The January 17 Senate Budget Committee hearing, "The Great Tax Escape: Closing Corporate Loopholes that Reward Offshoring Jobs and Profits," offered differing views of the international and other provisions of the 2017 Tax Cuts & Jobs Act (TCJA), comparisons of the TCJA with laws enacted during the Biden administration, and perspectives on how the tax system should be changed in conjunction with the expiration of TCJA provisions for individuals and small businesses in 2025.

Witnesses:

• Kimberly Clausing, University of California, Los Angeles School of Law
• Roy Houseman, United Steelworkers
• John Arensmeyer, Small Business Majority
• James R. Hines Jr., University of Michigan
• Mindy Herzfeld, University of Florida Levin College of Law

Clausing, a former Biden Treasury official, advocated implementing a country-by-country version of the global intangible low-taxed income (GILTI) minimum tax, which she has proposed in a comprehensive Hamilton Project paper on tax reform, and also supported Chairman Sheldon Whitehouse's (D-RI) "No Tax Breaks for Outsourcing Act" to fully tax (at the regular statutory rate) the foreign income of US multinational companies (MNCs) on a country-by-country basis, eliminate the exclusion from GILTI for returns on foreign tangible assets and repeal the foreign-derived intangible income (FDII) incentive.

Hines said while "a concern sometimes raised with the post-2017 GILTI regime is that the definition of income subject to tax may indirectly encourage U.S. firms to locate tangible capital outside the United States, and thereby encourage offshoring of jobs," actually the "exclusion of 10% returns on tangible capital serves the function of maintaining the competitiveness of U.S. firms in global markets, as they compete for business against domestic firms in foreign markets and their competitors from Japan, Britain, Germany, Canada, and elsewhere." He said that "most foreign direct investment consists of one company buying another, and the exclusion of net deemed tangible income makes these acquisitions feasible on a competitive basis for U.S. firms acquiring foreign companies with largely tangible assets."

Herzfeld raised some jurisdictional issues regarding the OECD BEPS 2.0 project. "One of the most concerning aspects of pillar 2 is the extent to which the OECD has stepped into the shoes of Congress and Treasury in writing rules that directly impact U.S. taxpayers, without any of the oversight mandated by the legislative process or as required by the Administrative Procedure Act. The lack of oversight should concern members of Congress of both parties," she said. "Congress can address the process concerns related to the OECD project by putting in place mechanisms for greater oversight over international tax rulemaking, perhaps looking to the Trade Promotion Authority as a model. And it could address underlying problems with the U.S. international tax system that the project has exposed by better defining the U.S. tax base to ensure primary taxing rights over profits from U.S. created intangibles."

Houseman said GILTI has provided US MNCs a significant incentive over domestic companies by imposing only half the corporate rate on their overseas profits. Arensmeyer advocated requiring multinationals to pay the same rate on profits earned abroad as they would domestically, also by eliminating the GILTI benefit for overseas investments in tangible assets.

During Q&A, Clausing said that US MNCs receiving a lower rate on profits earned offshore provides them a competitive advantage over smaller, purely domestic businesses. Chairman Whitehouse later concluded the hearing by saying the tax code creates an incentive for an American company to build a factory and hire workers overseas.

Senator Ron Johnson (R-WI) said he wasn't a big fan of the 2017 tax reform, at least in its initial state, because of the disparity in treatment between C corporations and other businesses, which was addressed with the 199A deduction. He said he voted in favor of the TCJA because it was "better than what we had" and did stop inversions of US companies, but it was not perfect. Senator Johnson said there is the potential for more agreement than disagreement on the tax reform issue and that both parties have used the reconciliation process to "ram through" tax cuts or other spending, at the last minute, without transparency. He suggested, ahead of the expiration of TCJA provisions in 2025, looking at areas of agreement and crafting a bipartisan package that can be considered in Congress under regular order.

Senator Alex Padilla (D-CA) questioned a "particularly egregious loophole" in the GILTI structure exempting income from foreign oil and gas (FOGEI) extraction, and said it is an unacceptable carveout. Clausing said the provision for FOGEI is an enormous benefit, and it should be addressed. She noted Chairman Whitehouse's "Clean Competition Act" to encourage more global adoption of climate mitigation policies.

Senator Tim Kaine (D-VA) said ahead of the TCJA, the Republican goal was to cut taxes on large corporations and cut tax rates on their profits from overseas and hope that they put those profits into investments. By contrast, in 2021 and 2022, Congress approved infrastructure and manufacturing legislation to boost semiconductors and other industries. Clausing said the TCJA mostly enriched shareholders, as opposed to workers, and the infrastructure law, CHIPS and Science Act, and Inflation Reduction Act (IRA) provided funds and infrastructure improvements better suited to allowing the US to compete in the world economy.

Senator Chris Van Hollen (D-MD) focused on country-by-country reporting, including the FASB international disclosure proposal and his Disclosure of Tax Havens and Offshoring Act (S. 638) to require public companies to disclose their financial reporting on a country-by-country basis. Clausing said the simple information required to be provided under CbCR increases transparency for corporations and is a "market-friendly nudge" for them to share information with the public. Van Hollen said there has been a lot of talk about GILTI, that he and others warned about the potential for encouraging offshore investment and jobs and he asked about the impact of the TCJA provisions. Clausing said a greater amount of tangible investment offshore generates more income free of US taxation because of the 10% return calculation.

Senate Finance Committee Chairman Ron Wyden (D-OR), referencing the Tax Relief for American Families and Workers Act of 2024 he proposed with House Ways & Means Committee Chairman Jason Smith (R-MO) January 16, said Congress is trying to use this year to help people and "tee up 2025." He highlighted the new opportunity for small business expensing under the proposal, which he said has not garnered enough attention, as well as Child Tax Credit (CTC) provisions. Clausing said the price tag for extending the TCJA is $4 trillion and there needs to be more progressive changes in the tax system, including being more generous with the CTC and EITC.

Testimony is available here.