As the calendar turned to July, the Organisation for Economic Co-operation and Development (OECD) announced that 130 countries representing 90 percent of global gross domestic product (GDP) have agreed to a “framework” for Pillars One and Two of the OECD’s global business tax reform talks. Here are some initial takeaways from National Taxpayers Union (NTU) on Pillar Two of the deal, which concerns a global minimum corporate tax rate.
Summary of the Pillar Two Deal
First, a quick summary of what has been agreed to in this new framework:
- A global minimum corporate tax rate of 15 percent, which will be enforced by two types of rules that each country that’s party to the deal will have to implement: 1) an Income Inclusion Rule (IIR) that allows a country where a company is headquartered to levy a “top-up tax” on that company’s (or related companies’) low-taxed income levied in countries below the 15-percent minimum; and 2) an Undertaxed Payment Rule (UTPR) that serves as a “backstop” to the IIR and adjusts the taxation of low-tax corporate income that “is not subject to tax under an IIR.”
- A Subject to Tax Rule (STTR) that is meant to prevent base erosion payments multinational companies can make from a high-tax country to related parties in a low-tax country. Parties to the agreement whose “nominal corporate income tax rates” on “interest, royalties and a defined set of other payments” that are below an STTR minimum of 7.5% to 9% would be required to implement STTR into bilateral tax treaties when developing countries that agree to the OECD framework ask them to do so.
- The application of IIRs, UTPRs, and STTRs to all multinational companies with revenue of more than €750 million ($888 million, as of this writing).
- The application of the IIR “top-up tax” based on effective tax rates (rather than statutory tax rates), using “a common definition of covered taxes and a tax base determined by reference to financial accounting income.” Importantly, the new framework refers to unspecified “agreed adjustments” to the “common definition of covered taxes” and the determination of the tax base. The devil will be in the details here.
- The inclusion of a de minimis exclusion for the IIR and UTPR rules, as well as the exclusion of multinational enterprise (MNE) income from the IIR and UTPR rules “at least 5% … of the carrying value of tangible assets and payroll.”
- A timeline of 1) agreement on an implementation plan by October 2021, 2) passage into countries’ laws in 2022, and 3) effective dates in 2023.
The U.S. Global Intangible Low-Taxed Income (GILTI) rules developed by the 2017 Tax Cuts and Jobs Act (TCJA) are the closest U.S. analog to an income inclusion rule (IIR), but the new framework suggests that the U.S. will need to assess GILTI on a country-by-country basis (rather than a “blended” global basis) if GILTI is to qualify under the OECD agreement. The exclusion for a five-percent return on the “carrying value of tangible assets and payroll” is similar to the qualified business asset investment (QBAI) exclusion in GITLI.
And here are some of the critical items that were not included or addressed in the agreement:
- Whether low-tax jurisdictions like Ireland (12.5-percent statutory corporate tax rate), Hungary (9-percent statutory rate), and Cyprus (12-percent statutory rate) will eventually join the agreement; the former two countries were part of the 139-member OECD Inclusive Framework, but are not part of the 130 countries agreeing to the deal.
- The exact rules for calculating effective tax rates, including but not limited to how sub-national corporate taxes apply (e.g., state corporate tax rates in the U.S.), and which “adjustments” were “agreed” to by the 130 countries for purposes of determining both covered taxes and the tax base.
- Whether additional carve-outs will be included between now and the deal’s implementation, such as China’s reported desire to allow some of its “high-tech sectors” to pay effective tax rates of less than 15 percent.
- How the U.S. Base Erosion and Anti-Abuse (BEAT) rules set up under TCJA will interact with IIR, UTPR, and STTR; earlier, the Inclusive Framework group of countries “strongly encourage[d] the United States to limit the operation of the Base Erosion and Anti-abuse Tax (BEAT) in respect of payments to entities that are subject to the IIR.”
- Whether there will be a dispute mechanism for countries that break the IIR, UTPR, and STTR rules, either by the letter of the agreement or in spirit.
- Most importantly, perhaps, what happens if some or many of the 130 countries who have reached this agreement fail to implement the agreement in 2022.
Initial Reactions and Key Considerations
Knowing what we know and do not know yet about the 130-country global minimum corporate tax agreement, here are a few things NTU believes policymakers should keep in mind:
- This deal, combined with President Biden’s proposed domestic corporate tax changes, will make the U.S. less competitive on taxes: The 15-percent global minimum might put the U.S. in a better position than low-tax peers like Ireland if President Biden was not also proposing to increase the domestic corporate tax rate from 21 percent to 28 percent and the GILTI rate from between 10.5 and 13.125 percent to between 21 and 26.25 percent. But with the President’s proposed domestic changes to corporate tax law, he would actually be increasing the gap in statutory rates between some low-tax countries (like Ireland) and the U.S. than what is under current law.
- Measuring the global minimum tax by effective rates guards against some abuse, but also limits U.S. tax sovereignty: While measuring the 15-percent minimum tax by effective rates rather than statutory rates, the partners to the agreement may guard against some abusive credits or deductions that countries could use as tools to evade the 15-percent minimum for favored companies or industries. That said, a 15-percent minimum based on effective rates also may weaken U.S. lawmakers’ ability to pass pro-growth tax policy changes, such as full expensing for capital investment and R&D, that reduces effective rates for some companies below 15 percent, thereby undermining U.S. tax sovereignty.
- Carve-outs and exceptions will make or break the deal: With China asking to exempt some favored sectors from the global minimum tax, and with the United Kingdom seeking exemptions for financial services, the next few months between now and the October implementation date will be critical in determining whether the deal is fair for American businesses or not. If countries that are economic rivals to the U.S. win concessions and exemptions at the Inclusive Framework but the U.S. does not, U.S. multinational companies could be even further disadvantaged by this agreement than they already are.
- Agreement does not equal implementation: Even if the Inclusive Framework countries agree on implementation principles in October, that will leave the 130 countries around 13 or 14 months to pass into law and/or implement IIR and UTPR rules before the effective 2023 date. If the political and policy divisions in the U.S. are mirrored in even a handful of other countries party to this agreement, multinational companies could end up with a patchwork of new corporate tax laws rather than a predictable and administratively simple global agreement. Such a result would also disadvantage the countries that do pass a global minimum tax against countries that do not pass a global minimum. U.S. taxpayers should be concerned that the Biden administration and Congressional Democrats may muscle through a 33-percent increase in the corporate tax rate and a doubling of the GILTI rate but fail to achieve a truly universal global minimum tax.
As with the G-7 announcement on the global minimum tax deal, the OECD announcement answers some questions but leaves many more unanswered. Treasury Secretary Janet Yellen and the Biden administration owe lawmakers and taxpayers full answers to these implementation questions and should address concerns that this global deal undermines U.S. tax sovereignty and competitiveness.