House Subcommittee Examines OECD Global Minimum Tax: Key Criticisms and Implications
The House Ways and Means Tax Subcommittee heard from critics of the OECD global minimum tax plan at a July hearing, even as an Outcome Statement agreed to by 138 members of the OECD/G20 Framework announced significant progress made on the proposed two pillar solution. Republican Tax Subcommittee members say the proposal will hurt American companies and “surrender $120 billion in US tax revenue.” On the other hand, the OECD release asserts that the plan, which targets the largest multinationals, will “ensure a fairer distribution of profits and taxing rights among countries and jurisdictions.”
Plan Could Disadvantage US
One witness, Mindy Herzfeld, Professor of Tax Practice at the University of Florida Levin College of Law, explained that an analysis by the Joint Committee on Taxation shows that Pillar Two, a 15% global minimum tax, could significantly reduce US revenue collections. Among other things, Herzfeld suggests that the US seeks modification of the more “arbitrary rules that have the worst effects on US businesses and revenues,’ such as the definition of qualifying credits.
Because Pillar Two is an effective tax rate, the treatment of credits and deductions affect whether a business’s income is considered “low-taxed.” The problem is that refundable credits are factored into the computation favorably but nonrefundable credits are not. The US uses nonrefundable credits much more so than other countries, potentially putting more US companies in the “low-taxed” category.
The OECD initiative “harms the competitiveness of American businesses,” according to Anne Gordon, Vice President of International Tax Policy for the National Foreign Trade Council. Gordon identified several problem areas in Pillar One, which would allocate income from cross border remote sales to market jurisdictions in return for countries agreeing not to impose their own digital services taxes. Gordon is concerned about whether the exclusion for financial services is properly scoped, how the plan will address distribution activities which involve franchise-type arrangements and the impact of withholding taxes.
Subcommittee members heard a different take from Peter Barnes, International Tax Advisor and of Counsel to Caplin & Drysdale, who believes the US should embrace the plan and stay involved in the process of shaping the global minimum tax. Barnes notes that the US developed many of the tax ideas present in Pillar Two on its own over time. If the US does not participate now, “more than 100 countries will enact Pillar Two into their domestic laws, with effect from 2024 and 2025.” The US will be at a disadvantage if it does not have influence over the contours of the final plan.
Barnes goes on to identify the benefits to the US of Pillar Two implementation:
- Participating in Pillar Two will raise significant tax revenues for the US versus not participating.
- If the US joins the Pillar Two group, it can work with other countries to modify the rules over time, so that key US priorities (including the tax treatment of incentives and of the US corporate alternative minimum tax) are better protected. If the US does not participate, its voice in negotiations will be much less influential.
- Joining Pillar Two will strongly benefit US-headquartered corporations. Compliance costs, including the cost of tax disputes, will be sharply lower, and some taxes paid by US multinationals will likely be paid to the US government instead of to other countries.
OECD Marches Ahead
The OECD/G20 Inclusive Outcome Statement reports on the current status of the global minimum tax plan. The group is finalizing the work on Pillar One and has completed the work on the development of the Subject to Tax Rule (STTR). The STTR rule applies where income is subject to a resident tax rate lower than 9%. It allows a treaty partner to tax certain income at a rate up to the difference between 9% and the nominal corporate income tax rate of the residence jurisdiction.
The statement also explains that Amount A of Pillar One will establish a taxing right for market jurisdictions for a defined portion of the residual profits of the largest and most profitable multinationals operating in their markets. It also will prevent the proliferation of digital service taxes by member countries, a key trade-off under the plan.
Amount B, which applies an arm’s length principle to in-country baseline marketing and distribution activities, is a “critical component of the broader agreement on Pillar One.” The OECD says members have achieved consensus on many aspects of that framework.
Finally, the statement summarizes the package of deliverables developed to address the remaining elements of the Two‐Pillar Solution, including a comprehensive action plan to implement the above elements of the plan.
The agreement on the Outcome Statement has been characterized as a “historic milestone” for the OECD/G20 Inclusive Framework in a report by the OECD Secretary-General. Recent progress indicates that the OECD global minimum tax will become a reality. An important question explored by the House Tax Subcommittee is whether the US will be able to win support of changes that can lessen negative impacts on US companies.
The OECD Two-Pillar Framework
To date, some 138 countries have joined the OECD’s two-pillar plan to reform international taxation. In February 2023, the 27 member states of the European Union reached an agreement on the implementation of a corporate minimum tax. The US is moving in that direction.
The plan targets income that goes untaxed by imposing a 15% minimum tax. Pillar One would re-allocate taxing rights over multinationals from home countries to markets where they do business and earn profits, regardless of physical presence. Pillar Two provides for a comprehensive jurisdiction-by-jurisdiction global effective minimum tax rate of 15%.
The OECD estimates that base erosion and profit-shifting of multinational corporations now costs countries 100-240 billion USD in lost revenue annually, which is equivalent to 4-10% of the global corporate income tax revenue.