Tax Cuts and Jobs Act: Future Rulemaking Should Provide Greater Detail on Paperwork Burden and Economic Effects of International Business Provisions
Fast Facts
The Tax Cuts and Jobs Act of 2017 changed how U.S. corporations' international income is taxed. We reviewed the regulations Treasury and IRS issued on the new international provisions.
Although Treasury and IRS generally complied with legal requirements for issuing regulations, we recommended ways to improve future regulations.
For example, IRS should estimate the time and money business taxpayers have to spend on completing paperwork related to the regulations. Developing more complete estimates of this burden is a leading practice related to the Paperwork Reduction Act that IRS and other agencies should aim to follow.
Highlights
What GAO Found
GAO's interviews with officials representing eight selected U.S.-based companies revealed considerable uncertainty in how the international business provisions of Public Law 115-97—commonly known as the Tax Cuts and Jobs Act of 2017 (TCJA)—may be affecting business planning decisions. Some companies reported making specific changes, such as moving intellectual property back to the U.S. in response to a new deduction for income earned from certain foreign-derived sales of property or services attributed to assets located in the U.S. Preliminary studies on another provision taxing net income earned by foreign subsidiaries exceeding a specified threshold of certain assets hypothesized that this provision could encourage moving tangible property outside the U.S. Other business representatives emphasized the importance of nontax factors in business planning decisions, such as entering foreign markets where executives believe potential customers may be located.
The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) proposed eight regulations and finalized six of them to implement four international provisions of TCJA between December 2017 and October 2020 (the most current information available at the time of GAO's review) and used guidance to supplement the regulations. The agency generally complied with legal requirements for issuing regulations and offered public comment opportunities for some guidance. However, Treasury and IRS did not fully address expectations set in government-wide guidance related to Paperwork Reduction Act (PRA) burden estimates, economic analysis requirements for regulations, and public comment on significant guidance:
- IRS generally did not provide specific estimates of the incremental paperwork burden of TCJA's international regulations and instead estimated the total burden for all business tax forms. The Office of Information and Regulatory Affairs' PRA guide says agencies should estimate the time and money required for an information collection. GAO's interviews with representatives of selected companies show why it is important for IRS to consider burden because representatives reported challenges, such as gathering required information from foreign subsidiaries.
- Anticipated economic benefits and costs of Treasury's and IRS's regulations were generally not quantified. An executive order requires agencies to provide such information to the extent feasible for regulations with the largest anticipated economic effects. As a result, Treasury and IRS made important decisions about regulations, such as whether to allow foreign military sales to be eligible for a U.S. deduction, without more specific information about the potential economic effects.
- IRS did not provide an opportunity for public comment before issuing revenue procedures related to TCJA's international provisions. The Office of Management and Budget identified ensuring public comment opportunities for significant guidance when appropriate as a leading practice that agencies should follow. The President recently directed a government-wide review of agency guidance processes.
Why GAO Did This Study
TCJA made sweeping changes to taxing U.S. corporations' international activities: (1) a transition tax on untaxed overseas earnings of foreign subsidiaries that accrued prior to 2017; (2) a tax on the net income earned by foreign subsidiaries exceeding a specified threshold of certain assets; (3) a deduction for income from certain foreign-derived sales of property or services exceeding a specified threshold of certain assets; and (4) a tax on certain payments made to a related foreign party referred to as base erosion payments.
GAO was asked to review IRS's implementation of TCJA and early effects of the law. This report: (1) describes how TCJA's international provisions may be affecting U.S.-based corporations' international business activities; and (2) assesses IRS's and Treasury's development of relevant regulations and guidance to implement the provisions. GAO interviewed representatives from eight companies' tax departments randomly selected from among the 100 largest U.S.-based companies and compared relevant regulations and guidance against procedural requirements.
Recommendations
GAO makes three recommendations to Treasury and IRS: develop more specific paperwork burden estimates for future TCJA regulations; quantify anticipated benefits and costs of these regulations; and identify ways to obtain public comment for significant guidance when appropriate. Treasury and IRS generally agreed with the goals of the recommendations but described challenges. GAO believes the recommendations are valid.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Treasury | The Secretary of the Treasury, in consultation with IRS, should ensure that relevant data are used to develop quantitative estimates of the benefits and costs for future regulations related to TCJA's international provisions, or any reviews Treasury or IRS may conduct for regulations already issued. (Recommendation 1) |
Open
Treasury and IRS generally agreed with the goals of the recommendations in our report but described challenges. In June 2023, Treasury and OMB signed a memorandum of agreement stating that tax regulatory actions will no longer be subject to the centralized review process established by Executive Order 12866, which included economic analysis requirements. In August 2023, Treasury officials stated in response to this recommendation that they will continue to provide robust and transparent explanation of tax regulations' provisions. While it is important for officials to clearly explain regulations, this recommendation focuses on improving the data used to assess potential economic effects. Treasury officials told us in 2021 that they had limited data to use in estimating the potential effects of regulations implementing TCJA's international business provisions. Further while OMB no longer reviews tax regulations, our report cited a prior report (GAO-14-714) that identified key elements for a cost-benefit analysis: a discussion of the problem the rule intends to address; monetized, quantified, or qualitatively discussed costs and benefits; and a discussion of alternatives. We derived these key elements from several sources including general economic principles. As such, we continue to believe that quantification, if done accurately and reliably, could help Treasury and IRS provide more precise descriptions of the anticipated economic effects of regulations. We will continue to monitor Treasury's and IRS's efforts to address this recommendation.
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| Internal Revenue Service | The Commissioner of IRS should use future regulatory activity and renewals of PRA authorizations to develop more specific paperwork burden estimates related to TCJA's international provisions. (Recommendation 2) |
Open
Treasury and IRS generally agreed with the goals of the recommendations in our report, but described challenges. While this recommendation was directed to IRS, the Deputy Assistant Secretary for Tax Policy provided written comments for both Treasury and IRS. In July 2022, Treasury's Assistant Secretary for Legislative Affairs reiterated points that officials had made in response to our recommendation. IRS continues to believe that it has a robust econometric model for estimating the paperwork burden for business entities, including for "highly impactful legislative and regulatory changes." However, Treasury's letter continues to emphasize concerns that it may be difficult to estimate the incremental burden of a regulation separate from the effects of the statute. We found in our report that IRS estimated how much time and money it would take taxpayers to respond to an information collection related to the transition tax. This is an example of what we believe IRS ought to do on a broader scale. Further in this example, IRS stated its estimate did not include burden estimates for forms related to the statute, thereby providing a clear explanation of what its estimate does and does not cover. We believe IRS should use a similar approach for assessing potential new regulations related to other international provisions of TCJA or regulations implementing other important changes to how international business income is taxed. A June 2023 memorandum of agreement between OMB and Treasury regarding the regulatory review process for tax regulations notes Treasury remains responsible for addressing requirements the Congress established in the Paperwork Reduction Act. We will continue to monitor Treasury and IRS's efforts to address this recommendation.
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| Internal Revenue Service | The Commissioner of IRS should, in light of the government wide regulatory review, identify ways to provide public comment opportunities for significant guidance documents when appropriate. (Recommendation 3) |
Open
Treasury and IRS generally agreed with the goals of the recommendations in our report but described challenges. While this recommendation was directed to IRS, the Deputy Assistant Secretary for Tax Policy provided written comments for both Treasury and IRS. In July 2022, Treasury's Assistant Secretary for Legislative Affairs reiterated points officials had previously made stating that Treasury and IRS recognize the value of public comment for all levels of tax guidance and seek to provide opportunities for comments when appropriate. However, Treasury's letter stated that it is not always appropriate or feasible to provide such opportunities when balanced against the immediate needs of taxpayers for greater clarity and the requirements of tax administration generally. In an August 2023 update, Treasury officials stated that they continue to agree with the goals of this recommendation and are committed to providing appropriate notice and opportunity to comment as part of the regulatory process, while providing clarity as quickly as possible to taxpayers. While we recognize that there may be situations in which Treasury and IRS must quickly publish guidance, we would encourage Treasury and IRS to limit the instances in which they publish guidance without seeking public comments. We will continue to monitor Treasury and IRS's efforts to address this recommendation.
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