Part 1 – International Tax Reform
2022 ended in fireworks for international tax reform and tax transparency efforts that FACT has been working to advance. This first blog in a two-part blog series will discuss recent developments in international tax to advance the global minimum corporate tax negotiated at the Organization for Economic Cooperation and Development (OECD), and why these advancements crystallize the case for the United States to reform its current international tax framework to deter tax dodging practices by multinational organizations.
Right before the clock struck midnight in 2022, there was finally a big “first-mover” to adopt a key component of 2021’s historic global tax agreement. The European Union reached an agreement to adopt “Pillar 2” – the country-by-country 15% global corporate minimum tax previously agreed to (but not adopted) by 137 other jurisdictions at the OECD–in December. In contrast, the United States failed to do so in 2022 for fear that no one else would follow suit. Now that others are sure to follow the EU (whoops), these fears are shown to be misguided. U.S. inaction will potentially leave heaps of revenue on the table while raising some thorny technical questions. At the same time, even the EU adoption of these reforms represents an important victory for multilateralism if and as other key nations adopt the reforms.
Meanwhile, a resolution was unanimously adopted at the United Nations (UN), led by key G-24 nations, to, among other things, create the UN as an alternative forum for international tax reform conversations moving forward. This resolution may encourage greater transparency and more sustainable outcomes for international tax reform agreements regardless of forum.
In 2023, FACT will be working to ensure the United States finishes the job on international tax reform necessary to curb improper incentives to dodge taxes by large multinationals and create tax and financial systems capable of structurally supporting global democracies as they take on generational challenges, such as to raise sustainable revenues necessary to combat climate change and address persistent global inequities. For our allies, here is a short cheat sheet on FACT’s international tax reform priorities as we transition from 2022 to the New Year:
- The EU Adopted the Global Corporate Minimum Tax (Pillar 2). Now What?
With the EU adopting Pillar 2–and the United Kingdom and Japan also reaffirming their plans to do the same–there is an increasing likelihood that a critical mass of tax jurisdictions will follow suit. Why? Because there is no advantage to not doing so, and the failure to do so may result in forfeited revenue.
Pillar 2 relies on “top-up” taxes designed so that only a critical mass of tax jurisdictions needs to adopt the rules to ensure that large multinational corporations are paying a 15% minimum corporate tax in each jurisdiction they operate (or book profits), regardless of whether certain holdouts remain. This is because participating jurisdictions may “top-up” taxes that non-participating jurisdictions fail to levy. An income inclusion rule (IIR) gives a headquarter jurisdiction the first right at these top-up taxes, and an undertaxed profit rule (UTPR) allocates these taxing rights to other jurisdictions in the event the headquarter jurisdiction is also non-participating. In this way, there is no competitive advantage for failing to adopt Pillar 2–just the voluntary forfeiture of potential revenue. This is what helps end the “race to the bottom” in corporate taxation, and it is one reason why a multilateral approach like the one taken at the OECD is so impactful in curbing multinational tax dodging incentives.
For political reasons, it may be that various jurisdictions adopt different components of Pillar 2 at various times and with varying degrees of consistency. There also remains forthcoming Pillar 2 guidance from the OECD, and it is clear that this historic agreement will come with certain technical hiccups that will likely need to be considered and addressed. It nonetheless remains a remarkable achievement and FACT will be keeping track as different jurisdictions propose and adopt Pillar 2 implementing measures.
- FACT Will Continue to Push the U.S. to Adopt Necessary International Tax Reforms in 2023, and to Recognize the Benefits of a Multilateral Approach
FACT continues to call on Congress to make necessary reforms to the U.S. tax code to better deter international tax dodging practices of multinationals. In 2022, the United States came close to doing so, instead, enacting a new 15% global corporate alternative minimum tax for only the largest multinationals (CAMT). This tax applies to only the largest multinationals–those with average annual income in excess of $1 billion (or effectively connected U.S. income in excess of $100 million for foreign multinationals operating in the U.S.). If applicable, this tax applies in lieu of the current U.S. tax on offshore earnings for multinationals–the global-intangible low-taxed income (GILTI) tax. There are a variety of differences between GILTI, CAMT and Pillar 2, but some key differences are summarized below for ease:
| CAMT | GILTI | Pillar 2 | |
| Scope | U.S. multinationals with avg. annual income > $1 billion (foreign multinationals if avg. annual effectively connected income is also >$100 million) | All U.S. multinationals | All multinationals with average annual revenue > EUR 750 million (~$813 million) |
| Rate (effective rate noted by ETR) | 15% ETR | ~10.5%, compared to U.S. domestic rate of 21% (13.125% considering foreign tax credit limitations) | 15% ETR |
| Application | Global aggregate (U.S. and offshore), allowing blending of high-tax and low-tax income | Offshore aggregate, allowing blending of high-tax and low-tax income | Country-by-country |
| Base | Modified book (applies in lieu of GILTI, if applicable) | U.S. tax base | Modified book |
| Estimated U.S. headquartered companies subject to these rules | 100 or fewer, potentially | All U.S. headquartered corporations with foreign operations (~over 14,000 groups in 2019) [1] | More than 1,600 [2] |
To better deter international tax dodging and align with Pillar 2, the United States should reform the global intangible low taxed income (GILTI) tax to apply at a 15% rate and on a country-by-country basis. Key reforms should also be made to replace the base erosion and anti-abuse tax (or BEAT), which fails to contemplate key categories of base erosion payments like costs of goods sold, with something more similar to the UTPR. If such reforms are made, CAMT can be modified as appropriate to ensure that U.S. multinationals are not subject to UTPR applying other jurisdictions and to simplify tax compliance across jurisdictions for these organizations (by conforming the regime into a qualified domestic minimum top-up tax in Pillar 2 parlance).
The road to reforming the U.S. international tax system is admittedly more complicated in light of a now-split Congress. Both parties, however, have enacted reforms in recent years meant to deter profit shifting and offshoring–the Democrats enacting CAMT and the Republicans enacting GILTI and BEAT. The parties should now work together in light of looming time-based changes to the tax code (due to expiring provisions in the 2017 Tax Cuts and Jobs Act) and international developments to better align the tax code with Pillar 2 and stop tax dodging by multinationals.
If the U.S. fails to do so, it will simply be leaving money on the table and creating technical headaches for its multinationals without any competitive benefit. In connection with Build Back Better, reforms to better conform GILTI and BEAT with Pillar 2 were projected to raise around $300 billion. Without these reforms, much of this revenue will now accrue to those countries that do enact Pillar 2.
However, it is important to note that simply by the EU and other jurisdictions acting, the incentive to engage in profit-shifting at all will go down for multinationals–even potentially those headquartered in the United States. That is, the adoption by our foreign partners of minimum taxes in line with Pillar 2 rules should discourage some current conduit jurisdiction planning, pushing some direct revenues back to the United States. This revenue should be projected and tracked by the OECD or Treasury to demonstrate a victory for multilateralism.
Nonetheless, the United States should still act to create a clearer tax regulatory environment for its multinationals and to support the very multilateral efforts that are already benefiting us, as well as to collect substantive portions of revenue that it might otherwise continue to forfeit should it not act. As FACT previously wrote in 2023, failing to adopt these reforms is a lose-lose-lose for the U.S., and so FACT will continue to work to advance these reforms.
- FACT will Push for More Transparent International Tax Reform Processes and Outcomes that are Sustainable for All Nations, including the Global South
As FACT has routinely noted, advocates for the Global South and low-income and developing countries are correct to point out that international tax reform processes should, like any democratic institution, be transparent and reflect outcomes that are sustainable solutions for all members. Opaque tax systems that favor already wealthy nations cannot achieve long-term democratic aims, including as it relates to funding coordinated responses to global crises like climate change. Further, developing nations–often with tax administration limitations, among other constraints–are often dependent on corporate taxation, and it is imperative that international tax conversations and agreements take into consideration the unique sets of interests competing for corporate income tax. Accordingly, FACT will continue to elevate the work that our partners–like the Global Alliance for Tax Justice–are doing to raise these concerns in 2023, including as that may mean working toward greater UN involvement in international tax conversations.
In the near-term, there is still much to achieve by promoting international tax reforms that are consistent with Pillar 2. But, there is also a lot of work to do to demonstrate that the United States, in fact, benefits when multinationals pay taxes in developing nations, and that certain reforms should also be made to the U.S. tax code to encourage easily administrable and transparent forms of corporate taxation in LMIC nations. The FACT Coalition is working to show these benefits and will continue to do so in 2023.
- No Level of Tax Reform Matters without Adequate Funding for Competent Tax Authorities; FACT will continue to Support Internal Revenue Service Funding
One key victory in the fight against tax dodging in the United States in 2022 was the Inflation Reduction Act’s long overdue funding of the Internal Revenue Service (IRS). Already, this funding is under attack. While international tax reform, along with a variety of other reforms, can help deter tax dodging by large multinationals and wealthy individuals, these reforms remain meaningless if the IRS does not have the proper funding to ensure the reforms are properly implemented and enforced. Among other recent examples of this, the $2 billion dollar tax-evasion case of Robert Brockman illustrates how inadequate IRS resources empowers international tax dodging. FACT will continue to push for adequate IRS funding, and proper use of funds by the IRS to deter multinational and wealthy tax dodging techniques.
Conclusion:
2023 promises to be a very busy year for FACT and our allies as we continue to push for international tax reform that curbs improper incentives for multinationals to engage in tax dodging. We look forward to working with many of you in these fights and feel free to reach out and get involved. In Part 2 of this blog series, I discuss FACT’s busy tax transparency calendar in 2023, where the opportunity to advance public country-by-country tax and operating reporting for large multinationals is more ripe than ever.
[1] See Joint Committee on Tax, Overview of the Taxation of Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income Sections 250 and 951A (June 06, 2019), https://www.jct.gov/publications/2019/overview-of-the-taxation-of-global-intangible-low-taxed-income-and-foreign-derived-intangible-income/.
[2] Based on aggregated U.S. country-by-country reporting statistics from 2019, which require reporting from U.S. headquartered multinationals with annual revenues in excess of $850 million. 2019 SOI Tax Stats – Country By Country Report, https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report.