GILTI: 'Made in America' for European Tax: Cooperative Unilateral Measures in the International Tax Competition Game
43 Pages Posted: 16 Nov 2018 Last revised: 29 Mar 2019
Date Written: October 25, 2018
How does GILTI, the U.S. global minimum tax on excess profits introduced with the TCJA fit into the larger debate about international tax avoidance, “harmful tax competition,” and taxation in the “digital economy”? Far from being a 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 resident based global minimum tax, GILTI is a tax tool “Made in America” for European tax. GILTI does for profit shifting and base erosion what FACTA did for financial information exchange. The OECD and EU might bemoan GILTI’s unilateral character. But behind the boogeyman of arrogant American unilateralism, GILTI stands a critical tax tool for fostering cooperation and beneficial competition among developed economies for productive efficiencies. Notwithstanding cries from multilateral bodies, global cooperation is not in tension with unilateral measures. As with FACTA, the “Made in America” medicine might be distasteful to EU member states inclined towards multilateral efforts directed at consensus building. Yet the United States’ ability to coordinate multi-state action through a unilateral commitment to a strategy with cooperative surplus is precisely what gives GILTI its potency. For many EU nations, the GILTI medicine is far superior to the disease of veiled and ineffectual multilateralism on display in attempts to “combat” harmful tax competition.
This paper draws on the theory of tax competition and language of international tax neutrality to argue that international tax policy must be viewed through the lens of “national welfare” when considering strategic incentives and thus positive predictions about nation state behavior in the international tax competition game. Viewing tax competition and GILTI’s global minimum tax through the prism of game theory yields important insights into the potential for unilateral U.S. action to alleviate global collective action problems. An important question in evaluating GILTI is whether it 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. In short, is GILTI a harmful unilateral measures that undermines cooperative efforts in the OECD and EU? Or is GILTI like FATCA — a veiled if unsolicited gift for developed EU economies? This paper answers these questions and highlights the potential of a global minimum tax on excess profits to further debate about international taxation in a digitized economy while retaining foundational principles of tax territoriality.
Part II introduces GILTI and the origins of the TCJA’s shift to current taxation of excess profits; it also defends GILTI’s focus on intangibles and excess profits. Part III introduces EU and OECD efforts to combat base erosion and profit shifting through multilateral initiatives (BEPS) as well as 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 under existing international tax paradigms that respect tax sovereignty.
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
Suggested Citation: Suggested Citation