A global agreement to overhaul the taxation of multinational corporations has come up against the circular saw known as the US Senate.
The 2021 pact between more than 130 countries, seen as a diplomatic victory for President Joe Biden and Treasury Secretary Janet Yellen, calls on countries to establish a global minimum tax of 15% and develop a new method of redirecting profits of the world’s largest companies more equitably between countries.
The Biden administration planned to establish the 15% minimum tax along with a host of other tax code changes in a budget reconciliation filing, but Sen.
While administration officials continue to speak optimistically about joining the global compact, neither pillar of the deal has an obvious way forward in Congress. Time is a factor due to Republicans’ unified opposition to Democrats’ tax plans, which means the results of November’s midterm elections will determine whether the United States passes either other board remains viable in 2023.
“It was never going to be easy, it was clear the president was struggling to get what he wanted anyway,” said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center. “And it seems that what was a very difficult task is, for now, impossible.”
Uncertainty in the United States, which is the world’s largest economy and home to many businesses affected by the potential new tax regime, would cast a shadow as the rest of the world scrambles to implement the minimum tax and to hash out the details of the profit reallocation scheme.
The minimum tax was seen as the politically easier half of the deal for the United States to comply with, as changes to the corporate tax code fit easily within the procedural safeguards of this which can be accomplished with the support of a simple majority in the Senate.
But the Senate leadership and administration have so far failed to win support from Manchin, who said in December he would not support a broad reconciliation agenda. Months of talks between Manchin and Senate Majority Leader
This don’t leave much time legislators to review fiscal and climate policies this fall. But even if Democrats manage to secure a reconciliation package that includes the 15% global minimum tax, known as Pillar Two, signed into law later this year, there is an open question about how the United States can engage with the profit reallocation plank of the agreement, known as the first pillar.
The first pillar seeks to create a single regime for countries to tax multinationals operating within their borders, particularly, but not limited to, tech giants. The provision was intended to prevent the proliferation of digital services taxes targeting companies like Alphabet Inc.’s Google, Facebook’s parent company Meta Platforms Inc., and Amazon.com Inc.
There is a debate about the procedural options open for the profit reallocation plan.
Before Manchin balked at tax hikes and climate spending, Treasury officials argued the Biden administration had several paths forward for the first pillar. A Treasury official involved in politics, who asked to speak on the merits due to the ongoing nature of deliberations, argued for potential options that would require lower voting thresholds in the Senate. This was the budget reconciliation tool that really only requires 50 votes and executive agreement from Congress, which would require a filibuster-proof 60-vote majority.
But Republicans argue that since the deal would nullify various existing tax treaties, it should be subject to the higher two-thirds threshold for treaty approval provided by the Constitution, because it nullifies a number of interstate tax treaties. States and other countries.
“The Constitution does not say that treaties are somehow confirmed by the Senate at the discretion of the executive,” the senator said.
Although a Treasury official left open the option of a vote pushed on the first pillar by reconciliation in an interview last month, the legality and political appetite for such a push have never been clear.
Democrats did not attempt to include instructions for the Pillar 1 profit reallocation plan, as they did for the Pillar 2 global minimum tax, in the economic package stalled in the Senate. Ahead of Manchin’s recent announcement regarding the postponement of the tax measures, the chairs of the Senate Finance Committee and the House Ways and Means Committee, as well as the chairman of the Senate Foreign Relations Committee, told Bloomberg Tax that the administration had made no move to advance First Pillar via reconciliation.
On the global fence
Barbara Angus, a former House Republican staffer and current head of global tax policy at EY, recently described the implementation of the global tax agreement as “a multidimensional game of chess in a very complicated time in the United States. United States and the rest of the world”.
Hungary has raised objections to the global minimum tax at the European Union level, and other countries may be reluctant to move forward if the United States does not. For now, Yellen appears to be banking on outside pressure forcing Congress to act.
“I would say that over time, as other countries pass a minimum, it will create an incentive for our Congress to pursue legislation that will bring us into compliance,” Yellen said during a July 19 appearance on National Public Radio.
If the United States does not approve the deal, it would likely mean that large American multinationals will face a complex patchwork of different taxes from different jurisdictions, mainly aimed at tech giants. Yellen has repeatedly said that she thinks American companies will help win legislative support for the tax deal, but this support has yet to materialize amid questions about how the minimum tax and profit reallocation elements would work in practice.
“You have a cohort of companies saying, ‘Wait a minute, I didn’t start this, why am I dragged into this? Senior Assistant to the Senate Minority Leader
Some observers see a possibility that this dynamic will change, depending on how many more countries move forward with implementing the fiscal pact as U.S. efforts stall.
“I think the question is how many of these countries will act first and act before the United States does,” Gleckman said. “At some point you reach critical mass and the recalcitrant countries have to say, ‘We’re out of step with the rest of the world and we have to catch up.'”
Daniel Bunn, executive vice president specializing in international research for the Tax Foundation, agreed that the pressures already built into the agreement could eventually bring Congress to bear – if enough other countries adopt it.
“As soon as you have, let’s say Canada, go ahead and implement Pillar Two, it will have an impact on many American multinationals,” Bunn said.
But one of the main critics of the agreement, member of the House Ways and Means ranking
“The only thing left is for the White House to call the time of death,” Brady told reporters during a July 19 briefing.