Effect of GILTI on U.S. MNEs’ Global Investment and Reporting Activity

• In Event: Minimum Tax Regimes and Tax Planning

Abstract

We investigate the effect of the Global Intangible Low-Tax Income (GILTI) regime on U.S. multinationals’ (MNEs) global investment and reporting activity. Enacted as part of the Tax Cuts and Jobs Act of 2017, the GILTI provision levies a tax on U.S. MNEs’ foreign profits in excess of a 10% deemed return on tangible assets (QBAI). Using U.S. tax administrative microdata, we examine whether U.S. MNEs exposed to GILTI: (1) alter the amount and proportion of their tangible and intangible assets, (2) alter the location (domestic vs. foreign) of their investments, and (3) manage their reported QBAI to avoid GILTI. While prior studies on the effect of GILTI on investment use publicly available financial statement data to identify GILTI-treated MNEs, we find that public proxies poorly identify exposure to GILTI as reflected on the tax return. Therefore, we define the treatment group using U.S. MNEs’ actual exposure to GILTI in 2018, exploiting the fact that GILTI was announced in late 2017 and was not anticipated by MNEs. In preliminary analyses, we find that GILTI payers have a lower proportion of intangible to tangible assets, hold fewer foreign tangible assets, and own more subsidiaries in haven countries relative to non-GILTI payers. To estimate the effects of GILTI while accounting for ex ante differences between GILTI and non-GILTI MNEs, we implement a difference-in-differences design with a matched control sample. Our study sheds light on the real effects of GILTI as well as behavioral responses of U.S. MNEs to the GILTI regime.

Authors

• Jane Song, University of Missouri

• Zahrah Abdulrauf, Yale University

• Benjamin Glass, United States Department of the Treasury

• Petr Jansky, Charles University