Treasury Secretary Janet Yellen this week is pressing counterparts from the world’s major economies to advance a rewrite of global tax rules, while one of her top deputies expressed hope that the Biden administration can work with Congress toward the same goal.
Yellen and finance ministers from other Group of 20 countries are meeting this week in Washington, D.C., and the deal reached by nearly 140 tax jurisdictions in October is high on their agenda, a senior Treasury Department official told reporters on a conference call April 18.
Under the auspices of the Organization for Economic Cooperation and Development (OECD), the deal’s signatories “agreed on the need to have stable tax systems that raise sufficient revenue that allow us to invest in essential public goods, respond to crises like COVID, and ensure corporations fairly share the burden of financing government,” the Treasury official said. “Leveling the playing field between U.S. and foreign corporations, ensuring corporations pay their fair share, and preventing the offshoring of American jobs is part of delivering on a foreign policy for the middle class.”
Yellen and the other G-20 finance chiefs were also scheduled to discuss ways to combat the climate crisis, strengthen the global health architecture, and address the growing food security crisis as a result of Russia’s war against Ukraine, according to the official.
On April 15, in an online discussion, Lily Batchelder, assistant Treasury secretary for tax policy, affirmed the U.S. commitment to conforming to the second “pillar” of the OECD plan: Multinational corporations with over €750 million ($809 million) in annual revenue should pay a tax rate of at least 15% on a country-by-country basis. This “would stabilize the international tax system and make it fairer to the benefit of U.S. workers and businesses,” Batchelder told the event, which was co-hosted by the Hutchins Center at Brookings and the Urban-Brookings Tax Policy Center.
The rationale behind a global minimum corporate tax is to deter highly profitable multinationals from shifting profits from intangible assets to low-tax countries in what Batchelder called a “race to the bottom.” Two so-called top-up taxes in the form of an income inclusion rule and an undertaxed-profits rule (UTPR) would act as backstops to ensure the global minimum tax is met in the event a jurisdiction’s effective corporate tax is below 15%.
There is a reluctance among experts to fully embrace Pillar Two, as it’s unclear what effects it would have on tax competition or corporate behavior. Economist and University of Chicago Law School professor Dhammika Dharmapala joined a panel at the Brookings event and said that while the direction of Pillar Two is clear, the “magnitude of change” it would bring about is “ultimately ambiguous.”
Batchelder later argued that enforcement rules such as UTPRs incentivize countries to adopt Pillar Two while “largely eliminating” the benefit of profit-shifting. President Joe Biden’s administration included the UTPR proposal in its fiscal 2023 proposed budget, which would replace the current base erosion anti-abuse tax (BEAT) enacted in the Tax Cuts and Jobs Act of 2017 (PL 115-97, TCJA) to conform with the OECD agreement. For more, see Biden Calls for Replacing Anti-Erosion Tax With OECD Rule on Offshore Profits (03/31/2022).
This is Biden’s most recent attempt to amend TCJA provisions in favor of a 15% global minimum. The Build Back Better (BBB) plan would have modified BEAT and revised the global intangible low-taxed income (GILTI) rate on offshore earnings upward from 10.5%.
The Treasury Department and Biden “fully support the BEAT reforms” as currently written in the House of Representatives’ version of the BBB, according to Batchelder, who clarified that replacing BEAT with the UTPR proposal is “really an alternative model for accomplishing the same objectives.” Despite the BBB stalling in the Senate, the administration believes it can gain enough congressional support and enact its Pillar Two adoption into law, she said.
Although both approaches to OECD conformity promote Biden’s agenda, the UTPR proposal would bring more revenue to the U.S., according to Batchelder. “Individuals and families will benefit from the revenues this deal raises to pay for important social goods like childcare, health care, climate protection, and education,” she said.
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