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 initially thought.
the lettersent on Wednesday, comes after a prior request for information in December 2021 that GOP lawmakers said went unanswered. Since then, they have seen additional concerns about the effect of a deal within the Organization for Economic Co-operation and Development on US competitiveness and tax revenue. They want Yellen to engage more with Republicans and Democrats on the so-called Rules of the “Pillar Two” model for a minimum tax on multinational corporations.
The Biden administration’s Build Back Better Act included a 15% minimum corporate tax, but the legislation has stalled in Congress since it passed the House last November. Evenly divided Senate Republicans remain evenly opposed to the sweeping 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 him, which they have so far refused to do.
Republicans on the Senate Finance Committee, led by senior member Sen. Mike Crapo of Idaho, say the Model Pillar Two rules, released in late December by the OECD, indicate that the proposed global minimum tax s would apply much more broadly to US businesses than previously expressed by the Treasury Department.
“Without evidence to the contrary, we are increasingly concerned that the Treasury brokered a deal that will hurt American businesses and jobs,” they wrote.
They also argue that other countries appear to have negotiated more successfully for exemptions from the global minimum tax, pointing to a UK research and development tax credit. “[T]his administration appears determined to thwart Congress’ constitutional tax-drafting authority, including its power to provide effective incentives that both sides agree are meaningful and necessary to promote investment and innovation in United States,” they wrote.
They argue that because of the Treasury’s negotiation strategy, other countries believe that the U.S. Global Minimum Tax under GILTI (Global Low-Tax Intangible Income) under the Cuts Act tax and jobs bill that was passed by Republicans in 2017 under the Trump administration, is not consistent with the second pillar in its current form.
“Although the United States has the only global minimum tax in the world, Treasury continues to take the position that Congress should make the U.S. global minimum tax tougher before other countries act,” they said. they wrote. “It’s 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 American businesses to a double taxation unless Congress acts upon it.”
Ernst & Young closely follows developments in international taxation. “Around Christmas, the OECD released hundreds and hundreds of pages on the second pillar of the global minimum tax and there were some surprises in there,” Kate Barton, global vice president for tax, said recently. at EY. accounting today. “There was one where the foreign tax credit rules didn’t work the way everyone thought they would. This is partly a combination of the OECD document and the Foreign Tax Credit regulations that were also released in December in the United States. There are now concerns that the United States may not be able to take their credits into account when calculating the effective tax rate to which their income is subject. And then, clearly the GILTI tax rate is 13% when you cut it, not 15, so it just exposes the US tax base to every other country in the world that taxes it. It’s very complicated.”
Uncertainty over whether parts of the Build Back Better Act could eventually pass Congress is adding to the nervousness of some businesses, although any tax increases seem extremely unlikely in an election year.
“What I would observe after Christmas is that American multinationals are really looking more closely,” Barton said. “They’re getting really serious now because they know this is moving forward and they see a lot of issues that because Build Back Better hasn’t been done, the United States isn’t in sync properly, so it’s a real problem. Do I think Build Back Better is going to be resurrected? I am not sure. I guess we’ll see over time. I think it needs to be done if it needs to be done because of the midterm elections in March or April, maybe. I think it can get very difficult if it’s not done by then. But I think there’s talk now that maybe if the worst gets worse they’ll take the international tax provisions out, just to put them in a separate bill, just adjust them so that at least they merge, if you will, with OECD BEPS 2.0.
BEPS 2.0 is a related initiative of the Organization for Economic Co-operation and Development to address base erosion and profit shifting by multinational enterprises.
Senate Republicans are warning that the latest OECD deal would cede a chunk of the US tax base to foreign countries, and they want the Treasury to bring it to Congress first. “Despite repeated requests . . . the Treasury has refused to provide data or analysis of the effect of the OECD agreement on U.S. revenues, not even to the nonpartisan experts of the Joint Committee on Taxation, in order that independent estimates and analysis can be developed and provided to members of Congress on a bipartisan basis,” they wrote.
They also stressed 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 argues that the Treasury Department would have the authority under existing tax treaties to make changes, even if the legislation goes through a reconciliation maneuver with just 50 Democrats and a deciding vote by Vice President Kamala. Harris.
“I think there’s a lot of complexity about whether or not you can do it just through national code changes,” Barton said. “There are certain elements in the pillars regarding competent multilateral agreements, such as how would you settle a controversy between two countries? Typically, some of this is done by treaty. There’s a lot of debate on both sides about whether or not it would be legal to do all of this through simple legislation or whether or not you need treaty action. Obviously, treaties in the United States are almost impossible to do, so people are hoping you could have some legislative fixes as a starting point and hopefully that would be constitutional or legal.
Another issue is the Pillar One agreement, which deals with taxes arising from digitization. Earlier this month, the OECD launched a public consultation on the tax challenges of digitalisation as countries attempt to capture tax revenue from multinational tech companies able to transfer profits and intellectual property across borders national. Some countries like Austria, France, Hungary, Italy, Poland, Portugal, Spain, Turkey and the UK have imposed digital service taxes on multinational technology companies, which has helped propel negotiations on a global agreement with the aim of preventing these taxes and leveling the playing field between different countries. These taxes appear to target US-based tech giants like Google, Facebook and Amazon, which have used tax strategies to transfer intellectual property to low-tax countries.
“Digital service taxes in many countries are laws on the books,” Barton said. “The United States, in the rhetoric that preceded Build Back Better, was saying that in order for the United States to sign on to the OECD model, they got the agreement that countries that apply digital services taxes And if there was a shortage of revenue, the taxes paid as digital services taxes were going to be prepaid, if you will, against the new income taxes that would come out of BEPS 2.0. companies to these taxes, they should ultimately be refundable on the new taxes they pay because everyone in the world is on the second pillar on the minimum tax side. kind of a mess right now because the U.S. isn’t necessarily compliant. That’s a big deal, and I think in Congress they’re trying to figure it out.