A global agreement to overhaul the taxation of multinational corporations has run into the buzzsaw known as the US Senate.
The 2021 pact between more than 130 countries, considered a diplomatic victory for President Joe Biden and Treasury Secretary Janet Yellen, calls for countries to establish a 15% global minimum tax and work out a new method for reallocating the profits of the world’s largest corporations more fairly among countries.
The Biden administration planned to establish the 15% minimum tax along with a host of other tax code changes in a budget reconciliation package, but Sen.
While administration officials continue to speak optimistically about participation in the global pact, neither of the two pillars of the deal has an obvious path forward in Congress. Time is a factor due to unified Republican opposition to Democrats’ tax plans, which means the results of the November midterms will determine whether US adoption of either plank remains viable in 2023.
“This was never going to be easy, it was clear that the president was having trouble getting what he wanted anyway,” said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center. “And it seems like what was a very difficult task is, for now, impossible.”
Uncertainty in the US, which is the world’s largest economy and hosts many of the companies affected by the potential new tax regime, would cast a shadow as the rest of the world works to implement the minimum tax and hash out the details of the profit reallocation scheme.
The minimum tax was considered the politically easier half of the deal for the US to comply with, since changes to the corporate tax code easily fit within the procedural guardrails of what can be accomplished with bare majority support in the Senate.
But Senate leadership and the administration have so far failed to gain the support of Manchin, who said in December that he wouldn’t support a broad reconciliation package. Months of talks between Manchin and Senate Majority Leader
That doesn’t leave much time for lawmakers to revisit tax and climate policies this fall. But even if Democrats manage to get a reconciliation package including the 15% global minimum tax, known as Pillar Two, enacted later this year, there is an open question about how the US can get on board with the profit reallocation plank of the deal, known as Pillar One.
Pillar One aims to create a singular regime for countries to tax multinationals operating within their borders—especially, but not limited to, tech giants. The provision sought to head off the proliferation of digital services taxes aimed at companies like Alphabet Inc.’s Google, Facebook parent Meta Platforms Inc., and Amazon.com Inc.
There is debate over what procedural options are open for the profit reallocation plan.
Prior to Manchin balking at tax hikes and climate spending, Treasury officials maintained that the Biden administration had multiple paths forward for Pillar One. A Treasury official involved in the policy, who asked to speak on background due to the ongoing nature of deliberations, argued for potential options that would require lower vote thresholds in the Senate. Those were the budget reconciliation tool that effectively only requires 50 votes and a congressional executive agreement, which would require a 60-vote, filibuster-proof majority.
But Republicans maintain that since the agreement would overrule various existing tax treaties, it should be subject to the higher two-thirds threshold for treaty approval laid out by the Constitution, since it overrules a number of tax treaties between the US and other countries.
“The Constitution doesn’t say that treaties are sort of confirmed by the Senate at the discretion of executive,” Sen.
Though a Treasury official kept open the option for an envelope-pushing vote on Pillar One through reconciliation in an interview last month, the legality and political appetite for such a push were never clear.
Democrats didn’t attempt to include instructions related to the Pillar One profit reallocation plan, as they did for the Pillar Two global minimum tax, in the economic package that is stalled in the Senate. Prior to Manchin’s recent announcement about holding off on tax measures, the chairs of the Senate Finance Committee and House Ways and Means Committee, as well as the chair of the Senate Foreign Relations Committee, told Bloomberg Tax that the administration had made no outreach about advancing Pillar One via reconciliation.
On The Global Fence
Barbara Angus, a former House Republican staffer and current EY global tax policy leader, recently described implementation of the global tax deal as “a multi-dimensional chess game at a very complicated time in the U.S. and the rest of the world.”
Hungary has raised objections about the global minimum tax at the European Union level, and other countries may hesitate to move forward if the US doesn’t. For now, Yellen appears to be banking on outside pressures forcing Congress to act.
“I would say that over time, as other countries do adopt a minimum, that will create an incentive for our Congress to pursue legislation that will put us in compliance,” Yellen said during a July 19 appearance on National Public Radio.
If the US doesn’t approve the deal, it would likely mean large American multinationals will face a complex patchwork of different taxes from different jurisdictions, primarily aimed at tech giants. Yellen has repeatedly said that she thinks corporate America will help garner legislative support for the tax deal, but that support has yet to materialize amid questions about how the minimum tax and profit reallocation pieces would work in practice.
“You have a cohort of companies that are going, ‘Wait and minute, I didn’t start this, why am I being dragged into this?’” said Rohit Kumar, co-leader of PwC’s Washington national services tax practice and a former senior aide to Senate Minority Leader
Some observers see a possibility of that dynamic changing, depending on how many other countries move ahead with implementing the tax pact while US efforts are stalled.
“I think the question is, how many of those countries will be first movers and act on this before the US does,” said Gleckman. “At some point you reach a critical mass and the recalcitrant countries have to say, ‘We’re way out of step with the rest of the world and have to catch up.’”
Daniel Bunn, an executive vice president focused on international research for the Tax Foundation, agreed that pressures baked into the deal already could eventually bring Congress around—if enough other countries adopt it.
“As soon as you get, let’s say Canada, moving forward and implementing Pillar Two, that’s going to impact a lot of U.S. multinationals,” said Bunn.
But a top critic of the deal, House Ways and Means ranking member
“The only thing that’s left to do is for the White House to call the time of death,” Brady told reporters during a July 19 briefing.