United States Now Must Address Unfinished International Tax Reform Efforts
WASHINGTON, DC – Following a political agreement reached unanimously last night in the European Union (EU) to require each member to implement a 15 percent global minimum corporate tax in line with the October 2021 agreement reached at the Organization for Economic Cooperation and Development (OECD) by 137 jurisdictions, the Financial Accountability and Corporate Transparency (FACT) Coalition is calling on Congress to move swiftly to adopt international tax reforms necessary to permanently quell tax-dodging incentives for multinational companies.
“Advancements at the European Union crystallize the case for these reforms,” said Ian Gary, FACT’s Executive Director. “Congress now has to make sure that the United States ditches incentives for profit-shifting and offshoring in favor of a tax code that encourages responsible tax practices that can sustainably fund critical investments in U.S. communities.”
Late last night, the EU unanimously reached an agreement to implement “Pillar 2” of the OECD international tax agreement, creating a 15% minimum global corporate tax, applied on a jurisdiction-by-jurisdiction basis. Formal adoption of the agreement is to follow in writing. EU states will be required to adopt the corporate minimum tax into their own national laws by the end of 2023 under the directive. In unanimously adopting this agreement, the EU has advanced the historic multilateral efforts to combat deleterious tax practices by multinational corporations and mounting pressure on global governments to lower corporate tax rates to zero in order to attract corporate profits. This comes on the heels of the United Kingdom announcing it will continue to advance efforts to adopt Pillar 2.
“The global tax race to the bottom jeopardizes the ability of governments around the world to sustainably fund responses to existential threats like climate change,” said Ryan Gurule, Policy Director at the FACT Coalition. “It also undermines public trust and politically entrenches financial systems that enable corruption and jeopardize democracies all over the world.”
Under the OECD agreement, headquarter jurisdictions, like the United States have the first right to “top-up” undertaxed profits around the world to the 15% minimum effective tax rate on a jurisdiction-by-jurisdiction basis. International tax reforms that were passed by the U.S. House of Representatives in November of 2021 in Build Back Better (H.R. 5376), as well as earlier proposals from President Biden in his 2023 Budget Request, would have ensured that the United States complied with the OECD agreement to capitalize on these preferential taxing rights.
However, the United States largely failed to adopt these reforms as part of the Inflation Reduction Act (IRA) enacted in August 2022. Instead, Congress created a 15% worldwide corporate alternative minimum tax (CAMT) on the financial income of the largest multinationals in the Inflation Reduction Act. If applicable, CAMT applies instead of the global intangible low-income tax (GILTI) tax, that currently creates an effective minimum tax equal to 10.5% (or, up to 13.125% based on related foreign tax credit limitations) on aggregated foreign profits of U.S. multinationals.
The GILTI tax, created as part of the 2017 Tax Cuts and Jobs Act, has largely failed to stem profit shifting and offshoring practices of U.S. multinationals because of its low effective rate, the incentive it creates to invest in offshore tangible assets, and the ability to blend foreign profits in high-tax jurisdictions with income moved to tax havens for foreign tax credit purposes.
“The corporate alternative minimum tax created in the Inflation Reduction Act is not a rejection of the OECD’s global minimum tax under Pillar 2; nor is it an adequate substitute technically or internationally,” said Gurule, “While CAMT emphasizes the commitment of the United States to tax global operations of large multinational corporations, like GILTI before it, it fails to tackle the multinational tax dodging problem in a way that can really only be addressed by applying corporate taxes on a multilateral and country-by-country basis.”
“One undeniable fact is that both U.S. parties have now imposed a global corporate minimum tax,” said Gurule. “It’s time to embrace a new international norm in stopping undesirable profit-shifting and offshoring practices, put aside any partisan differences, and avoid leaving free money on the table.”
Failure by the United States to advance international reforms consistent with the OECD agreement, will undermine the benefit of the OECD agreement for the United States, likely resulting in substantial revenue forfeiture to EU jurisdictions in light of today’s EU agreement. At the same time, the OECD rules make clear that the failure by the United States or other jurisdictions to advance OECD-compliant reforms would not provide any competitive advantage for multinational companies headquartered or operating in non-compliant jurisdictions.
“Congress has a clear choice here: advance international tax reforms consistent with international tax reforms that the United States already agreed to and take an easy win to strengthen the foundations of the corporate tax base in the U.S.,” said Gary. “Or, lose out on additional revenues, lose out on the investments that can be funded by these revenues to create a more competitive environment in the United States for investment and working families, and lose out on the rare chance at furthering a multilateral solution to the global scourge of tax-dodging.”
Outside of the OECD Agreement process, in November 2022, led by the G-77, consensus at the United Nations was reached to begin intergovernmental discussions on ways to strengthen the inclusiveness and effectiveness of international tax cooperation through a potential United Nations international tax cooperation framework, taking into account other processes. FACT continues to call for inclusive and transparent multilateral tax efforts that take into consideration the unique concerns of developing nations, including relating to issues previously raised by the G-77 regarding OECD processes and results. “By moving quickly to implement Pillar 2, while continuing to take seriously the need to promote sustainable revenue raising policies for developing nations across the globe, the United States can be a leader in ensuring a more durable and less corrupt global economy,” said Gary.
Notes to the Editor:
- For more information on why failing to advance international tax reform in the U.S. would be a lose-lose-lose situation, see FACT analysis here.
- The EU release on its minimum tax agreement can be found here.
- Earlier UK indications that it will pursue legislation to implement Pillar 2 can be found here.
- President Biden’s Budget Request for FY2023.
- The Build Back Better Act as passed by the U.S. House of Representatives.
- The OECD international tax agreement agreed to by 140 jurisdictions, and recent guidance on model rules and additional commentary for implementing Pillar 2 of the rules.
- Treasury’s Green Book explaining the Revenue Proposals in the President’s FY 2023 Budget Request.
- Prior FACT analysis of the Inflation Reduction Act and the application of the Corporate Alternative Minimum Tax enacted in the IRA as it relates to the OECD corporate minimum tax..
- The text of the Inflation Reduction Act can be found here.
- Treasury revenue estimates relating to the President’s 2023 Budget Proposals can be found here. Earlier JCT scores relating to Build Back Better can be found here. Notably, the President’s Budget formally contemplates increasing the domestic corporate tax rate to 28 percent (from 21 percent), and maintaining a reduced deduction for offshore earnings contemplated in Build Back Better under the global intangible low taxed income (GILTI) tax, resulting in a minimum rate on offshore profits equal to near 20 percent. The FACT Coalition has previously advocated for a higher GILTI rate.
- Among other differences between CAMT and Pillar 2, CAMT would apply to a much smaller base of entities. The CAMT will apply to those corporations earning more than $1 billion in income annually on average (or $100 million in U.S. income annually in the case of foreign headquartered multinationals). Pillar 2 would apply to multinationals generating in excess of 750 million EUR annually; in contrast the U.S. GILTI does not have a current income or revenue threshold, and reforms to GILTI proposed in Build Back Better and the President’s 2023 Green Book did not include such a threshold. Further, CAMT would not apply on a country-by-country basis. Failing to apply a corporate minimum tax on a country-by-country basis, as is the case with CAMT or the current GILTI, can encourage increased profit shifting. Without country-by-country application, multinationals can blend less mobile high-tax income and related foreign tax credits with more mobile income–such as royalties–booked in tax haven jurisdictions to shortchange governments and increase the incentive for governments to engage in deleterious tax competition.
- The resolution to begin UN discussions regarding an international tax convention can be found here.