“Debate” re. the 2017 tax act’s international tax provisions

Today at the annual NYU-KPMG tax symposium at NYU Law School, Kim Blanchard and I “debated” Itai Grinberg and Michael Plowgian, with Diana Wollman moderating, regarding whether the 2017 tax act made the U.S. international tax system better or worse. I use scare quotes around “debating” because we had assigned roles (not guaranteed to reflect our actual views) and aimed to be lively and give the audience a good show, rather than to engage in an academic seminar-style serious mutual exploration of the issue. Kim and I were assigned the role of saying that, yes, the 2017 act improved U.S. international tax law.

I happened to go first. Keeping in mind the nature of the assignment, I started by mentioning the wonderful scene in Alice Through the Looking Glass when Alice (unwillingly) hears “The Walrus and the Carpenter,” whose two protagonists cruelly trick a group of oysters into being eaten by them (under the false pretense of taking a walk to discuss “why the sea is boiling hot, and whether pigs have wings”), and then the following ensues:

‘I like the Walrus best,’ said Alice: ‘because you see he was a little sorry for the poor oysters.’
‘He ate more than the Carpenter, though,’ said Tweedledee. ‘You see he held his handkerchief in front, so that the Carpenter couldn’t count how many he took: contrariwise.’
‘That was mean!’ Alice said indignantly. ‘Then I like the Carpenter best—if he didn’t eat so many as the Walrus.’
‘But he ate as many as he could get,’ said Tweedledum.
This was a puzzler. After a pause, Alice began, ‘Well! They were both very unpleasant characters.”

I have always admired Alice’s solution here – practical and clear-headed, as she so often is. Rather than deciding whether one’s judgment should reflect actions taken or state of mind, or whether moral judgments should be harsher or milder when one knows that what one is doing is wrong, she crisply dismisses the entire question that she has raised.

But the four of us were evidently less wise than Alice, since we took on the assignment of debating whether or not the 2017 act improved the U.S. international regime. We didn’t just leave it at agreeing that they are both very unpleasant

The case Kim and I made for “yes, it made things better” had the following main points:

1) No more deferral! – This particular way of lowering the effective tax rate on foreign source income (FSI) never made any sense (as compared to, say, contemporaneously applying intermediate rates), and led U.S. multinationals to jump through hoops to avoid taxable repatriations, while they lobbied for tax holidays, trapped themselves by accepting the accounting benefits of claiming that profits were permanently reinvested abroad, and based decisions on current versus expected future repatriation tax rates.

Our debating opponents not unreasonably pointed out in response that it’s not clear how huge the inefficiencies resulting from this admittedly quite poorly conceived regime actually were.

2) Enactment of GILTI – For all its flaws, GILTI makes it harder for highly profitable U.S. multinationals to pay a global 0% rate on large swathes of their income. And as minimum tax proposals go, it has the virtue of preserving some incentive for U.S. companies to minimize foreign taxes, rather than just pay them in lieu of higher U.S. taxes, because GILTI makes foreign taxes only 80% creditable.

3) Enactment of the BEAT – This provision, for all its perhaps even greater flaws, at least responds to the ineluctable problems with transfer pricing. In effect, it imposes an excise tax on “base erosion tax benefits” (deductible payments to foreign affiliates) that has a 0% rate until one is on the BEAT, then effectively a 21% rate. Admittedly, the rationale for this rate structure is not overwhelmingly obvious. But could one argue that it results in a kind of rough justice that might improve things overall?

4) Changes to business interest disallowance – Code section 163(j) now applies to inbound as well as outbound interest expense. Not all of its ramifications lie in the international realm, but it might be significant in relation to inbound earnings-stripping, which might (depending on the effective tax rates one favors for inbound) be a good thing.

5) Room for improvement? – We pointed out that many of the most egregious flaws in GILTI and the BEAT rules could in principle be addressed legislatively. Plus, FDII might not last long and who really cares about it anyway.

Here we were trying a rotten debating trick: Rather than debate the rules as they are, which the proposition to be debated arguably placed on the table, we tried to shift our defense to the rules as they might hypothetically become.

But then again our opponents had their own rotten debating trick, which we tried to call them on, while hoping they wouldn’t call us on ours. (Needless to say, this was all done on both sides entirely in good humor, and I am using the word “rotten” with tongue firmly in cheek.) They spent part of their time comparing the actual effects of the 2017 tax act’s international provisions to the proponents’ stated intent, which made their case (even) stronger than if they had been comparing present law to prior law, with all of its defects.

But perhaps it was more rotten still that they also powerfully addressed the comparison that the debate proposition actually called for! I have to say, listening to them I was glad I didn’t have a vote, as they might conceivably have gotten it.