Treasury Eyes Guidance to Address US R&D, Global Tax Interaction

The US wants to change how its research and development credit is accounted for under the global minimum tax rules through OECD administrative guidance, following business concerns the incentive will cause companies to fall under the levy’s 15% threshold.

Scott Levine, acting deputy assistant secretary for international affairs at the Treasury Department, reiterated Tuesday that preserving the R&D credit—a major tax benefit for US companies—is a “top priority” for the Biden administration in OECD negotiations.

“I think we will ultimately try to get this fixed with administrative guidance, if possible. And if not, we’ll revert to plan B,” he said while speaking on a panel at the Tax Executives Institute Midyear Conference.

Following the panel’s conclusion, Levine told reporters that “plan B” referred to legislation that would address R&D credits and the global minimum tax rules.

The comments from Levine come amid concern from multinational companies that the R&D credit would lower their effective tax rate and subsequently subject them to a top-up tax under the global minimum levy. The 15% global minimum tax is part of a larger international tax deal agreed to by over 140 countries in 2021. The tax is designed to impose a 15% tax on multinational companies no matter where they operate.

The OECD released guidance in July detailing how the global minimum tax rules would mesh with the transferable green energy credits under President Joe Biden’s 2022 tax-and-climate law. At the time, countries involved in the global tax deal negotiations—known as the Inclusive Framework—agreed to treat these credits as largely refundable.

A refundable tax credit is similar to a grant and will be seen as an increase of income. This categorization under the global minimum tax rules is more favorable because it won’t have as large of an impact on a company’s effective tax rate. By contrast, the research and development credits aren’t refundable and would act as a reduction in tax expense.

However, Levine said that the solution to the problem must not undermine the overall effect of the global minimum tax.

Additional Guidance

In addition to working on the R&D credit issue, the Inclusive Framework is aiming to release three more tranches of administrative guidance on the global minimum tax, Levine said.

He said there “was hope” that the OECD would be able to publish a tranche of administrative guidance in April, but the Inclusive Framework may miss that date.

The next tranche of guidance is likely to address differences in generally accepted accounting principles and international financial reporting standards in common control transactions and the allocation of both current and deferred taxes.