Global Minimum Tax in Limbo Following Bessent, G7 Agreement

The fate of the OECD’s global minimum tax framework is in limbo following an agreement struck by the US and its Group of Seven allies that would exempt US multinational companies from the levy.

Concessions announced Thursday threaten to upend an OECD-brokered effort to curb the competition among countries that over the years have relied on lower and lower tax rates to attract companies, observers warned.

“The so-called deal does not kill the minimum tax. It weakens it to the extent that it unlevels the playing field, which will put some tension in the system,” said Pascal Saint-Amans, a partner at the Brunswick Group and the former tax head of the OECD. He is the main architect of the global tax deal that was agreed to by more than 140 countries in 2021.

The G7 agreement raises new questions about whether tax havens—which have raced to keep up with the global minimum tax developments—will alter their laws because US business will be exempted.

There’s also uncertainty about how OECD guidance projects, which seek to make it easier for companies to comply with the tax, will be developed and whether they weaken the effect of the levy.

“Pillar Two was intended to be a coordinated minimum tax system with countries implementing consistent rules,” said Alistair Pepper, a managing director at KPMG’s Washington National Tax group and former OECD official.

The US decision could be “perceived as a rejection of multilateralism” and inconsistent with the original aim of Pillar Two, he said.

Under the G7 agreement, US companies will be excluded from key portions of the minimum tax rules—known as Pillar Two of a two-part OECD-led global tax deal—in exchange for removing the Section 899 “revenge tax” proposal from President Donald Trump’s tax bill. Section 899 would hit countries that have what the US considers to be “discriminatory taxes,” like the global minimum tax and the digital services tax.

Impact Uncertain

Other observers said the impact of the G7 agreement isn’t so definitive.

Michael Plowgian, a former international tax negotiator for the US government and now a tax principal at KPMG, said the effectiveness of the global minimum tax will depend on if and how Congress changes the US’s own minimum tax on foreign-earned income.

“If something like current law is maintained, then I don’t expect lots of companies to invert into the US for tax reasons,” Plowgian said. The US’s minimum tax on global intangible low-taxed income, or GILTI, has many differences with the global minimum tax, he added.

“But I just don’t see that being a driver for companies to be parented in the US. And I think that’s really the big issue on whether Pillar Two is weakened now.”

The global minimum tax seeks to charge a 15% minimum tax rate on multinational companies in every country where they operate.

The minimum tax, negotiated during the Biden administration, has been applied in dozens of countries around the world. At the time, delegates to the OECD said the minimum levy would limit harmful tax competition and profit shifting by companies from high-tax to low-tax jurisdictions.

The Trump administration and Republicans in Congress have repeatedly lambasted Pillar Two, arguing the tax cedes American taxing rights of its own companies to other nations. They’ve also called parts of the global minimum tax framework “extraterritorial.”

The Trump Treasury Department for weeks has called for a “side-by-side” system, one in which Pillar Two wouldn’t apply to income that the US was also monitoring.

The current Pillar Two rules recognized the “particularities” of the US, Achim Pross, deputy director of the OECD’s Center for Tax Policy and Administration, said Friday.

The conversation about “coexistence” of the US and Pillar Two systems has been had before, he added.

But Bessent’s announcement Thursday moved the US and the globe closer to achieving the Treasury’s position.

If US businesses are exempt from key rules that help enforce a 15% minimum tax rate, the incentive for some jurisdictions to continue to apply a 15% minimum rate domestically is diminished, said Pat Brown, a co-leader and partner at PwC’s Washington National Tax Service.

However, he added, this moment also represents an opportunity for the OECD and countries involved in the discussion to change the treatment of incentives under Pillar Two.

Currently, Pillar Two treats refundable tax credits like an increase in income in its calculation, whereas nonrefundable credits are treated as a reduction in tax. As a result, companies that use nonrefundable credits—like the US’s research and development credit—may be subject to more tax under the Pillar Two framework.

The willingness of many of these countries to apply the global minimum tax domestically “is probably correlated to how the OECD and the Inclusive Framework approaches the question of incentives, permissible incentives,” Brown said.