader fights over President Biden’s agenda. Because of Ms. Sinema, Democrats are leaving in place the 21% corporate tax rate that Republicans established in 2017. And they are using the basic international-tax architecture that Republicans set then.

The House bill would increase the minimum tax on U.S. companies’ foreign profits to 15% from 10.5%, impose that tax on earnings in each country and shrink an exemption for tangible assets abroad. But Democrats are also proposing to relax some rules that companies have complained about, giving them more ability to use losses and tax credits and removing rules that raised effective tax rates on companies operating in high-tax foreign countries.

If all that goes forward, it could temporarily increase tax-rate gaps by raising U.S. minimum taxes on companies starting in 2023 before other countries act. And on net, U.S. companies would pay higher taxes than now; Republicans and industry groups have warned about negative effects on investment and job creation.

International tax changes in the latest House bill would raise more than $200 billion over a decade. That is atop a separate 15% minimum tax on large companies based on their financial-statement income.

The relatively quick U.S. action makes companies nervous, and they have urged delay until other countries follow through on the global agreement reached by nearly 140 countries this year.

“I expect other countries to drag their feet, because their companies have a distinct advantage over us,” said Catherine Schultz, vice president of tax and fiscal policy at Business Roundtable, a group of large-company chief executives.

Some House Democrats agreed, but party leaders are still moving ahead and the plan has remained relatively consistent even as other pieces of the bill have changed.

“Businesses will be very concerned if foreign countries, especially the European Union, have not made progress in the first half of next year,” said Joshua Odintz, a tax lawyer at Holland & Knight LLP who was an Obama administration Treasury Department official.

Even if other developed countries enact similar minimum taxes on their home companies’ foreign income, they won’t be identical to the U.S. system. Others are expected to offer an exemption for assets and payroll, not just assets as the U.S. does. And they may lack a rule that would make the U.S. minimum tax 15.8% for many companies.

“On paper, the band may be narrow and of course every company has different facts and different pressure points,” said Ray Beeman, a former House GOP tax aide now at accounting firm EY LLP. “It’s just going to be more complicated.”

But the long direction of the U.S. and foreign governments is toward reducing tax differences across borders.

“It’s surprisingly close to something you could almost describe as a world-wide tax system” where foreign and domestic income are taxed equally, said Danielle Rolfes of KPMG LLP, a former Obama administration official. “I didn’t think we would end up here if you had asked me a month ago.”

Write to Richard Rubin at richard.rubin@wsj.com

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