The Biden administration has made international tax negotiations a top priority, especially the part of the negotiations focused on creating a global minimum tax.
The administration sees a minimum tax agreement as a way to prevent companies from making location decisions based on corporate tax rates. Administration officials are also seeing a deal as a way to prevent U.S. multinational corporations from becoming less competitive if the U.S. increases corporate taxes.
secretary of the treasury Janet YellenJanet Louise Yellen What You Need to Know About International Tax Negotiations Key Inflation Measure 0.6%, Above Expectations On the Money: Biden to Propose a Trillion Dollar Budget | Senate Republicans Present $ 8 Billion Infrastructure Offer | Biden faces dilemma over Trump’s steel tariffs READ MORE said in a House hearing Thursday that the United States is trying to come to an agreement on a global minimum tax “that would stop what has been essentially a race to the bottom, so those are the competitive attractions of different countries that influence location decisions, not taxes. competition.”
Countries participating in the negotiations of the Organization for Economic Co-operation and Development (OECD) and the Group of 20, two groups of industrialized countries, hope to reach a political agreement in July.
Here’s what you need to know about international tax negotiations.
There are two main topics under discussion
The OECD has been working on international tax issues for a number of years and its current efforts focus on two key issues.
The area where the Biden administration has put the most emphasis, known as Pillar 2, focuses on an overall minimum effective tax rate for foreign corporate profits. This part of the negotiations aims to prevent corporate profits from escaping taxation.
There is no global minimum tax rate, and countries have varying rules regarding their national corporate tax rates and how they tax foreign corporate income.
An agreement on a global minimum tax would not oblige countries to raise their corporate tax rates to a certain level. Instead, it would encourage companies to have ways of subjecting their companies’ foreign profits to a minimum level of taxation at least as high as the rate specified in the agreement.
For example, a country might require its businesses to pay it the difference between its minimum tax rate and the tax rate it paid on foreign income to foreign countries. The United States has adopted this type of minimum tax, known as the Global Low Tax Intangible Income Tax (GILTI), as part of its President TrumpDonald Trump What you need to know about international tax negotiations 9 Senate seats most likely to overturn in 2022 Biden denounces Texas’ ballot bill: ‘An assault on democracy’ READ MOREthe 2017 tax law, and its rate officially varies from 10.5% to 13.125%.
Countries can also prohibit deductions when companies make payments to related parties in countries that do not adopt minimum tax rates. President BidenWhat you need to know about international tax negotiations 9 Senate seats most likely to overthrow in 2022 Is Biden trying to avoid congressional review of Russian sanctions? AFTER has offered to put in place this type of mechanism to help pay for its $ 2.25 trillion infrastructure plan.
The other area under consideration, known as Pillar 1, aims to change the rules on the taxation of corporate profits.
This problem stems from the fact that some large companies, especially US technology companies, did not pay taxes in countries where they generate significant income but do not carry out operations. This has prompted some countries to adopt unilateral digital services taxes (DSTs), which the United States says discriminates against their businesses. US policymakers and tech companies would prefer a deal at the OECD.
The two pillars are “tied together,” said Daniel Bunn, vice president of global projects at the Tax Foundation. Some countries are more interested in one pillar than the other, and the OECD wants to reach agreement on both points at the same time, he said.
Biden put a renewed emphasis on the talks
The Trump administration had weighed on the negotiations but had some concerns. He was in favor of an agreement on a comprehensive minimum tax, but wanted to ensure that such an agreement would not force the United States to make changes to GILTI. He wanted an agreement on the taxation of corporate profits to be optional for businesses.
The Biden administration has been more sympathetic to negotiations and more eager to reach a deal. He dropped the Trump administration’s proposal that a tax location agreement be optional. And he signaled that an agreement on a comprehensive minimum tax is a major item on the agenda, with Yellen frequently discussing the issue in speeches and hearings in Congress.
The Biden administration “came very early on to say that we are determined to reach a consensus-based solution,” said Manal Corwin, a former treasury official in the Obama administration, who is now chiefly responsible for the process. KPMG’s national tax practice in Washington.
Biden offered to pay for his $ 2.25 trillion infrastructure plan in part by raising the corporate tax rate in the United States from 21% to 28% and increasing the GILTI rate to 21%. The administration sees an agreement on a comprehensive minimum tax as a way to address concerns that its proposed corporate tax increases would make U.S. businesses less competitive.
In recent discussions with OECD countries, the United States argued that the rate of an overall minimum tax should be at least 15%, which is lower than the rate of 21% proposed by the administration for its own minimum tax.
Some other countries, such as Germany and France, have reacted positively to the US proposal. But others, like Ireland and Hungary, have raised concerns.
Republicans have concerns
In recent days, Republicans in Congress have expressed some concerns about the negotiations in recent days and have raised some of their priorities with Treasury Department officials and candidates.
Republicans don’t want the United States to raise the GILTI rate until other countries take steps to implement similar types of taxes. They argue that this would put American companies at a disadvantage compared to foreign companies. They also want to ensure that a minimum tax agreement does not include any exceptions for countries competing with the United States, including China.
Moreover, Republicans want the Treasury to accept a Pillar 1 deal only if it forces countries to repeal their DSTs.
Democrats in Congress also strongly oppose the unilateral DSTs countries have enacted in recent years.
The implementation will not be quick
The OECD hopes to reach a political agreement in July, with more details to follow later.
Tax experts who followed the negotiations said it will take time for the United States and other countries to implement any deal once it is finalized.
Implementation of the agreement is voluntary for countries. To implement it, the United States and other countries will need to make changes to national laws and possibly tax treaties, experts said.