President Joe Biden’s administration has proposed eliminating a Code provision that limits deductions U.S. companies can claim on payments to related entities abroad, and replacing it with a measure underpinning a global agreement to overhaul corporate taxation.
The potential change is contained in Biden’s proposed budget for fiscal 2023, presented March 28. It would move the U.S. from its current base erosion and anti-abuse tax (BEAT) to the undertaxed-profits rule (UTPR) included in the second of two “pillars” of a cross-border tax deal approved by Washington and 140 other governments via the Organisation for Economic Cooperation and Development.
Pillar Two of the OECD-brokered deal requires each participating country or territory to set a minimum domestic tax of at least 15% on profits of multinational corporations in its purview, though only companies with over €750 million ($837 million) in annual revenue are affected. The deal’s other pillar would reallocate taxing rights worldwide so that developing countries can capture more revenue from the digital economy.
The UTPR and an income inclusion rule (IIR) were written into the global deal to serve as “top-up” levies in the event a jurisdiction’s tax code didn’t rise to the 15% threshold—as occurs when a multinational based in that jurisdiction is paying a sub-minimum rate elsewhere. The BEAT and the global intangible low-taxed income (GILTI) provision affecting offshore profits were enacted with the Tax Cuts and Jobs Act of 2017 (PL 115-97, TCJA) as ways to align the Code with the OECD minimum tax. See BBB’s Changes to GILTI, Other Measures Complicate Global Tax Picture, Tax Lawyers Say (12/10/2021)
Once the deal was finalized in October, the U.S. faced growing criticism from tax policy experts that neither the BEAT nor GILTI as originally crafted could ensure Pillar Two’s 15% corporate minimum tax would be met. In response, the Biden administration and congressional Democrats strengthened terms of GILTI in the Build Back Better (BBB) legislation, which passed the House of Representatives in November but remains stalled in the Senate. Mainly, the BBB calls for increasing GILTI’s rate on offshore earnings of a U.S. multinational to 15% from its initial 10.5% while requiring that the company calculate taxes on a country-by-country basis.
In describing the proposed change, the Treasury Department in its latest “Green Book”—a description of revenue estimates for the federal government’s forthcoming fiscal year—said the plan to repeal the BEAT and replace it with a UTPR was “consistent with the UTPR described in the Pillar Two Model Rules” disseminated by the OECD. If approved by Congress and signed by the president, the change would take effect for tax years starting January 1, 2024, and beyond.
“When another jurisdiction adopts a UTPR, the proposal also includes a domestic minimum top-up tax that would protect U.S. revenues from the imposition of UTPR by other countries,” the Green Book stated. “Separately, the proposal would provide a mechanism to ensure U.S. taxpayers would continue to benefit from U.S. tax credits and other tax incentives that promote U.S. jobs and investment.”
On March 29, a day after the Green Book’s release, the subject of how jurisdictions without a UTPR could lose potential revenue to other areas was addressed by the OECD’s top tax official, Pascal Saint-Amans. Speaking at an American Bar Association conference, Saint-Amans said countries and territories are “heading to a new world” in which tax competition is capped by the OECD’s 15% minimum tax. He added that the Green Book proposals indicate that Biden’s administration remains committed to implementing provisions at the heart of Pillar Two.
The proposal was also welcomed by the Financial Accountability and Corporate Transparency (FACT) Coalition, a group that advocates for more openness in corporate taxation and governance. In a statement, FACT’s policy director, Ryan Gurule, said action from the Senate in passing the BBB could end abuse of tax havens, “advance unprecedented global tax cooperation, and better equip the IRS to improve tax administration and crack down on tax dodgers.”
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