McConnell Shows Who’s Boss After 9-Year Battle Over Tax Treaties

Mitch McConnell was hearing the same message from multiple directions: It was time to roll him.

His fellow Republican from Kentucky, Rand Paul, for virtually his entire tenure in the U.S. Senate had blocked votes on treaties that multinational corporations depend on to avoid being taxed twice on the same income and to resolve disputes with foreign governments. The treaties are also used to help crack down on tax avoidance.

It was a nine-year-long stalemate, spanning Democratic and Republican administrations. Negotiations with the Treasury Department produced only frustration and accusation. Other senators tried workarounds, to no avail.

Until on July 11, when, in the thick of high-level talks to avoid a potential default on the federal debt, McConnell walked to the Senate floor and filed notice he was going to force votes the following week to approve updates to the treaties.

The majority leader’s action was classic Washington hardball: a master of the legislative process biding his time before seizing an opportune moment to overpower a colleague wielding arcane rules to his advantage. McConnell’s decision involved a complex matrix of political calculations, combining pressure from at least one important constituent, the desire to show results for Kentucky voters heading into a re-election bid, and the opportunity to settle an old score.

It was also a message to Paul that McConnell could call his bluff in the future—on other tax treaties pending in the Senate, or anything else.

This account is based on interviews with a dozen individuals intimately familiar with the discussions on tax treaties, including current and former Senate aides, lobbyists, and lawmakers, to piece together the events leading to the July vote. Paul twice declined to answer questions. McConnell’s office and the Treasury Department declined to comment.

Hatfields and McCoys

The senators’ uneasy relationship began before Paul even arrived in Washington. In 2010, McConnell endorsed Trey Grayson, Paul’s primary opponent, and filmed a campaign ad for Grayson.

When McConnell faced a serious primary challenge in 2014 from future governor Matt Bevin, some in McConnell’s camp weren’t sure whom Paul would back. He endorsed McConnell, though he said he did so only because McConnell asked and there was no one else in the race at that point, according to news reports. McConnell beat back the challenge, won re-election, and became majority leader as Republicans took control of the Senate.

The skirmishes became more public as the senators fought over renewal of the post-9/11 Patriot Act, prompting then-White House press secretary Josh Earnest to compare them to the Hatfields and the McCoys.

Photographer: Andrew Harrer/Bloomberg

By that time, Paul had been blocking the tax treaties for four years, contending they would give foreign governments too much power to dig up private information on U.S. citizens.

“To be clear, I certainly do not condone tax cheats, but I can’t support a law that endangers regular foreign investment and punishes every American in pursuit of a few tax cheats,” he said in a 2014 letter to then-Majority Leader Harry Reid, a Nevada Democrat.

Paul placed a “hold” on the treaties, giving notice that he wouldn’t allow the updates to be ratified by unanimous consent—effectively a threat to filibuster if the issue was brought to the floor for a vote.

Senate floor time is a precious commodity. When legislation is held up, the majority leader has to decide whether to risk a protracted floor fight that could preclude work on other legislation or nominations. Senate leadership, under both Democrats and Republicans, elected not to take that risk.

The treaties languished year after year.

A Kentucky Company Hurting

One of the companies most affected by Paul’s hold was steelmaker North American Stainless, which employs about 1,500 at its facilities in Ghent, Ky.

As a subsidiary of Spanish company Acerinox SA, North American Stainless was subject to a 10% withholding tax when it paid dividends to its parent company under the old U.S.-Spain treaty. That tax would disappear if the update to the treaty was ratified. From 2014, when Mary Jean Riley, then a vice president at the company, testified at a Senate Foreign Relations hearing, company representatives reminded McConnell’s staff regularly that failure to ratify the treaty update was costing North American Stainless tens of millions of dollars.

The U.S. has almost 60 such treaties. Countries use them to have a common set of rules for taxing companies involved in cross-border business. They include provisions that lower withholding rates on dividends, interest and royalty payments, as well as prevent double taxation and help resolve tax disputes.

Foreign Relations advanced some of the treaties being stalled in 2011, 2014, and 2015—the first two times under Democratic chairmen, the latter under Tennessee Republican Bob Corker. The then-senator wrote his colleagues that the treaties would benefit U.S. companies and citizens, calling them “consistent with the Fourth Amendment protections ensuring that our citizens are protected against unreasonable search and seizure.”

But Paul wouldn’t drop his hold, and McConnell elected not to risk tying up the Senate. The stalemate continued and Corker gave up on trying to move them through the committee.

‘A Little Quirky’

Treasury officials and congressional aides initially proposed attachments to the treaties to address Paul’s objections. Those adds—known as RUDs, for reservations, understandings and declarations—are standard practice to accommodate a senator’s concerns.

Paul, however, objected to using RUDs, saying they didn’t have the force of law.

In 2016, President Barack Obama called on Paul to stop blocking the treaties, calling him “a little quirky” on the issue. Paul fired back on Twitter, saying, “Privacy and 4^th Amendment rights are not ‘quirky.’” He was up for re-election that year, and it was an opportunity to look good before Kentucky voters.

But the treaties weren’t a partisan issue, which became clear after Donald Trump was elected in 2016.

Treasury Secretary Steven Mnuchin devoted resources to negotiating with Paul, even as his department was immersed in the 2017 tax law. Senior officials became involved, including Chip Harter, deputy assistant secretary for international tax affairs, and David Kautter, assistant secretary for tax policy.

Talks with Treasury

In 2017, Treasury officials offered a provision they hoped would spur action. They offered to require the Internal Revenue Service to notify U.S. taxpayers when it requests information about them because of a tax treaty. Paul rejected doing that through a RUD, and wanted to require foreign tax jurisdictions to provide their own citizens with the same due-process rights that Americans would have from the IRS, according to a person familiar with the conversation. The request stunned Treasury officials because it went well beyond what they could do, the person said.

In 2018, Mnuchin met with Paul in the senator’s office. Paul raised concerns about information the IRS was collecting on U.S. citizens through foreign tax jurisdictions, the person said.

The IRS’s data collection had long been a sore point for Paul. In his letter to Reid four years earlier, Paul had said the Foreign Account Tax Compliance Act punished every overseas financial institution with a 30% withholding tax unless they sent the IRS private bank records of American account holders. Later, in his discussions with Treasury, Paul proposed legislative changes to FATCA, which he contended would gain teeth under the treaties.

Again, talks hit a dead end.

In 2019, Treasury officials went to Paul’s staff one last time in April, asking if they could do anything to persuade the senator to drop the hold. There were more conversations, but no real progress, a person familiar with the conversation said.

At that point, Treasury staff asked McConnell and the Foreign Relations Committee to act.

Matthew Hawes, a spokesman for Paul, said Mnuchin made a verbal promise in 2019 to include privacy language but backed out after McConnell agreed to push the treaties through.

“When confronted with the inevitability of the treaties passing without the privacy language, Senator Paul proposed amendments to make the treaties retroactive, thereby saving millions of dollars for any company affected by the long debate. Inexplicably, Senator McConnell rallied the troops to defeat this amendment, which would have saved many companies from double taxation,” Hawes said in an e-mail. McConnell’s staff didn’t respond to a request to comment on that assertion.

Paul’s amendments would have forced the treaties to be renegotiated and further delayed ratification, said a Senate Republican aide who spoke on the condition of anonymity.

‘I Know It When I See It’

North American Stainless had complained about lack of movement on the treaties since at least 2014. By early 2019, though, the issue had become more urgent: The company faced a $35 million Spanish tax bill if that country’s treaty update didn’t clear the Senate by July.

The company reported spending $20,000 in the second quarter of 2019 lobbying on trade issues, including tax treaties, according to Senate records.

Other corporations also ratcheted up the pressure. In April, Coca-Cola Co., Alphabet Inc.’s Google, and Walmart Inc. were among 86 companies that signed a letter to Senate Foreign Relations Chairman Jim Risch (R-Idaho) and McConnell urging them to move the treaties with Spain, Switzerland, Japan, and Luxembourg. By that point, McConnell was hearing from Democrats that they would support the treaties as long as all of them were considered.

By April, it was clear that something had changed, Risch said in an interview.

“I know when I see it but I can’t describe it,” he said in July. “Other than it’s a feeling.”

Re-Election Campaign Ahead

McConnell faced a time window of his own—his re-election bid in 2020.

This time, unlike in 2014, McConnell didn’t need an endorsement or anything else from Paul. He was at the peak of his power after seeing Brett Kavanaugh confirmed to the U.S. Supreme Court, cementing the court’s conservative majority, and no serious primary challengers emerged.

“Coming off the Supreme Court fight, his standing with primary voters is bulletproof,” a former Senate staffer said.

Benefits to Kentucky employers that would save millions before an election year, and the fact that support from Democrats would allow the measures to easily get the two-thirds majority required to ratify treaties, made it the ideal fight to pick with Paul, the former staffer said.

Mnuchin Factor

Mnuchin and acting White House Chief of Staff Mick Mulvaney visited often with McConnell and other congressional leaders in both parties in June and July. Another government shutdown and a default on the national debt loomed in the early fall, and they were trying to reach a deal to raise the debt limit and discretionary spending caps.

On the afternoon of July 10, Mnuchin and McConnell met without Mulvaney. The next day, as senators waited for updates from Mnuchin on when the government would exhaust its borrowing authority, McConnell undertook moves to bring the treaties with Spain, Switzerland, Japan and Luxembourg to the floor, just as the Senate was about to leave Washington for the week.

Five days later, the Senate cut off debate and approved the Spanish treaty, then the others. The vote on the Spanish treaty update was 94-2, with only Sen. Mike Lee (R-Utah) voting with Paul. Treaties with Chile, Hungary and Poland are still pending.

McConnell punctuated his victory with an uncharacteristic rant against Paul on the Senate floor.

“Nine years. Nine years of rejecting reasonable counter-offers and accommodations. Nine years of working to hold up these treaties and trying to sell the Obama administration, and the Trump administration, and his Senate colleagues an off-the-wall story that failed to persuade anybody,” McConnell said. “I’m a patient man, but my patience is not inexhaustible.”

North American Stainless CEO Cris Fuentes lavished praise on McConnell in a column in Kentucky’s largest newspaper, the Louisville Courier-Journal.

“This delay cost our company $15 million earlier this year and would have cost us another $35 million had Sen. Mitch McConnell not stepped in to fix it,” he said.

A public relations representative for North American Stainless declined to comment directly, referring questions to a news release published after the treaties cleared the Senate and to Fuentes’s column. Shannon Campagna, a Van Scoyoc Associates lobbyist for the company in the tax treaties effort, declined to comment.

The Last Word

Aides declined to say, or said they didn’t know, whether Mnuchin specifically asked McConnell to break Paul’s hold. Paul, however, accused Treasury officials of letting McConnell sabotage them.

“This process has been severely damaged and short-circuited by the Republican leader choosing to push this forward and destroy the negotiations that we were having at the time,” he said on the Senate floor.

The scars haven’t healed.

Paul in September held up a vote on Brian McGuire, a former McConnell aide, to serve as Treasury deputy undersecretary. The reason: Treasury, Paul said, had reneged on dealing with him on the treaties.

But again, McConnell had the last word: A few days later he brought the nomination to the floor anyway, and the Senate confirmed McGuire on an 88-6 vote.

—With assistance from Isabel Gottlieb.