GILTI: 'Made in America' for European Tax - Unilateral Measures & Cooperative Surplus in the International Tax Competition Game

Abstract

How does the TCJA’s Global Intangible Low-Taxed Income (GILTI) provision—a global minimum tax on excess profits—fit into the larger debate about international tax avoidance, “harmful” tax competition, and taxation of the “digital” economy? Far from rolling in a U.S. Trojan horse, GILTI offers developed resident economies (particularly EU member states) a critical tax instrument to combat base erosion and profit shifting to low-tax jurisdictions. As a residence-based global minimum tax, GILTI is a tax tool “Made in America” for European tax.

GILTI does for profit shifting and base erosion what FATCA did for financial information exchange and tax evasion. GILTI provides a globally significant baseline around which other countries can implement defensive tax measures for resident firms. The OECD and EU might bemoan GILTI’s unilateral character. But behind the boogeyman of arrogant American unilateralism, GILTI stands out as a critical tax tool for countries wishing to foster beneficial competition on productive economic factors. As with FATCA, the “Made in America” medicine might be distasteful to EU member states inclined towards multilateral efforts built on consensus building. Yet the United States’ ability to facilitate cooperative multi-state action through a unilateral strategy with cooperative potential is precisely what gives GILTI its potency. For countries seeking to protect and recoup government subsidies for innovation, GILTI’s medicine is far superior to the disease of veiled and ineffectual multilateralism on display in BEPS’ empty attempts to “combat” harmful tax competition.

This paper argues that GILTI enables potential cooperative behavior among developed economies through signaling and minimum standards by a sovereign with “pricing” power to set global rate and base terms for MNEs. Part II introduces GILTI and the origins of the TCJA’s shift to current taxation of excess profits; it also defends GILTI’s reliance on intangibles to define excess profits. Part III introduces the EU and OECD’s efforts to combat base erosion and profit shifting through multilateral initiatives—like BEPS—as well as the debate about “digital taxation.” Part IV introduces theories of tax competition and international tax neutrality benchmarks to establish “national welfare” as the appropriate descriptive and normative framework for evaluating international tax policy within a multi-sovereign tax competition game. Part V applies game theory to the tax competition and “digital taxation” debates to show how GILTI’s resident based global minimum tax liberates developed economies to compete on productive factors and combat base erosion and profit shifting.

Keywords: GILTI, TCJA, Global Intangible Low-Taxed Income, Game Theory, Unilateral Measures, OECD, BEPS, Patent Box, Innovation Incentives, International Tax, DST, EU Digital Tax, Global Minimum Tax, Tax Competition, Excess Profits, Trump Tax Reform, GOP Tax Reform

JEL Classification: K34, F53, F23, F21, C70, G18, O31, O32, O34