US Following Pillar Two Would Undermine Congress’ Rightful Power

The US should defeat the global minimum tax framework known as Pillar Two, because accepting the Organization for Economic Cooperation and Development’s global tax code would transfer Congress’ power over taxation to other countries.

A legacy clause, as the OECD has outlined, would give foreign powers control over US tax law. If the global minimum tax framework changes and Congress refuses to comply, or Congress otherwise lowers taxes, other countries would then tax US companies on US earnings.

As Secretary Scott Bessent testified at his confirmation hearing and at the Ways and Means Committee, Pillar Two is first and foremost about national sovereignty.

Right to Sovereignty

The global minimum tax imposes a minimum 15% rate in each country on corporate book income as defined by OECD-led “working parties” of global and national bureaucrats. Not one of the many OECD model rules, commentary, and guidance has the signature of even a single elected official.

President Donald Trump’s September visit to the UK sparked a congressional letter expressing concerns over digital services taxes in the UK and other countries that mostly affect US companies and that have drawn bipartisan criticism. But Pillar Two raises a more basic and important issue about sovereignty.

Progressive refundable tax credits are favored under Pillar Two, while most US tax credits, such as the non-refundable R&D credit, aren’t. As a result, US companies can have a global minimum tax rate under 15% even though the US corporate rate is 21%.

Countries have a right to tax economic activity within their borders and their own residents but not to dictate the tax law of other countries. But starting in 2026, some countries will tax the US earnings of US companies on the grounds that Congress won’t raise taxes.

In 2021, then-Treasury Secretary Janet Yellen argued countries should exercise “sovereign rights together” to create a “level playing field” and prevent a “race to the bottom” over low corporate tax rates to attract foreign investment. But the global tax framework allows countries to compete over foreign investment through refundable tax credits and non-tax subsidies.

Prohibiting low tax rates in favor of corporate welfare is terrible policy. An important feature of the Tax Cuts and Jobs Act was broadening the tax base while lowering rates, an objective also conceptually supported by former President Barack Obama, whose fiscal commission concluded this was key to “improving fairness, reducing the tax gap, and spurring economic growth.”

The initial version of the GOP tax package, passed by the House in May, included a new tax code Section 899 imposing retaliatory measures against countries levying the global minimum tax. To avert this, the G-7 agreed to exempt US companies under a “side-by-side” system.

Although the G-7 agreement lacks details and involves only a few countries, Congress dropped Section 899 from the legislation. OECD’s Working Party 11 circulated a draft to flesh out the agreement that would exempt countries with sufficiently “robust taxation.”

Legacy System

To obtain US support, the OECD appears willing to improve the treatment of US tax credits and to legacy the current US system. But a deal conditioned on the OECD and other countries judging whether the US maintains “robust taxation” forfeits the underlying principle that only Congress can make US tax law.

Trump’s Jan. 20 executive order correctly declares that the global minimum tax has “no force or effect within the United States absent an act by the Congress adopting the relevant provisions.” But that isn’t stopping other countries.

Superficially, a legacy deal wouldn’t require changing US tax law or any action by Congress. Neither would acquiescing to, or even encouraging, foreign countries imposing the tax framework unilaterally. Indeed, this was the very conduct by Yellen that the order seeks to redress.

Preserving the US Constitution requires fighting countries that aim to seize Congress’ power to tax, unless we enact a Constitutional amendment approving such a revolutionary change to our governmental system. The Constitution doesn’t condition Congress’ power to tax on foreign powers considering such taxation to be sufficiently robust.

Some may argue that the Treasury Department should concede the sovereignty principle because countries otherwise will move ahead with the current framework. But countries will fear doing so if the US firmly says no, as evidenced by the reaction to Section 899—just as our trading partners don’t usually attempt to seize assets of US companies on the high seas. Trump’s successful campaign to convince countries to back off a United Nations global shipping carbon tax last week is also instructive.

Some countries appear reluctant to accept even a legacy clause of the current US rules as OECD outlined. For example, Germany’s prime minister suggested scuttling the project, earning a rebuke from his finance minister. But a side-by-side system exempting US companies regardless of whether Congress lowers taxes would go much further and upend the entire OECD project.

Key Takeaways

The US shouldn’t try to save any version of the global minimum tax. Pillar Two proponents argue it would bring certainty. But the opposite is more probable, as taxes would likely increase and expand from corporations to individuals as the OECD has stated.

Meanwhile, countries would continuously fight over the newly created “right” to tax foreign companies on profits earned in other countries. For example, Pakistan would have the right to tax Indian profits of American companies if India’s taxes were too low, and the reverse.

Making concessions would only encourage more bad behavior. A US president could use Pillar Two to override congressional refusal to increase taxes generally, as Biden tried to do, or repeal a specific tax credit.

Getting rid of the portions of the global minimum tax that violate national sovereignty would give countries incentive to drop associated domestic tax increases on US companies costing America $122 billion in lost revenue from tax credits.

Countries have a right to increase taxes on the foreign earnings of US companies, but the US shouldn’t facilitate this. Instead, we should encourage economic growth through competition over low tax rates instead of corporate welfare.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Aharon Friedman is special counsel at Sullivan & Cromwell who previously was senior tax counsel to the Committee on Ways and Means and senior adviser for tax policy at the Treasury Department.

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