How a legal fight over a $15,000 tax bill could upend America’s tax code

In conversation with business leaders during a dinner in 2018 at his golf club in New Jersey, former President Donald J. Trump touted the achievement of his recently passed tax cuts, highlighting a provision that he said would bring in trillions of dollars that U.S. companies had held abroad.

“We expect more than $4 trillion will be returned very soon,” Trump said. “This is money that would never be seen again by the workers and people of our country.”

Mr. Trump referred to measures in the 2017 Tax Cuts and Jobs Act, which overhauled how the United States taxed corporate profits earned abroad. These provisions dramatically reduced the incentives that large corporations had to keep their money parked abroad in the hope that that money would be reinvested at home.

Mr. Trump did not say that in addition to that lower tax on foreign income, known as Global Intangible Low-Taxed Income — or its acronym GILTI — came a one-time levy on three decades of foreign corporate profits that were “repatriated.” Five years later, that tax is the subject of a case before the Supreme Court on Tuesday that has implications for the entire U.S. tax code.

GILTI as charged?

Before the 2017 tax law took effect, U.S. companies paid taxes on their global profits at a rate of 35 percent. But they could defer taxes on profits they earned abroad indefinitely, as long as that money stayed abroad.

If a company wanted to bring that money back to the United States, it would have to pay the 35 percent corporate tax rate, minus what it had already paid abroad. The potential for a large tax burden encouraged multinational companies to store their profits in low-tax jurisdictions such as Bermuda, Ireland and the Netherlands.

The ‘GILTI’ tax introduced as part of the 2017 tax law imposed a tax of at least 10.5 percent on US companies’ foreign earnings, so companies like Microsoft, Merck and Facebook would benefit less from pushing through profits to foreign subsidiaries. . The law also applied a one-time “transition tax” on cash and assets that companies had held abroad for the past thirty years that had essentially escaped U.S. taxation.

The changes to international tax law, which have been the subject of intense lobbying by the US business community, are expected to generate more than $300 billion over ten years.

A difficult transition tax

The transition tax is at the heart of the case being heard by the Supreme Court on Tuesday, Moore versus the US

While the tax broadly applied to large companies like Apple and Alphabet, it also affected some individuals if they owned more than 10 percent of a foreign company. Charles and Kathleen Moore, who live in Washington state, owned an 11 percent stake in KisanKraft, an Indian company that supplies equipment to small farmers. That stake was worth about $500,000.

Because of the transition tax, the Moores owed $15,000 to the U.S. government, even though they never “realized” or actually received any of their profits from the investment.

In their lawsuit seeking reimbursement, the Moores argued that the one-time levy was beyond the power Congress has under the 16th Amendment to tax income.

A statement with major consequences

Legal experts and economists have been closely following the arguments in the Moore case and will listen to the thrust of the justices’ questions, as the ruling has the potential to upend large parts of the U.S. tax code.

In particular, this could impact the United States’ ability to tax total wealth, including assets such as real estate, stock ownership, and other assets that have accumulated value but whose profits have not been realized by their owners. In other words: whether the government can tax income that exists on paper, but has not yet been recognized.

The Committee for a Responsible Federal Budget, a budget watchdog, estimates the decision could cost the federal government money everywhere from $3 billion to $1 trillion of lost revenue over the past decade and creating a series of new loopholes.

A limited ruling in favor of the Moores, the group suggests, could eliminate the transition tax on individuals and “pass-through” companies, whose profits go directly to owners who are taxed as individuals. A broader ruling could eliminate the entire transition tax, which could cost nearly $350 billion in lost revenue, and the 10.5 percent tax on foreign earnings, which could cost another $350 billion.

If the Supreme Court takes a broader view, it could also theoretically invalidate the new 15 percent minimum tax that Democrats passed as part of the Inflation Reduction Act of 2022. That tax applies to financial income that companies report to their shareholders and which may be considered “unrealized” gains.

And the chance of global consequences

Although these taxes were passed by Republicans and signed into law by Mr. Trump, the Supreme Court’s ruling could impact a key part of President Biden’s economic agenda.

In 2021, the Biden administration reached an agreement with more than 130 countries on a new 15 percent “global minimum tax,” which would require companies to pay a rate of at least that amount on their global profits, regardless of where they locate. The threshold was intended to give companies less reason to flee to countries with rock bottom rates, and to put less pressure on countries to lower their tax rates to attract foreign investment.

To comply with that agreement, the US said it would revise the 2017 international tax, raising the rate from 10.5 percent to 15 percent.

It would also seek to change the structure of the GILTI tax so that the new minimum tax is applied on a country-by-country basis, preventing companies from reducing their tax bills simply by seeking out tax havens and ‘blending’ their tax rates.

Congress has so far failed to pass legislation that would allow the US to comply with the agreement it brokered. A Supreme Court ruling saying the US cannot tax foreign income would be a further blow. according to a recent report from the Congressional Research Serviceby making it impossible for the US to adhere to the rules of the deal.