Should You Be Worried About Your Foreign Investments? A Look into SCOTUS’s New Tax Law Decision

Benjamin Franklin once said, "Nothing is certain except death and taxes." (Benjamin Franklin, Letter to Jean-Baptiste Le Roy).  In a recent United States Supreme Court (“SCOTUS”) decision, the tax portion is more certain than ever. (Richard Rubin, Wall Street Journal). On June 20, 2024, SCOTUS rejected a challenge to a 2017 tax law (“Tax Law”) on certain foreign investments. (Moore v. United States, 144 S. Ct. 1680, 1697 (2024)). The decision keeps the foreign investment tax intact, while avoiding addressing a 16th Amendment interpretation. (Richard Rubin, Wall Street Journal). This article explores the case's background, the Court's reasoning, and how this decision will ultimately discourage individuals from investing in foreign companies. 

In 2017, Congress, under the direction of former President Trump, created a one-time tax on foreign profits. (Richard Rubin, Wall Street Journal). One of the significant aspects of the Tax Law is that a tax applied to: (i) 30 years of profits held overseas, and (ii) individuals who hold the income from stock owned in at least 10% of any foreign companies. Id. The purpose of this tax was to raise $339 billion and prevent companies from avoiding taxes through foreign income. Id. The tax is also a part of a larger global convergence project started by G20 and the Organization for Economic Cooperation and Development (OECD) that recognized base erosion, a strategy used by multinational corporations to avoid taxes, as a globalized economic problem. (OECD). The main purpose of this global convergence project is to limit the tax avoidance strategies that many multinational companies engage in. Id.

A few years after the Tax Law was enacted, Charles and Kathleen Moore were owners of a significant stake in the company KisanKraft. (Alan Cole, Tax Foundation). KisanKraft is an Indian corporation that manufactures farming equipment. (KisanKraft). Before the Tax Law, the income that the Moores received from their ownership of KisanKraft was only taxed when the income was repatriated. (Alan Cole, Tax Foundation). In other words, taxes would apply to the income that was transferred back to the U.S. as distributions. Id. However, with the Tax Law, a global intangible low-taxed income (“GILTI”) tax, a tax on income earned by US controlled corporations abroad, would immediately be applied to any income. Id. More importantly, any income that would remain unrepatriated would also be taxed. Id. The Moores, reasonably upset about paying more taxes, challenged the law's constitutionality under the 16th Amendment, which grants Congress the power to tax income. Id. 

The majority’s reasoning circumvents addressing the implications of the 16th Amendment, which requires taxes on realized (or received) income. (Richard Rubin, Wall Street Journal). Essentially, the question is, if income is taxed, is it taxed when an individual or corporation accrues the income in financial statements or when the income is actually received? (Richard Rubin, Wall Street Journal). This question derives from the 16th Amendment, which permits Congress to tax income but does not define whether it needs to be realized before taxing. (Jess Bravin & Richard Rubin, Wall Street Journal). However, instead of answering this question, SCOTUS avoids the question, stating, “[t]hose are potential issues for another day, and we do not address or resolve any of those issues here.” (Moore, 144 S. Ct. at 1697). This reasoning could be SCOTUS procrastinating to find a direct answer to this vague question, or it could be a strategy used by SCOTUS to preserve the current Tax Law by letting it thrive in the ambiguity of Tax Law. Regardless, SCOTUS upholding the constitutionality of the Tax Law shows the Court’s support of the tax.

Why would a conservative Supreme Court reject a conservative challenge to a Tax Law? Justice Kavanaugh wrote in the Court's opinion that this tax on American-controlled foreign companies aligned with long-standing precedents and practices. (Moore, 144 S. Ct. at 1697). In the opinion's conclusion, Justice Kavanaugh writes, “[t]his Court has long upheld taxes of that kind, and we do the same today.” Id. In a concurring opinion, Justices Barrett and Alito give more detail about these “long upheld taxes,” stating that there is a precedent of upholding tax laws that attribute the income of a foreign investment to a U.S. investor and Mandatory Repatriation Tax, a tax on US shareholders’ pro rata shares in foreign corporations. Id.    

In his dissenting opinion, Justice Thomas says that the majority believes that a Moore victory would “deprive the U.S. Government and the American people of trillions in lost tax” and would “require Congress to either drastically cut critical national programs or significantly increase [other] taxes.” Id. One of the primary reasons behind the majority upholding the Tax Law is the same reasoning behind most tax laws: to help the government raise more revenue.

How does SCOTUS's decision impact foreign investments moving forward? Because the Tax Law is a part of the greater OECD global project, nearly every country is creating laws to stop effective legalized tax evasion. (OECD). One example of this is the UK’s Criminal Finance Act of 2017, which is a similar law made to prevent tax evasion in the UK. (United Kingdom Legislation). Because taxing on foreign investments is a worldwide phenomenon made to stop legalized tax evasion, SCOTUS deciding that the Tax Law is legal will not have an adverse effect on foreign investments since many other major countries have similar laws enacted right now. Additionally, SCOTUS's decision will not affect your average Joe. Ultimately, the primary demographic that will be affected by this decision is the ultra-wealthy 1%. (Richard Rubin, Wall Street Journal).

Although the Tax Law is in line with global efforts to curb tax evasion, this Tax Law could have broader implications. By avoiding the question of whether the 16th Amendment permits Congress to tax only on unrealized or realized income, SCOTUS is allowing Congress to tax a foreign company's unrealized income to its shareholders. (Jess Bravin & Richard Rubin, Wall Street Journal). However, not narrowing the tax rule allows Democrats to gain some footing in their quest for a billionaire tax. (Richard Rubin, Wall Street Journal). The Democrats now have a potential pathway with this 16th Amendment gray area to start taxing billionaires’ unrealized income.

However, for the ultra-wealthy readers, there is no need to go into crisis mode and move to the Cayman Islands just yet. There is still a long road to the Democrat's billionaire tax. The Democrats struggled to get any advancement in a billionaire tax when they had complete control of Congress a couple of years ago. Id. As anything, the billionaire tax is politically charged, so there would need to be a unified push from all Democrats to get such a tax passed in Congress. Id.    

SCOTUS's decision to uphold the tax rule allows the government to tax realized income in foreign investments. Given that foreign investments have increased since the rule was introduced, it is safe to assume that the Court's decision will not adversely affect the foreign market. (Bureau of Economic Analysis).  However, one key takeaway from this case is that SCOTUS is remaining silent on whether realized or unrealized income can be taxed. This decision may catalyze Democrats to continue pushing for their long-fought billionaire tax.