Big Business Ponders Global Tax Strategy as 2025 Cliff Nears

Corporate America is grappling with how to approach competing US and global minimum tax policies ahead of a Capitol Hill tax battle next year.

At odds are the 2017 GOP tax law’s global intangible low-taxed income regime and the 15% global minimum tax brokered by the Organization for Economic Cooperation and Development more than 140 countries agreed to in 2021.

Many companies oppose the OECD’s minimum tax, known as Pillar Two, arguing it will erode the US tax base and threaten US sovereignty. But some are conceding that alignment between the two approaches may ease compliance costs and retain lucrative tax credits.

“There are an increasing number of companies who are analyzing it and saying, ‘Eh, maybe we do better off, in the long run, coordinating or aligning GILTI with Pillar Two,’” said Russell W. Sullivan, a shareholder at Brownstein and former Democratic Senate Finance Committee staff director, noting that he didn’t see a majority in that camp.

The 2017 GOP tax overhaul slashed the corporate rate from 35% to 21%. To pay for such a big cut and to spur businesses to bring foreign capital home while continuing to invest in the US, the law enacted international provisions such as GILTI along with other tax base-broadening policies. The hope was to reward companies for moving profits back to the US while slapping them on the wrist if they sent them to lower-tax jurisdictions.

While the law made the corporate rate permanent, it built in a sunset of individual tax cuts and an increase in international tax rates at the end of 2025.

If Congress does not act by the end of 2025, the GILTI effective rate is set to rise from 10.5% to 13.125%. Because of the law’s foreign tax credit haircut, that income would not be subject to US tax if it is subject to a foreign tax rate above 16.4%, an increase from the current rate of 13.125%.

Concerns over the deficit loom larger this time around for some GOP lawmakers than in 2017, putting all parts of the tax code on the theoretical cutting board.

Democrats, meanwhile, want to keep the individual provisions for those making $400,000 or less, in part, by boosting the corporate rate and setting more aggressive international tax regimes.

GILTI Gripes

In the years since the 2017 law, companies just getting used to GILTI watched as the global tax landscape shifted. Dozens of countries are implementing the OECD-negotiated minimum tax, and more are expected to join.

GILTI requires businesses to use a worldwide blended or average accounting of a company’s total global income. That conflicts with the Pillar Two country-by-country approach.

Republicans and many big companies have loudly opposed the OECD global tax and in particular a mechanism known as the undertaxed payments rule. The UTPR allows nations to apply extra tax to a company if its parent’s jurisdiction and local jurisdiction aren’t charging that 15% minimum rate.

Companies also fret that Pillar Two’s treatment of research and development credits could have them losing hundreds of millions in deductions incurred from income.

Multinational companies with major US research and development might be most interested in approaching Congress to help find ways that make that credit refundable under Pillar Two rules, said EY’s Colleen O’Neill. But others may focus on domestic policy asks to Congress or for changes in the foreign-derived intangible income deduction.

“They are not of one mind as to what the priorities are because there’s so many different provisions that could be in play,” O’Neill said. “It’s no longer one-size-fits-all.”

US companies investing in foreign markets may be more concerned over the corporate rate or what Congress can do to blunt the impact of the global minimum tax rule. Foreign companies with income or operations in the US may be more concerned about potential retaliatory action proposed by GOP tax writers or if former president Donald Trump gets reelected.

The differences between the two approaches are leading most to conclude that Congress and the OECD must figure out how to blend the two systems, said Anne Gordon, a tax policy expert at the National Foreign Trade Council.

“I think people prefer the US system and prefer GILTI, and we’d rather fix GILTI,” said Gordon, a former GOP tax staffer. “We just want to make sure that US businesses are not disadvantaged by Pillar Two.”

Political Maneuvering

Rep. Kevin Hern (R-Okla.) said companies are experienced with GILTI now, and tell him that minor tweaks—not structural changes such as moving to country-by-country—are preferred.

“The headaches are really around Pillar Two,” Hern, who is leading a GOP House Ways and Means Committee group on international tax, said in an interview.

Some Republicans still hope that OECD will ultimately deem GILTI as compliant with Pillar Two without major changes.

Experts suggest the US would likely need to adopt a global minimum tax for GILTI to be considered an equivalent tax regime, but whether countries begin imposing the UTPR on US companies remains to be seen.

Democrats included country-by-country reporting in the House-passed version of legislation that became the 2022 tax-and-climate law, dubbed the Inflation Reduction Act. The international provisions were ultimately stripped from the law, though it did include an unrelated 15% corporate minimum income tax on companies with at least $1 billion in profits.

US business is still formulating its Pillar Two-related asks to Congress partly because of the demise of those international provisions, said Ryan Bowen, a senior manager in Deloitte’s Washington National Tax Practice. As the likelihood of international changes receded, so did the interest in modeling the implications.

“To some extent, the US business community, especially, came to embrace Pillar Two relatively late, relative to their European counterparts,” he said, but that’s changing as companies see the full picture of their tax burdens.

The Biden administration has proposed moving from GILTI’s anti-profit shifting rules toward the OECD’s UTPR and adopting country-by-country, and Democrats in Congress have reintroduced versions of the country-by-country legislation.

“The rest of the world is going that way,” Sen. Mark Warner (D-Va.), a Finance Committee member said of Pillar Two. “It would be crazy if American businesses are paying taxes in France that otherwise they would have been paying here.”