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Experts Warn Against U.S. Involvement in Pillar Two of the Global Tax Deal
Currently, under “Pillar Two” of the global tax deal, many countries around the world are planning to implement a 15% minimum tax on large multinational corporations with global or total revenues over €750 million.
President Biden has indicated that the U.S. federal government will engage on Pillar Two with the Organization for Economic Co-operation and Development (OECD), the international forum working to coordinate acceptance of the global tax deal. The Biden administration’s stance has drawn stern criticism from certain tax experts.
According to an analysis by the Joint Committee on Taxation (JCT), the United States stands to lose over $120 billion in tax revenues under Pillar Two as negotiated by the Biden administration. The JCT analysis provides five alternative scenarios against a baseline assuming nearly 50 countries, including all European Union countries, have already enacted Pillar Two:
Scenario 1: The rest of world enacts Pillar Two in 2025, but the United States doesn’t.
Scenario 2: The rest of the world enacts Pillar Two in 2025 and the United States does as well.
Scenario 3: The rest of the world doesn’t enact Pillar Two and neither does the United States.
Scenario 4: The rest of world doesn’t enact Pillar Two.
Scenario 5: The United States enacts Pillar Two in 2025 (with and without implementation of the extraterritorial Undertaxed Profits Rule).
During a House Ways and Means Tax Subcommittee hearing in July, a panel of international tax lawyers and global experts weighed in further.
Tax Subcommittee Chairman Mike Kelly (R-PA) kicked off the proceedings by criticizing the Biden administration’s dealings with the OECD. “With active encouragement from the Biden Treasury Department, the OECD in its Pillar Two agreement failed to recognize our pioneering global minimum tax as a qualifying tax,” he said. “Instead, the agreement they came back with is so inconsistent with our tax laws that it would tilt the playing field in favor of foreign firms.”
Adam Michel, Director of Tax Policy Studies at the CATO Institute, told lawmakers that the OECD has proven it “no longer serves the interests of the United States” and has abandoned its founding mission to promote international economic growth. “Therefore, Congress should withdraw from and stop financially supporting the OECD and reform our domestic tax laws,” he said.
Moreover, Michel suggested Congress should lower the corporate tax to the OECD and Biden administration’s agreed-upon rate of 15% and make full expensing for all new U.S. investments permanent, including structures. He indicated the purpose of doing so would be to benefit American workers and undercut the OECD’s global tax deal by making the United States a more attractive place to do business. “Rather than adopting the OECD foreign tax rules, Congress should finish converting the U.S. corporate tax to a full territorial system that entirely disregards both foreign profits and foreign taxes,” said Michel.
Anne Gordon, Vice President for International Tax Policy at the National Foreign Trade Council, stated that it “is vital to the health” of U.S. enterprises and to their continuing ability to contribute to the U.S. economy that they be free from discriminatory foreign taxes, double taxation and other nontax barriers to the flow of capital that impede full participation in the international marketplace. “On balance, the work of the Inclusive Framework on Pillars One and Two fails to achieve this in several respects, and in too many instances specifically harms the competitiveness of American businesses,” she said.
David M. Schizer, Dean Emeritus of Columbia Law School, told committee members that taxes must be imposed by Congress, not the president. He went on to contend that the tax policy of the United States should be set by the United States, not other countries. “Unfortunately, in joining the Pillar Two agreement in October 2021, the Biden administration has strayed from both of these simple principles,” he said. “Proceeding without congressional approval, they have given other countries significant influence over our tax system.”
As the comments above demonstrate, perspectives on the U.S. government’s involvement in the global tax deal tend to fall sharply along a wide partisan divide. Work with the internatonal tax professionals at Sol Schwartz & Associates to keep tabs on how your tax situation could be affected by this developing story.