By Jesse Drucker and Jim Tankersley
As the Treasury Department prepared to enact the 2017 Republican tax overhaul, corporate lobbyists swarmed — and won big.
The overhaul of the federal tax law in 2017 was the signature legislative achievement of Donald J. Trump’s presidency.
The biggest change to the tax code in three decades, the law slashed taxes for big companies, part of an effort to coax them to invest more in the United States and to discourage them from stashing profits in overseas tax havens.
Corporate executives, major investors and the wealthiest Americans hailed the tax cuts as a once-in-a-generation boon not only to their own fortunes but also to the United States economy.
But big companies wanted more — and, not long after the bill became law in December 2017, the Trump administration began transforming the tax package into a greater windfall for the world’s largest corporations and their shareholders. The tax bills of many big companies have ended up even smaller than what was anticipated when the president signed the bill.
One consequence is that the federal government may collect hundreds of billions of dollars less over the coming decade than previously projected. The budget deficit has jumped more than 50 percent since Mr. Trump took office and is expected to top $1 trillion in 2020, partly as a result of the tax law.
HIDING A HAVEN
Laws like the 2017 tax cuts are carried out by federal agencies that first must formalize them via rules and regulations. The process of writing the rules, conducted largely out of public view, can determine who wins and who loses.
Starting in early 2018, senior officials in President Trump’s Treasury Department were swarmed by lobbyists seeking to insulate companies from the few parts of the tax law that would have required them to pay more. The crush of meetings was so intense that some top Treasury officials had little time to do their jobs, according to two people familiar with the process.
The lobbyists targeted a pair of major new taxes that were supposed to raise hundreds of billions of dollars from companies that had been avoiding taxes in part by claiming their profits were earned outside the United States.
The blitz was led by a cross section of the world’s largest companies, including Anheuser-Busch, Credit Suisse, General Electric, United Technologies, Barclays, Coca-Cola, Bank of America, UBS, IBM, Kraft Heinz, Kimberly-Clark, News Corporation, Chubb, ConocoPhillips, HSBC and the American International Group.
Thanks in part to the chaotic manner in which the bill was rushed through Congress — a situation that gave the Treasury Department extra latitude to interpret a law that was, by all accounts, sloppily written — the corporate lobbying campaign was a resounding success.
Through a series of obscure regulations, the Treasury carved out exceptions to the law that mean many leading American and foreign companies will owe little or nothing in new taxes on offshore profits, according to a review of the Treasury’s rules, government lobbying records, and interviews with federal policymakers and tax experts. Companies were effectively let off the hook for tens if not hundreds of billions of taxes that they would have been required to pay.
“Treasury is gutting the new law,” said Bret Wells, a tax law professor at the University of Houston. “It is largely the top 1 percent that will disproportionately benefit — the wealthiest people in the world.”
It is the latest example of the benefits of the Republican tax package flowing disproportionately to the richest of the rich. Even a tax break that was supposed to aid poor communities — an initiative called “opportunity zones” — is being used in part to finance high-end developments in affluent neighborhoods, at times benefiting those with ties to the Trump administration.
Of course, companies didn’t get everything they wanted, and Brian Morgenstern, a Treasury spokesman, defended the department’s handling of the tax rules. “No particular taxpayer or group had any undue influence at any time in the process,” he said.
Racing for a Win
Ever since the birth of the modern federal income tax in 1913, companies have been concocting ways to avoid it.
In the late 1990s, American companies accelerated their efforts to claim that trillions of dollars of profits they earned in high-tax places like the United States, Japan or Germany were actually earned in low- or no-tax places like Luxembourg, Bermuda or Ireland.
Google, Apple, Cisco, Pfizer, Merck, Coca-Cola, Facebook and many others have deployed elaborate techniques that let the companies pay taxes at far less than the 35 percent corporate tax rate in the United States that existed before the 2017 changes. Their playful nicknames — like Double Irish and Dutch Sandwich — made them sound benign.
How the Republican tax cuts of 2017 — President Trump’s signature legislative achievement — became a once-in-a generation giveaway for the richest of the rich.
The Obama administration and lawmakers from both parties have tried to combat this profit shifting, but their efforts mostly stalled.
When President Trump and congressional Republicans assembled an enormous tax-cut package in 2017, they pitched it in part as a grand bargain: Companies would get the deep tax cuts that they had spent years clamoring for, but the law would also represent a long-overdue effort to fight corporate tax avoidance and the shipment of jobs overseas.
“The situation where companies are actually encouraged to move overseas and keep their profits overseas makes no sense,” Senator Rob Portman, an Ohio Republican, said on the Senate floor in November 2017.
Republicans were racing to secure a legislative victory during Mr. Trump’s first year in office — a period marked by the administration’s failure to repeal Obamacare and an embarrassing procession of political blunders. Sweeping tax cuts could give Republicans a jolt of much-needed momentum heading into the 2018 midterm elections.
To speed things along, Republicans used a congressional process known as “budget reconciliation,” which blocked Democrats from filibustering and allowed Republicans to pass the bill with a simple majority. But to qualify for that parliamentary green light, the net cost of the bill — after accounting for different tax cuts and tax increases — had to be less than $1.5 trillion over 10 years.
The bill’s cuts totaled $5.5 trillion. The corporate income tax rate shrank to 21 percent from 35 percent, and companies also won a tax break on the trillions in profits brought home from offshore.
To close the gap between the $5.5 trillion in cuts and the maximum price tag of $1.5 trillion, the package sought to raise new revenue by eliminating deductions and introducing new taxes.
Companies are not disclosing how much they are paying under new taxes.
Two of the biggest new taxes were supposed to apply to multinational corporations, and lawmakers bestowed them with easy-to-pronounce acronyms — BEAT and GILTI — that belie their complexity.
BEAT stands for the base erosion and anti-abuse tax. It was aimed largely at foreign companies with major operations in the United States, some of which had for years minimized their United States tax bills by shifting money between American subsidiaries and their foreign parent companies.
Instead of paying taxes in the United States, companies send the profits to countries with lower tax rates.
The BEAT aimed to make that less lucrative. Some payments that companies sent to their foreign affiliates would face a new 10 percent tax.
The other big measure was called GILTI: global intangible low-taxed income.
To reduce the benefit companies reaped by claiming that their profits were earned in tax havens, the law imposed an additional tax of up to 10.5 percent on some offshore earnings.
The Joint Committee on Taxation, the congressional panel that estimates the impacts of tax changes, predicted that the BEAT and GILTI would bring in $262 billion over a decade — roughly enough to fund the Treasury Department, the Environmental Protection Agency and the National Cancer Institute for 10 years.
Sitting in the Oval Office on Dec. 22, 2017, Mr. Trump signed the tax cuts into law. It was — and remains — the president’s most significant legislative achievement.
From the start, the new taxes were pocked with loopholes.
In the BEAT, for example, Senate Republicans hoped to avoid a revolt by large companies. They wrote the law so that any payments an American company made to a foreign affiliate for something that went into a product — as opposed to, say, interest payments on loans — were excluded from the tax.
Let’s say an American pharmaceutical company sells pills in the United States. The pills are manufactured by a subsidiary in Ireland, and the American parent pays the Irish unit for the pills before they are sold to the public. Those payments mean that the company’s profits in the United States, where taxes are relatively high, go down; profits in tax-friendly Ireland go up.
Because such payments to Ireland wouldn’t be taxed, some companies that had been the most aggressive at shifting profits into offshore havens were spared the full brunt of the BEAT.
Other companies, like General Electric, were surprised to be hit by the new tax, thinking it applied only to foreign multinationals, according to Pat Brown, who had been G.E.’s top tax expert.
Mr. Brown, now the head of international tax policy at the accounting and consulting firm PwC, said on a podcast this year that the Trump administration should bridge the gap between expectations about the tax law and how it was playing out in reality. He lobbied the Treasury on behalf of G.E.
“The question,” he said, “is how creative and how expansive is Treasury and the I.R.S. able to be.”
An Exhaustive Lobbying Campaign
Almost immediately after Mr. Trump signed the bill, companies and their lobbyists — including G.E.’s Mr. Brown — began a full-court pressure campaign to try to shield themselves from the BEAT and GILTI.
The Treasury Department had to figure out how to carry out the hastily written law, which lacked crucial details.
Chip Harter was the Treasury official in charge of writing the rules for the BEAT and GILTI. He had spent decades at PwC and the law firm Baker McKenzie, counseling companies on the same sorts of tax-avoidance arrangements that the new law was supposed to discourage.
Starting in January 2018, he and his colleagues found themselves in nonstop meetings — roughly 10 a week at times — with lobbyists for companies and industry groups.
The Organization for International Investment — a powerful trade group for foreign multinationals like the Swiss food company Nestlé and the Dutch chemical maker LyondellBasell — objected to a Treasury proposal that would have prevented companies from using a complex currency-accounting maneuver to avoid the BEAT.
The group’s lobbyists were from PwC and Baker McKenzie, Mr. Harter’s former firms, according to public lobbying disclosures. One of them, Pam Olson, was the top Treasury tax official in the George W. Bush administration. (Mr. Morgenstern, the Treasury spokesman, said Mr. Harter didn’t meet with PwC while the rules were being written.)
This month, the Treasury issued the final version of some of the BEAT regulations. The Organization for International Investment got what it wanted.
Helping Foreign Banks
One of the most effective campaigns, with the greatest financial consequence, was led by a small group of large foreign banks, including Credit Suisse and Barclays.
American regulators require international banks to ensure that their United States divisions are financially equipped to absorb big losses in a crisis. To meet those requirements, foreign banks lend the money to their American outposts. Those loans accrue interest. Under the BEAT, the interest that the American units paid to their European parents would often be taxed.
“Foreign banks should not be penalized by the U.S. tax laws for complying” with regulations, said Briget Polichene, chief executive of the Institute of International Bankers, whose members include many of the world’s largest banks.
Banks flooded the Treasury Department with lobbyists and letters.
Late last year, Mr. Harter went to Treasury Secretary Steven Mnuchin and told him about the plan to give the banks a break. Mr. Mnuchin — a longtime banking executive before joining the Trump administration — signed off on the new exemptions, according to a person familiar with the matter.
A few months later, the tax-policy office handed another victory to the foreign banks, ruling that an even wider range of bank payments would be exempted.
Among the lobbyists who successfully pushed the banks’ case in private meetings with senior Treasury officials was Erika Nijenhuis of the law firm Cleary Gottlieb. Her client was the Institute of International Bankers.
In September 2019, Ms. Nijenhuis took off her lobbying hat and joined the Treasury’s Office of Tax Policy, which was still writing the rules governing the tax law.
Some tax experts said that the Treasury had no legal authority to exempt the bank payments from the BEAT; only Congress had that power. The Trump administration created the exception “out of whole cloth,” said Mr. Wells, the University of Houston professor.
Even inside the Treasury, the ruling was controversial. Some officials told Mr. Harter — the senior official in charge of the international rules — that the department lacked the power, according to people familiar with the discussions. Mr. Harter dismissed the objections.
Officials at the Joint Committee on Taxation have calculated that the exemptions for international banks could reduce by up to $50 billion the revenue raised by the BEAT.
Over all, the BEAT is likely to collect “a small fraction” of the $150 billion of new tax revenue that was originally projected by Congress, said Thomas Horst, who advises companies on their overseas tax arrangements. He came to that conclusion after reviewing the tax disclosures in more than 140 annual reports filed by multinationals.
Mr. Morgenstern, the Treasury spokesman, said: “We thoroughly reviewed these issues internally and are fully comfortable that we have the legal authority for the conclusions reached in these regulations.” He said Ms. Nijenhuis was not involved in crafting the BEAT rules.
He also said the Treasury decided that changing the rules for foreign banks was appropriate.
“We were responsive to job creators,” he said.
Heading to the Hill
The lobbying surrounding the GILTI was equally intense — and, once again, large companies won valuable concessions.
Back in 2017, Republicans said the GILTI was meant to prevent companies from avoiding American taxes by moving their intellectual property overseas.
In the pharmaceutical and tech industries in particular, profits are often tied to patents. Companies had sold the rights to their patents to subsidiaries in offshore tax havens. The companies then imposed steep licensing fees on their American units. The sleight-of-hand transactions reduced profits in the United States and left them in places like Bermuda and the British Virgin Islands.
But after the law was enacted, large multinationals in industries like consumer products discovered that the GILTI tax applied to them, too. That threatened to cut into their windfalls from the corporate tax rate’s falling to 21 percent from 35 percent.
Lobbyists for Procter & Gamble and other companies turned to lawmakers for help. They asked members of the Senate Finance Committee to tell Treasury officials that they hadn’t intended the GILTI to affect their industries. It was a simple but powerful strategy: Because the Treasury was required to consider congressional intent when writing the tax rules, such explanations could sway the outcome.
Several senators then met with Mr. Mnuchin to discuss the rules.
One lobbyist, Michael Caballero, had been a senior Treasury official in the Obama administration. His clients included Credit Suisse and the industrial conglomerate United Technologies. He met repeatedly with Treasury and White House officials and pushed them to modify the rules so that big companies hit by the GILTI wouldn’t lose certain tax deductions.
In essence, the “high-tax exception” that Mr. Caballero was proposing would allow companies to deduct expenses that they incurred in their overseas operations from their American profits — lowering their United States tax bills.
Other companies jumped on the bandwagon. News Corporation, Liberty Mutual, Anheuser-Busch, Comcast and P.&G. wrote letters or dispatched lobbyists to argue for the high-tax exception.
After months of meetings with lobbyists, the Treasury announced in June 2019 that it was creating a version of the exception that the companies had sought.
An Implied Threat
Two years after the tax cuts became law, their impact is becoming clear.
Companies continue to shift hundreds of billions of dollars to overseas tax havens, ensuring that huge sums of corporate profits remain out of reach of the United States government.
The Internal Revenue Service is collecting tens of billions of dollars less in corporate taxes than Congress projected, inflating the tax law’s 13-figure price tag.
This month, the Organization for Economic Cooperation and Development calculated that the United States in 2018 experienced the largest drop in tax revenue of any of the group’s 36 member countries. The United States also had by far the largest budget deficit of any of those countries.
In the coming days, the Treasury is likely to complete its last round of rules carrying out the tax cuts. Big companies have spent this fall trying to win more.
In September, Chris D. Trunck, the vice president for tax at Owens Corning, the maker of insulation and roofing materials, wrote to the I.R.S. He pushed the Treasury to tinker with the GILTI rules in a way that would preserve hundreds of millions of dollars of tax benefits that Owens Corning had accumulated from settling claims that it poisoned employees and others with asbestos.
The same month, the underwear manufacturer Hanes sent its own letter to Mr. Mnuchin. The letter, from Bryant Purvis, Hanes’s vice president of global tax, urged Mr. Mnuchin to broaden the high-tax exception so that more companies could take advantage of it.
Otherwise, Mr. Purvis warned, “the GILTI regime will become an impediment to U.S. companies and their ability to not only compete globally as a general matter, but also their ability to remain U.S.-headquartered if they are to maintain the overall fiscal health of their business.”
The implied threat was clear: If the Treasury didn’t further chip away at the new tax, companies like Hanes, based in Winston-Salem, N.C., might have no choice but to move their headquarters overseas.
Jim Tankersley covers economic and tax policy. Over more than a decade covering politics and economics in Washington, he has written extensively about the stagnation of the American middle class and the decline of economic opportunity. @jimtankersley