The US played a crucial role in encouraging 136 countries to join a global tax treaty presented by the OECD last October and hailed as the most important tax reform in more than a century.
But in recent days it has become clear that the way Washington intends to apply one of two parts of the proposals — a minimum corporate tax floor of 15 percent — is at odds with how the deal might work elsewhere .
The stripped-down version of Joe Biden’s tax plans included in the Inflation Reduction Act, the White House’s flagship economic bill, which narrowly passed the Senate last week and is expected to pass the House of Representatives this week, leaves key elements of the law out of the deal in Paris signed.
This has raised concerns that multinationals will be faced with an intricate web that will scramble them to comply with a set of rules designed to ensure they pay a fairer amount of tax. “All companies want this alignment that they’ve been working towards, but now it’s not how they envisioned it,” said Kate Barton, global vice chair of tax at accounting firm EY. “Will all countries just do their own thing now?”
Where does the Anti-Inflation Act fall short?
The rules set by the OECD for the global minimum tax require multinational companies with annual sales of more than EUR 750 million to
This part of the deal, known in tax circles as “Pillar Two,” aims to “end a decades-long race to the bottom in corporate taxation,” as US Treasury Secretary Janet Yellen put it when signing the deal.
To bring the US into alignment with the second pillar, the Biden administration originally proposed reforms to the US global intangible low-tax income regime – or Gilti. Gilti currently levies an additional tax of about 10.5 percent on the profits of subsidiaries of US companies located in low-tax jurisdictions.
Gilti was introduced in the US in 2017 to prevent US companies from shifting profits abroad, and Biden’s original proposal was to increase the Gilti rate to 15 percent to bring the US into line with the OECD deal .
However, these proposals failed to gain approval in the Senate because Joe Manchin, the West Virginia Democrat who was instrumental in getting the bill passed, asked for their removal.
Instead, a minimum corporate tax rate of 15 percent applies only to the “book earnings” — the amount shown in financial accounts — of companies with revenues over $1 billion. It will also only apply on a group level and not on a country basis – thus missing the goal of the agreement to eliminate the practice of establishing subsidiaries in tax havens.
It was “doubtful” that the law would be deemed compatible with the global minimum tax, said Ross Robertson, international tax partner at accounting firm BDO.
“Ultimately, international companies could face increased complexity in applying the rules once they are in place – or worse, it could increase the risk of double taxation,” Robertson added.
How are other signers likely to react?
Peter Barnes, a tax specialist at Washington law firm Caplin & Drysdale, called Congress’ change in Biden’s tax proposals “disappointing” but “certainly not fatal” to the deal.
One reason is that if the US implements the 15 percent minimum rate as described in the law rather than the treaty, other tax authorities could potentially reap more revenue from US companies. Because the deal provides for a complex mechanism that allows other countries to effectively tax the income of a subsidiary based there at up to 15 percent if – as in the case of the USA – the home country of the parent company does not levy an additional tax.
“That[4.5 percentage point]The difference between the 10.5 percent and 15 percent Gilti rate is tracked by other jurisdictions,” said Reuven Avi-Yonah, law professor at the University of Michigan.
Pascal Saint-Amans, director of tax administration at the OECD, said: “If you think about it seriously [the design of] With Pillar Two, you realize it’s going to happen anyway.”
Barnes agrees and believes US multinationals may eventually pressure Congress to apply Pillar Two in a form closer to that agreed by the OECD.
However, progress on implementing the global minimum tax has generally been delayed as all countries have yet to legislate for it, despite initially agreeing to do so by the end of 2022.
What’s causing the delays elsewhere?
The EU issued a draft directive to implement the second pillar in December, but political disagreements failed to secure unanimous approval from member states. Hungary, a member state that is often at odds with Brussels, is currently blocking progress.
However, the remaining 26 European countries may be able to implement the second pillar without Hungary by enshrining it in their own national legislation.
“There remains significant political will in Europe to move forward,” Robertson said, adding he expects most of Europe to apply Pillar Two from January 2024.
As the EU goes ahead, other countries are likely to follow suit to prevent the additional taxes from being lost.
The other part of the deal, Pillar One, which aims to get the world’s largest multinationals to pay more taxes in the countries where they do business, is even further behind schedule.
While the delays and setbacks have proven frustrating for those desperate for companies to pay their fair share, practitioners are stressing how fundamental reform the deal is.
“We need to effectively design a whole new global tax base,” said Heydon Wardell-Burrus, a researcher at the Oxford Center for Business Taxation.