US’ Global Minimum Tax Carveout Is an Illusion of Sovereignty

Supporters of the OECD’s new Pillar Two “side-by-side” agreement—which carves the US out of the global minimum tax—claim the deal protects US tax sovereignty and preserves Congress’ authority over domestic tax law.

Treasury Secretary Scott Bessent called the agreement a victory for US sovereignty, saying it will shield domestic companies from extraterritorial taxation.

That claim deserves closer scrutiny. If the agreement works as intended, it doesn’t preserve congressional sovereignty over domestic tax laws; it constrains it.

The agreement’s statutory and effective tax rate safe harbors lock in current tax rules, binding future Congresses to a narrow range of acceptable tax policies—unless they’re willing to expose US firms to the Organization for Economic Cooperation and Development’s extraterritorial undertaxed profits rule, or UTPR.

The US hasn’t formally adopted Pillar Two, but the side-by-side agreement quietly imports its legislative straitjacket through the back door.

Constraint, Not Sovereignty

The side-by-side agreement is best understood as a salvage operation. Pillar Two, which the Biden administration agreed to in principle in 2021, was designed to impose a coordinated 15% worldwide minimum tax through a complex web of top-up rules across the globe.

From the start, Pillar Two suffered from overly complex design, uneven implementation, and strongly diverging national interests. Despite steady support from the Biden administration, Congress remained deeply skeptical of the deal and rejected the model rules while under Democratic and Republican control.

The side-by-side agreement acknowledges the Trump administration’s opposition to the OECD rules and recognizes that the US already has an international tax system that, in practice, can be more restrictive than Pillar Two, resulting in higher effective tax rates.

Under the side-by-side agreement, US-parented multinational groups are exempt from Pillar Two’s income inclusion rule and UTPR. This exemption applies as long as the US maintains a tax system that the OECD’s Inclusive Framework judges to pose “no material risk” that US businesses’ domestic effective tax rate will fall below the 15% floor.

Additional requirements include a statutory corporate tax rate of at least 20%, a worldwide minimum tax, and special recognition of other countries’ OECD-mandated minimum taxes.

Formally, Congress remains free to change US tax law. Practically, future reforms are now conditioned on the permission of 147 foreign jurisdictions in the Inclusive Framework.

A future Congress risks triggering foreign top-up taxes on US earnings if it lowers the corporate tax rate, narrows the tax base, repeals a minimum tax, adds new nonrefundable tax credits, or chooses to overhaul the business tax system as former House Speaker Paul Ryan and former Ways and Means Committee Chairman Kevin Brady proposed in 2016.

That is why repeated assurances that the deal respects domestic law or congressional intent miss the point.

Tax sovereignty isn’t merely the protection of existing laws from foreign interference. It’s the ability to legislate in the future without external vetoes by countries such as China, Russia, France, Portugal, and Mexico.

By tying the tax treatment of US companies’ domestic operations to OECD-defined safe harbors, the side-by-side system conditions Congress’ freedom of action on foreign approval. That is a meaningful limit on tax sovereignty.

Ossification or Unraveling

Looking ahead, the side-by-side deal points toward two plausible futures.

The first is ossification. If the agreement builds greater international tax stability and survives through the 2029 “evidence-based objective” review, the safe harbors could harden into durable limits on congressional tax reforms.

The US would retain nominal control over its tax code while losing practical freedom to pursue reforms to attract international investment, such as rate cuts or minimum tax reforms, without international consultation.

Still worse, the agreement keeps the Pillar Two system alive long enough for a future US government to wholesale import the OECD-designed system. If the outcome is international tax stability, Pillar Two succeeds through gradual entrenchment rather than formal adoption.

The second, and more likely, outcome is unraveling and continued instability. The side-by-side system could mark the beginning of the end for Pillar Two.

Without direct US participation and a new precedent for carveouts, the OECD framework will become increasingly EU-centric as other countries seek their own ways to retreat from the complicated and ineffective system. EU firms will shoulder the full administrative burden of the OECD framework, with little additional revenue to show for it.

As other countries look to design Pillar Two-compliant side-by-side systems, abandon domestic top-up taxes, and compete for global corporate investment through new incentives, the project could fragment due to its own complexity. In this scenario, the side-by-side deal accelerates the end of global minimum tax harmonization instead of entrenching and stabilizing it.

Silver Lining

The side-by-side agreement is a bad deal for the US because it creates a world in which Congress’ tax-writing authority is implicitly conditioned on foreign approval. That risk alone undermines claims that the agreement respects US sovereignty.

Still, it’s better than the most obvious alternative. Full US acquiescence to Pillar Two would have more explicitly transferred taxing authority and the US tax base to an unaccountable international process.

If the side-by-side system ultimately accelerates Pillar Two’s collapse, it may prove to be a useful transitional step away from a project that should never have started. But that is a contingent defense, and such an unstable, complex system may have unraveled more quickly in the absence of a side-by-side agreement.

A deal that preserves sovereignty only if it fails isn’t a strong endorsement. Congress should be clear-eyed about what the side-by-side agreement does. It trades immediate relief from extraterritorial taxation for the risk of a longer-term constraint on domestic tax policymaking.

The agreement can’t simultaneously preserve sovereignty and deliver stability. It either constrains domestic policymaking or hastens the end of the Pillar Two project.

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

Adam N. Michel is director of tax policy studies at the Cato Institute.

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