House leadership and top Republican tax writers doubled down on their rejection this week of an international tax provision within an Organization for Economic Cooperation and Development (OECD) framework, as the Treasury advanced rules that may help companies avoid it.
House Speaker Mike Johnson (R-La.) and Ways and Means Committee Chair Jason Smith (R-Mo.), among others, wrote a letter Tuesday to OECD Secretary-General Mathias Cormann arguing the provision, known as the undertaxed profits rule (UTPR), would “surrender U.S. tax sovereignty.”
They blasted the Biden administration for pressing ahead with negotiations on the international deal without congressional approval.
“The Biden-Harris administration lacks the authority to impose any tax deal on Americans without the approval of the U.S. Congress — doing so would violate the United States Constitution. For these reasons, we continue to oppose the OECD global tax deal,” they wrote.
But despite the contrarian rhetoric from Republicans, the Biden administration started a rulemaking process last week that could allow U.S. multinationals to get around paying the UTPR.
Also known as a “top-up tax,” the UTPR would let countries increase taxes on a parent company if a subsidiary in a separate jurisdiction isn’t paying a baseline 15 percent rate.
The workaround comes in the form of the corporate alternative minimum tax (CAMT), which was updated in the 2022 Inflation Reduction Act as a 15 percent minimum tax on big companies separate from the 15 percent tax in the OECD’s so-called Pillar Two agreement.
“The corporate AMT … will make it less likely that U.S. multinationals will be subject to a top-up tax under the UTPR,” University of Michigan Law School tax professor Reuven Avi-Yonah wrote in a January commentary for Tax Notes.
Many participating countries have begun to implement the Pillar Two agreement, though the U.S. isn’t one of them. The Treasury Department said last week that its rival AMT rules were one of its biggest projects in years.
“Crafting the rules to implement this tax has been one of the most significant projects the Treasury Department has undertaken in decades. Congress delegated a significant amount of authority to Treasury to implement the CAMT, and Treasury and the IRS are implementing the law via these proposed regulations consistent with Congress’s statutory direction and intent,” the Treasury said.
In their letter this week to the OECD secretary-general, Republicans touted a lawsuit brought up by the Wyoming-based American Free Enterprise Chamber of Commerce in a Belgian court to block the implementation of the undertaxed profits rule.
“We encourage and support all efforts to preserve countries’ tax sovereignty and to block implementation of unfair rules like the UTPR, including the most recent challenge filed in the Belgian Constitutional Court,” they wrote.
But with its own 15 percent minimum tax rule in place and the UTPR potentially neutralized for U.S. multinationals, the U.S. may have a clearer runway for the implementation of the OECD’s Pillar Two agreement. Avi-Yonah described Pillar Two as a “fait accompli.”
It’s a different story for the other component of the OECD tax deal, which has to do not with minimum levels of corporate taxation but where it is that companies can be taxed. Referred to as Pillar One, this part of the deal is dead in the water due to U.S. opposition and has led to a rival negotiating process at the United Nations.
Part of the issue there is tax havens, with smaller and less developed countries keen to see a greater share of the tax revenue claimed by multinational corporations that operate in their jurisdictions. The African Union last year described a U.N. resolution related to the initiative as a “beacon of hope.”
“It will facilitate the access of much needed financial resources, crucial for responding to the current debt crises and facilitate the pursuit of achieving sustainable development,” the group said in a statement. “It is also in line with African aspirations … strengthening tax systems and fostering tax equity.”
Another issue implicated in the U.N. process, which was the main motivating factor behind the OECD process started several years ago, is the taxation of big tech companies, which, due to the nature of their product, can have a huge amount of sales across international borders in places where they have no physical operations.
Without a broader agreement on where it is that those revenues can be taxed, tech sector-specific tax regimes, known as digital services taxes, can proliferate, leading to localized and retaliatory trade spats.
“A draft of the multilateral treaty for Pillar One was published in October 2023, and a deadline of June 30 for a final agreement has come and gone,” Tax Foundation analysts Daniel Bunn and Sean Bray wrote in a July commentary. “The agreement between the US and several nations with discriminatory digital services taxes has also lapsed. Canada, which was not part of that agreement, has implemented its own digital services tax.”
