Republican members of the Senate Finance Committee have written to Treasury Secretary Janet Yellen asking her to keep both parties in Congress involved in negotiations on a global minimum tax, arguing that such a tax would apply more broadly than originally thought.
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The Biden administration’s Build Back Better Act included a 15% minimum corporate tax, but the legislation has been stalled in Congress since passing the House last November. Republicans in the evenly divided Senate remain uniformly opposed to the far-reaching tax, social spending and climate change package. Senate Democrats are unable to use a budget reconciliation maneuver to pass the bill until they can convince a pair of moderate Democrats, Sen. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, to support it, which so far they have refused to do.
The Senate Finance Committee Republicans, led by ranking member Sen. Mike Crapo of Idaho, believe the Pillar Two model rules, released in late December by the OECD, indicate the proposed global minimum tax would apply much more broadly to U.S. companies than previously expressed by the Treasury Department.
“Without evidence to the contrary, we are increasingly concerned that Treasury has negotiated a deal that will harm U.S. businesses and jobs,” they wrote.
They also contend that other countries seem to have negotiated more successfully to receive exemptions from the global minimum tax, pointing to a research and development tax credit in the United Kingdom. “[T]his Administration appears intent on thwarting Congress’s constitutional tax-writing authority, including its authority to provide effective incentives that both parties agree are meaningful and necessary to promote U.S. investment and innovation,” they wrote.
They contend that as a result of the Treasury’s negotiating strategy, other countries believe the U.S. global minimum tax under the GILTI (global intangible low-taxed income) under the Tax Cuts and Jobs Act that was passed by Republicans in 2017 during the Trump administration, does not comply with Pillar Two in its current form.
“Despite the United States having the world’s only global minimum tax, Treasury continues to take the position that Congress should make the U.S. global minimum tax harsher before other countries take any action,” they wrote. “It is one thing for the Administration to advocate for higher taxes as part of its domestic tax agenda, but quite another to explicitly negotiate an international agreement that would subject U.S. companies to double taxation unless Congress acts accordingly.”
Ernst & Young has been following the developments on the international tax front closely. “Around Christmastime, the OECD came out with hundreds and hundreds of pages on the global minimum tax Pillar Two and there were a couple of surprises in there,” Kate Barton, EY global vice chair of tax, recently told Accounting Today. “There was one where the foreign tax credit rules didn't work as everyone had thought they would. Some of this is a combination of the OECD paper plus the foreign tax credit regulations that came out in December in the United States as well. There's real concern now that the U.S. might not be able to take into account their credits as they calculate what the effective rate of tax that their earnings are being subjected to. And then clearly the GILTI tax rate is 13% when you cut through it, not 15, so it just exposes the U.S. tax base to every other country in the world taxing it. It’s very complicated.”
The uncertainty surrounding whether some elements of the Build Back Better Act might eventually get passed in Congress is adding to the nervousness among some companies, although any tax increases appear extremely unlikely during an election year.
“What I would observe after Christmas is the U.S. multinational companies really are taking a much closer look,” said Barton. “They’re really getting serious now because they know this is going forward and they’re seeing a lot of issues that, because Build Back Better didn’t get done, the U.S. is not synched up properly, so it’s a real issue. Do I think Build Back Better is going to be resurrected? I’m not sure. I guess we'll see in the fullness of time. I think it has to be done if it’s going to get done because of the midterm elections in March or April, maybe. I think it may get very hard if it's not done by then. But I think there is some discussion now that maybe, if worse comes to worse, they’ll pull out the international tax provisions, just to put them in a separate bill, just get those adjusted so that at least they’re coalescing, if you will, with OECD BEPS 2.0.”
BEPS 2.0 is a related initiative by the Organization for Economic Cooperation and Development to combat base erosion and profit shifting by multinational companies.
Senate Republicans warn that the latest OECD agreement would surrender a share of the U.S. tax base to foreign countries, and they want the Treasury to submit it to Congress first. “Despite repeated requests . . . Treasury has declined to provide any data or analysis of the effect of the OECD agreement on U.S. revenue, not even to the nonpartisan experts at the Joint Committee on Taxation, so that independent estimates and analysis can be developed and provided to members of Congress on a bipartisan basis,” they wrote.
They have also pointed out that the Senate should play a role in ratifying any changes to international tax treaties. Under the Constitution treaties require a two-thirds majority vote in the Senate to be ratified. The Biden administration contends the Treasury Department would have authority under existing tax treaties to make changes, even if the legislation passes through a reconciliation maneuver with just 50 Democrats and a tie-breaking vote by Vice President Kamala Harris.
“I think that there's a lot of complexity on whether or not you can do this purely through the domestic code changes,” said Barton. “There are certain elements in the pillars regarding multilateral competent agreements, like how would you settle a controversy between two countries? Typically, some of that is done by treaty. There’s a lot of debate on both sides as to whether or not that would be legal to do this all through just legislation or whether or not you need some treaty action. Clearly, treaties in the United States are almost impossible to get done, so people are hoping that you could have some legislative fixes as a starter and hopefully that would be constitutional or legal.”
Another issue is the Pillar One agreement, which deals with taxes arising from digitalization. Earlier this month, the OECD launched a public consultation on the tax challenges of digitalization as countries try to capture tax revenue from multinational technology companies that are able to shift profits and intellectual property across national borders. Some countries such as Austria, France, Hungary, Italy, Poland, Portugal, Spain, Turkey and the U.K. have imposed digital services taxes on multinational tech companies, which helped propel negotiations over a global agreement in an effort to forestall such taxes and level the playing field among different countries. Such taxes seem to target U.S.-based tech giants like Google, Facebook and Amazon, which have used tax strategies to shift intellectual property to low-tax countries.
”The digital services taxes in many countries are laws on the books,” said Barton. “The U.S., in the rhetoric leading up to Build Back Better, was saying that in order for the U.S. to sign the OECD model, they got agreement that countries that have the digital services taxes would drop them. And if there was a revenue shortage, the taxes paid under the digital services taxes were going to be prepaid, if you will, against the new income taxes that would come out of BEPS 2.0. But if you have to subject companies to these taxes, ultimately it should be refundable against the new taxes that they pay as a result of getting everybody in the world onto Pillar Two on the minimum tax side. Long story short, this is a bit of a mess right now because the U.S. is not necessarily in conformity. It’s a big issue, and I think that in Congress they’re trying to figure it out.”
