US Failure to Implement Global Minimum Tax Could Be Costly

A breakthrough agreement announced by Senate Democrats on Wednesday, which would dedicate hundreds of billions of dollars to addressing climate change and other Democratic priorities, is designed to raise federal revenues by increasing taxes on wealthy Americans and large corporations. But the agreement sidesteps an international tax agreement brokered by the Biden administration.

That agreement, which is meant to require large multinational companies to pay taxes in the countries where they do business and to pay a global minimum of 15% on profits worldwide, is opposed by Senator Joe Manchin, the conservative Democrat who has withheld his vote on a number of the Biden administration’s priorities. Manchin said he is concerned that U.S. companies will be placed at a disadvantage if the U.S. implements the law and other countries do not.

The 15% global minimum tax is distinct from a 15% minimum tax on corporations that is reportedly in the deal that Manchin struck with Senate Majority Leader Chuck Schumer.

The agreement in the new proposed deal applies to “taxable income” and takes many deductions and adjustments into account. The international deal applies to “book income,” which corporations report on financial statements to shareholders and is typically a much larger figure.

Ironically, the failure to implement the law could harm U.S. tax revenues while doing little to benefit companies based here. A provision in the agreement allows other countries to impose additional taxes on multinational corporations if their home countries do not tax their profits at a minimum rate of 15%.

According to Congress’s Joint Committee on Taxation, if the U.S. were to adopt the agreement and implement that rule, the Internal Revenue Service would collect an additional $23 billion in 2023, and nearly $319 billion in the 10 years ending in 2032. The committee says failure to adopt the rule could mean those revenues flow to other countries’ treasuries.

Adoption slow

The U.S. is not the only country slow in adopting the new rules. European Union negotiations over implementation recently hit a snag when Hungary declared itself unwilling to raise taxes on its domestic corporations. The United Kingdom and Japan have drafted implementation guidelines, but they are not yet official.

The overwhelming majority of countries that signed on to the accord have still not taken steps to actually put it in place.

“This entire process has been very uncertain and difficult to predict,” Will McBride, vice president of federal tax and economic policy at the Tax Foundation, told VOA. “It’s actually introduced a lot of uncertainty into international tax, although it was initially pitched, and continues to be pitched, as a way to create certainty for taxpayers.”

135-country agreement

The global minimum tax is part of a larger international taxation framework developed under the auspices of the Organization for Economic Cooperation and Development and the G-20 group of large economies. The deal brought together more than 135 countries in an effort to control “base erosion and profit shifting,” known by the acronym BEPS.

BEPS refers to tax strategies employed by multinational corporations. The practice involves strategically placing operations in low-tax jurisdictions, thereby eroding the tax “base” of their home countries, and then “shifting” profits earned internationally so that they are paid in those low-tax jurisdictions.

The OECD estimates that as much as $240 billion in global tax revenue is lost to BEPS every year.

Two pillar

The agreement, finalized in 2021, has two pillars. The first includes a mechanism for allocating a share of large multinational corporations’ profits to the countries where their products and services are actually consumed, preventing those profits from being booked in tax haven countries.

The second pillar includes a 15% minimum tax rate on those profits across all countries in the agreement. The pillar also contains a mechanism meant to prevent participating countries from reducing their tax rates in order to attract companies to their shores. If a country does not tax corporate profits earned within its borders at 15%, other countries have the ability to “top up” their tax assessments of those companies in order to bring its total tax rate up to 15%.

The thinking behind the design is that it eliminates the benefits a corporation gets from moving to a low-tax country, while simultaneously encouraging governments around the world to adopt the 15% rule, because if they do not, other governments will collect the additional taxes anyway.

“Under Pillar Two, it’s the country of residence that gets the first crack at taxing the foreign income of their multinationals,” Thornton Matheson, a senior fellow at the Urban-Brookings Tax Policy Center, told VOA. “But if they don’t do that, then the countries in which they operate can effectively tax their subsidiaries as if they were subject to such a rule.”

“If the European countries were all applying this, it could undermine U.S. revenues,” she said, adding that such a situation would create an incentive for the U.S. to put the agreement into force.

Doubts about effectiveness

Some experts remain doubtful that the global minimum tax, even if it were adopted universally, would actually end the practice of countries using financial incentives to attract corporations to their jurisdictions.

Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, told VOA that even with a 15% minimum tax in place and strictly enforced, there are a multitude of ways that governments can deliver other benefits that offset that burden.

As an example, he pointed to the legislation currently working its way through Congress that would provide billions in subsidies and tax credits to the semiconductor industry in order to spur growth in U.S.-based production.

“If you have a minimum tax of 15%, and then give $50 billion plus $24 billion of tax credits to semiconductor companies, what does that tell you? To me as an economist, that’s a negative tax. And other countries will do the same for industries that they regard as critical to their security or livelihood, or whatever the rationale is,” he said.

McBride of the Washington-based Tax Foundation noted that the agreement has an explicit carve-out that prevents direct subsidies from being counted as an offset to a company’s tax burden.

“It actually incentivizes countries … to go with direct subsidies as a way to attract companies,” he said.

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