This makes the eyes of many legislators glassy.
Most members of Congress do not understand the first thing about the international corporate tax system and do not have the bandwidth to figure it out – which should make it easier for the Democrats to approve their proposals.
“A lot of members don’t get it and won’t be interested in hearing about it – they’ll just defy the people in the caucus they consider to be experts,” predicts Rohit Kumar, a former top adviser to Republican Senate leader Mitch McConnell now with the consulting firm PwC.
The complexity of the proposals and the legislature’s ignorance of the international tax system also challenge opponents of the plans, including lobbyists who try to kill or blunt the regulations.
Legislators have long complained that their rivals are voting for bills they haven’t read or understood. But that may never be truer with the Democrats’ international tax changes.
The section of the Code that deals with companies operating in multiple countries is notoriously baroque among tax professionals. Corporations often have ornate structures with subsidiaries around the world, and it can be difficult to determine where they made their money, how much taxes they owe, and what government they should pay.
“This stuff is enough to make your head explode even if you’re a tax attorney,” said one tax lobbyist on condition of anonymity. “It’s wickedly complicated.”
President Joe Biden has proposed a number of changes to the international tax system. On Monday, three senators, including Finance Committee Chairman Ron Wyden (D-Ore), submitted their own international proposal that builds on and extends the administration’s plans. Bernie Sanders (I-Vt.), Chair of the Senate Budget Committee, has presented another package of possible changes.
Democrats could end up raising more money from these international regulations than from their much better known plan to raise them Corporate tax rate, especially if Congress rejects Biden’s proposal to raise that rate from 21 percent to 28 percent. If lawmakers increase the corporate rate, many expect to settle for something in the mid-twenties – which could force Democrats to delve even further into dunning companies’ overseas activities to keep their budget numbers working.
Many of their proposals revolve around strengthening a special tax known as GILTI Republicans, which was introduced in 2017 to target so-called intangible income. This is money companies make from patents, royalties, and other types of intellectual property.
Democrats also want to revise or discard an export incentive known as overseas intangible income, or FDII, sometimes referred to as “fiddy”.
And the Democrats are proposing to rewrite or kill another special tax called BEAT, which is supposed to go after companies lowering their tax burdens by posting many deductions in the US while declaring that they made most of their profits in overseas subsidiaries that are outside the jurisdiction of the IRS. The BEAT, or the property tax on erosion and anti-abuse, has not worked as intended by the legislature, generating a fraction of the revenue expected by policy makers.
On Wednesday, the government proposed replacing it with a new tax it called SHIELD. The tax officials said they’d better fight offshore tax avoidance.
The proposals require a major educational campaign on Capitol Hill to get the basic concepts across, and lawmakers from both parties have begun preparing for the debate on the provisions. Any vote will potentially matter because of the tiny Democratic majorities in the House and Senate.
Democrats recognize the complexity of their proposals but say they are trying to give colleagues enough time to research the issues.
“It’s really Byzantine and you have to balance this and that passage. So let’s start early and start with some pretty simple concepts,” said Wyden.
Your more digestible message about the proposals consists of one word: outsourcing.
Recalling the fact that corporations can pay lower tax rates on their overseas profits than on their domestic profits – the GILTI tax rate is half the regular corporate rate of 21 percent – Democrats argue that the regulations urge companies to stop doing business and to relocate their jobs overseas.
“Republicans in Congress essentially gave companies a 50 percent discount coupon on their taxes when they move manufacturing overseas,” said Sen. Sherrod Brown, Ohio, another tax advisor.
Experts say there is little over-simplification and the evidence that businesses are going overseas due to the provisions that were part of the 2017 tax revision of the GOP. Investment and jobs in the US actually increased in 2018, according to an analysis by the non-partisan mixed tax committee.
Some say there is no point in getting the legislature into the details of the proposals because they are too complicated. Better focus on basic issues like the burden on employers. Republican lawmakers, for example, warn that the regulations will encourage companies to move their headquarters overseas to escape the IRS and will lead to more overseas takeovers of American companies.
“It will not be productive to go up there and talk about the technical details of this material – it would be a complete waste of time,” said the lobbyist. “You will have no idea what you are talking about.”
At the same time, the complexity of a very small group of lawmakers, staff, financial assistants, and lobbyists trained in the international tax system will give an overwhelming influence on the debate about the Democrats’ plans.
There will likely also be some lawmakers who are unfamiliar with the issues and who will be persuasive, said Kumar. If so, the density of proposals could be a headache for Democrats trying to get proposals through the House and Senate.
“There are always some members who are at risk and concerned about voting on something that is so enormously complicated,” he said. “It is easiest for these members to vote ‘no’.”
“And in this environment, a no is potentially fatal” for the Democrats’ plan.