The groundbreaking global corporate-tax agreement secured last year by Treasury Secretary Janet Yellen included a “failsafe” measure to encourage compliance by its 137 signatories.
That tripwire now looks to be tested by its biggest member economy: the U.S.
Just as feared by some negotiators, Congress has shown little appetite for enacting the 15% worldwide minimum tax. Democratic Senator Joe Manchin — a swing voter in the 50-50 chamber — said this month he’s
That now leaves the U.S. at risk of forgoing billions of dollars of tax revenue from its own corporations, however. Overseas authorities would be able to top up taxes on American firms that pay less than 15% to the IRS on their earnings in that location. The bigger the take-up of the agreement abroad, the better the chances of eventual American enactment — even in the face of concerted Republican opposition, observers say.
“It’s not fatal,” if Congress fails to endorse the deal now, said Ruth Mason, a University of Virginia School of Law professor who specializes in cross-border tax issues. “Negotiators anticipated that there might be holdouts, and they built into the structure what I call ‘fiscal failsafe,’ which says if the home country doesn’t tax, then some other country is going to tax.”
Yellen herself has pointed to the dynamic, saying in a recent interview that “the money’s not going into U.S. coffers. It seems stupid.”
“Effectively we’re subject to it,” she said of the minimum tax — given how U.S. firms would be paying it abroad. “But it’s a dumb way to be subject to it.”
How quickly that will happen isn’t immediately clear, with other key economies moving at different speeds.
The U.K. recently
The European Union, meanwhile, has been held up by Hungary, which opposes raising its taxes to meet the 15% minimum. The Czech Republic, which holds the rotating presidency of bloc through year-end, aims to get a formal agreement among the region’s finance chiefs in October, according to Czech Finance Minister Zbynek Stanjura.
The 15% minimum is one piece of a
Tactics by multinational firms to shift profits and tax liabilities can cost countries up to $240 billion annually, according to OECD estimates.
Known as Pillar Two, the minimum tax, primarily works through a mechanism called the income inclusion rule — which allows a country where a company is headquartered to apply an extra levy if that firm isn’t paying a full 15% in another jurisdiction. It’s an effective topping up.
If the headquarter country doesn’t apply that rule, then others can go in to grab that top-up revenue — under the so-called
“If the U.S. continues to not act, other jurisdictions will have an opportunity to claim revenue off the U.S. tax base,” said Daniel Bunn, executive vice president at the Tax Foundation, a right-leaning think tank.
The congressional
The other component of the global deal, known as Pillar One, seeks to tax a portion of the profits earned by multinational giants based on where they generate revenue — rather than where they’re domiciled. Details on that piece are still being hammered out, and the agreement potentially faces an even tougher route toward global adoption.
Both pillars are now expected to be
“Secretary Yellen and U.S. Treasury continue to be very supportive of other countries adopting the global minimum-tax regime, even in the face of U.S. congressional inaction,” said Manal Corwin at KPMG. That suggests “that adoption by other countries might motivate Congressional action,” she said.
— With assistance from Yuko Takeo, William Horobin, James Mayger and Christopher Condon
