We’ve heard a lot about the practice of financial offshoring in recent years. It’s a complex, sprawling topic, and if we’re being honest, much of the media coverage on it has missed the mark. Mainstream media coverage of Asiaciti Trust and Trident Trust Limited — international fiduciaries mentioned in the Pandora Papers — shows what can happen when non-experts write about concepts they don’t really understand.
Setting aside the misconceptions baked into media coverage of events like the Pandora Papers and the potential harm to the reputations of fiduciaries like Asiaciti Trust and Trident Trust, it’s reasonable to advocate for fairer tax policy and stronger financial regulation.
The question, of course, is how to balance sensible reforms against the legitimate interests of multinational businesses and their shareholders.
These four related proposals could help advance the conversation.
1. Global Minimum Tax (GMT)
The Global Minimum Tax, or GMT, is a sort of “master” international tax reform proposal that has gained considerable momentum in recent years. According to the Organization for Economic Cooperation and Development, more than 130 countries and territories have joined a two-pronged framework to develop what would in effect be a global floor in corporate tax rates.
These countries and jurisdictions represent a combined 90% of global GDP. The effort would institute a minimum corporate tax rate of at least 15% on larger multinational firms. Despite exempting smaller enterprises, the OECD estimates the initiative will generate an additional $150 billion in global tax revenues — that is, over and above what participating jurisdictions already collect.
The global minimum tax is proposed as part of a broader “pillar” of the OECD framework, known as Global Anti-base Erosion (GloBE). In addition to the 15% minimum tax on eligible corporations, GloBE ensures that all signatories coordinate in implementing and regulating the tax. The aim is to reduce the appearance of loopholes or carve-outs that encourage firms to move money to more advantageous jurisdictions and to discourage the practice of offshoring more generally.
Would a global minimum tax affect international fiduciaries like Asiaciti Trust and Trident Trust? Perhaps. After all, international fiduciaries do rely on demand for offshoring expertise, and any policy changes that dampen that demand could create headwinds. But no sweeping initiative is without tradeoffs, and the fiscal benefits for signatory nations — not to mention the enhanced credibility of a “fairer” tax system — may be worth the cost.
2. Shoring Up the Tax on Global Intangible Low-Taxed Income (GILTI)
The Global Intangible Low-Taxed Income (GILTI) tax applies to certain foreign corporations in which a U.S. person is at least a 10% shareholder. The details are complex, but the effect is to tax certain U.S.-derived income at a lower rate than the standard corporate tax rate. The GILTI tax code is also rife with deductions and exemptions — carve-outs that, in the interest of fairness, may need to be reduced or eliminated altogether.
3. Eliminating Foreign Derived Intangible Income (FDII)
FDII is another complex tax category that levies U.S. tax on foreign sales derived from U.S.-registered intellectual property. This is a broad category that can include software, educational courses, and even disposable consumer goods. While the FDII tax rate is lower than the standard U.S. corporate tax rate, it may disincentivize U.S.-based enterprises to develop IP-based products for sale abroad and for local licensees or resellers to invest in those products.
4. Raising the Base Erosion and Anti-abuse Tax (BEAT)
The Base Erosion and Anti-abuse Tax serves as a de facto minimum U.S. tax on larger U.S.-based corporations that shift profits abroad. Instituted in 2017, it has been moderately successful, but the rate — 10% — is lower than the proposed 15% global minimum tax. As the BEAT would likely need to be raised as part of the global minimum tax framework, there seems no point in waiting for that more complex deal to be finalized and ratified by the 130-and-counting signatories.
Fairness Matters
“Fairness” is a popular policy position. But the devil is often in the details. What’s fair to one party might seem punitive to another.
This is the political reality in which free and open societies operate, in which nations conduct international relations. It’s why improvements to transnational policy take years to negotiate and occur incrementally, if at all.
Yet we can’t allow political reality to stand in the way of common-sense reforms. We have many reasonable proposals for better international tax policy and financial regulation at our disposal. Let’s continue to work toward them, whatever the details of our differences.
