OECD Proposes Changes to Global Tax Deal to Appease US (2)

The OECD has proposed a range of tweaks to the global minimum tax agreement in a bid to quell US concerns about how the regime affects American companies.

The 30-page draft proposal dated Aug. 13 attempts to follow through on a Group of Seven understanding that would ensure US companies aren’t subject to key enforcement measures of the minimum tax, also known as Pillar Two of the OECD-led tax deal that’s in force across the EU, the UK, Australia, Canada, Japan, Korea, and other countries, according to documents seen by Bloomberg Tax.

The document details how companies could be exempt from the global minimum tax agreement if their “profits are already subject to robust taxation.” Some of the fundamental features of the minimum tax agreement wouldn’t apply to those companies.

The draft document is educational, laying out in detail how the US taxes its multinational companies.

In the lead-up to discussions on the matter, US officials were adamant that the US has robustly taxed foreign-earned income for decades, and that countries at the OECD should negotiate a “side-by-side” agreement where the US tax system and the global minimum tax framework are completely separate.

The OECD declined to comment on the documents.

Explaining the US System

The OECD’s Working Party 11, a technical group of experts from across the globe, explained in the proposal how the US’s minimum tax on foreign-earned income, known as Net CFC Tested Income, works. This tax was formerly known as the global intangible low-taxed income regime, or GILTI, but its name and its effective rate were changed in Republicans’ massive tax bill enacted July 4.

The OECD plan also describes the way the US corporate alternative minimum tax, or CAMT, sets a 15% minimum tax rate for companies operating in the US that have a three-year average financial statement income of at least $1 billion.

The Working Party also said that US multinationals would see their effective tax rates on foreign income decline between 0.2 and 0.4 percentage points under the proposed side-by-side system, according to a preliminary economic analysis by the OECD.

It said that this “static scenario” analysis, based on 2019-20 data, is “subject to a range of caveats” and considers recent tax legislative changes in the US. Under a different “dynamic scenario” analysis, the effective tax rates of US multinationals could see a decline of 0.7 to 0.9 percentage points, according to the OECD.

Side-by-Side Eligibility

The document suggests three possible criteria for a country’s tax system to qualify as a side-by-side regime.

“A Side-by-Side system recognizes that a jurisdiction may already have a comprehensive taxation regime with respect to all its domestic and foreign income,” the document reads.

Where it’s determined that a country qualifies as an eligible side-by-side tax system, two out of three rules in the global minimum tax framework—the income inclusion rule and the undertaxed profits rule—won’t apply.

The income inclusion rule allows the parent country of a multinational company to collect tax from a subsidiary if its local jurisdiction is paying below a 15% rate.

The undertaxed profits rule—the key enforcement mechanism of the global minimum tax—allows any country applying the measure to collect tax from a multinational company if it isn’t paying at least 15% in both its parent country and the local jurisdiction.

A country could be considered to have an eligible side-by-side regime if companies are subject to tax on a “comprehensive measure of income at a rate that exceeds an agreed rate regardless of whether that income is derived from domestic or foreign sources.”

Second, a country should tax a parent company at an agreed rate on income that it receives from a controlled foreign corporation, or CFC, the document shows. In the US, a controlled foreign corporation is one in which a US company owns at least 50%.

The last change is that a qualifying tax regime provides a foreign tax credit or “equivalent relief” for a qualified domestic top-up tax.

Tax Credits and Simplified Calculations

Additional documents obtained by Bloomberg Tax show the OECD proposed changes to how tax credits are treated, a simplified reporting procedure for multinationals in jurisdictions with high effective tax rates—and therefore exempt from the minimum tax—and changes to the agreement to recognize other so-called eligible side-by-side regimes, the US’s regime in particular.

The sets of proposals are an attempt at implementing the compromise by the G7 countries in June to “fully exclude” US companies from provisions of the global minimum tax agreement meant to ensure companies pay at least 15% corporate tax in every jurisdiction.

Despite having signed onto the agreement in 2021, the US under President Donald Trump has criticized it for unfairly targeting American companies, and threatened to punish countries that applied the agreement’s provisions.

The OECD asked for comments on the proposals by Sept. 5, for discussion at a meeting later in the month.