In 2021, the U.S., along with 136 other countries, reached an agreement negotiated by the Organization for Economic Co-operation and Development (OECD), of which the U.S. is a member, the Base Erosion and Profit Shifting Project (BEPS), aimed at correcting global tax inequities enjoyed by multinational enterprises (MNEs).
BEPS has two parts, Pillar One and Pillar Two. This News Brief largely discusses Pillar Two, because OECD member disagreements over Pillar One have cast doubt over whether it will ever be fully implemented. Pillar Two seeks to provide for a global minimum corporate tax rate of 15%. OECD estimates that having all MNEs around the world pay a 15% tax will generate around USD 150 billion in additional global tax revenues annually. Additional benefits are expected to include stabilization of the international tax system and increased tax certainty for taxpayers and tax administrations.
In December 2021, the OECD released lengthy Model Rules (referred to as the “Anti Global Base Erosion” or “GloBE” Rules), to implement Pillar Two. Parties to BEPS have agreed that Pillar Two will go into effect by January 2024. Recently, on February 2, 2023, the OECD/G20 released Agreed Administrative Guidance for the Pillar Two GloBE Rules to, in OECD’s words, “assist governments with implementation of the landmark reform to the international tax systems, which will ensure multinational enterprises (MNEs) will be subject to a 15% effective minimum tax rate.” OECD/G20 believes that this document will finalize the framework for Pillar Two. Governments can top-up a MNE’s tax rate to 15% when the MNE is paying less in other jurisdictions. The government can then apply its own tax rules to the top-up amount. Pillar Two also includes the undertaxed profits rule, which would enable, for example, other countries to apply the minimum tax rules to a U.S. MNE’s domestic low-taxed income.
But all may not proceed as smoothly as the OECD hopes. The EU will implement the 15% minimum tax by the end of this year, and the UK, Switzerland, and South Korea have already done so. But there is strong U.S. resistance because, under the GloBE Rules, American corporations will inevitably pay more taxes both globally and domestically. Unsurprisingly, many Republican lawmakers are opposed. On March 24, 2023, for example, ten Republican Members of Congress, led by Representative Adrian Smith (R-NE), wrote to the Chairman and the Ranking Member of the House Appropriations Committee, Subcommittee on State Department and Foreign Operations, addressing both Pillars One and Two. They assert that: “While U.S. participation in Pillars 1 and 2 requires legislative action, no majority exists in the House or Senate to enact these agreements. Despite this, OECD continues to produce implementation guidance for Pillars 1 and 2, which could ultimately lead to foreign countries levying additional taxes on American companies.” The letter notes that the U.S. funds almost 20% of OECD’s budget, more than double any other member, and requests House appropriators to prohibit the U.S. from continuing to fund the OECD.
Bloomberg Tax’s March 24, 2023, issue of the Daily Tax Report reports that a signatory to Congressman Smith’s letter, Rep. Kevin Hern (R-OK), has requested more details from the Department of the Treasury about the estimated economic impact of the OECD BEPS agreement. Hern believes that: “This Administration has made commitments they have no authority to carry out, and that’s not going to go well for them when they finally do seek out Congressional approval.” Bloomberg notes that Republican maneuvering may not have significant impact while there is a Democratic President and Senate, but there may be a dramatic change if 2024 brings a Republican President and Republican majorities in Congress.
i Pillar One would re-allocate some taxing rights over MNEs from their home countries to markets where they have business activities and earn profits, even though the MNEs don’t have a physical presence there. OECD aims to finalize a new Pillar One Multilateral Convention by mid-2023, to enter into force in 2024. France, the UK, and India have already begun applying Pillar One. Despite the US’s agreement to BEPA, it has responded with a threat of imposing tariffs.
ii See https://www.oecd.org/tax/beps/beps-actions/action1/
iii See https://www.oecd.org/tax/beps/international-tax-reform-oecd-releases-technical-guidance-for-implementation-of-the-global-minimum-tax.htm
iv See OECD: Tax Incentives and the Global Minimum Corporate Tax, Reconsidering Tax Incentives after the GloBE Rules (October 6, 2022), https://www.oecd.org/tax/tax-incentives-and-the-global-minimum-corporate-tax-25d30b96-en.htm
vi View the full March 24, 2023, issue of the Daily Tax Report here.