Congress Frets Over Biden Plan To Subject American Companies to Global ‘Top-Up Tax’

GOP lawmakers say Biden’s plan has ‘no path forward’ in Congress and violates tax treaties as well as American sovereignty.

AP/Patrick Semansky, file
The U.S. Treasury Department building. AP/Patrick Semansky, file

Now that the Biden administration has successfully maneuvered through Congress a minimum corporate tax rate for American companies via last year’s Inflation Reduction Act, it wants to make sure those companies can’t escape that duty in other countries by signing on to an international tax treaty that would tax multinationals equally across the globe.

GOP lawmakers say such a plan has “no path forward” in Congress and violates tax treaties as well as American sovereignty. Yet the provisions set forth by the Organization for Economic Cooperation and Development are proceeding apace in dozens of nations, including in the EU, and Congress likely has no power to stop its taxing authority. 

“If enough countries adopt the rules, it doesn’t matter if everybody else adopts the rules,” the president and chief executive of the Tax Foundation, Daniel Bunn, told the Sun. “You don’t necessarily have to have the U.S. doing anything for these rules to affect a lot of U.S. companies.”

Initiated in 2013, the OECD had hoped the rules would be implemented by participating nations by 2024. However, conflicting guidance and heated domestic debate have slowed implementation in several countries, including the United Arab Emirates, Singapore, Ireland, and Switzerland, all of which are tax havens or offer incentives to attract foreign direct investment.

Earlier this month, the organization issued guidance to help create clarity. The complex web of rules contains multiple layers of enforcement to ensure that no companies making €750 million or more a year can escape the minimum tax burden by relocating elsewhere.

The first layer allows countries to impose a 15 percent minimum tax on large domestic companies that operate in their own or in another country. That is followed by a second layer that says if a domestic company’s profits earned in another country don’t reach a 15 percent taxable threshold, the company pays the difference anyway.

On top of that is the Undertaxed Payment Rule, a layer that gives countries the opportunity to collect taxes from a foreign parent company that has a subsidiary operating in the country if the parent company doesn’t pay 15 percent in its home country.

Mr. Bunn said that last rule enables countries to offer incentives that keep their tax rate below 15 percent because they can still collect the money from elsewhere. 

The Undertaxed Payment Rule is “essentially the vacuum cleaner that says, ‘Okay, well we’re paying attention to this thing and then we’re going to suck up all the low-tax profits around the world if those profits aren’t already being taxed at 15 percent,’” he said.

Proponents say the global rules reduce the attempt to shift profits abroad or erode a country’s tax base by allowing the taxing authority to reach into corporate pockets from anywhere in the world.  

As a result, the program executive for economic and ecological justice at the World Council of Churches, Athena Peralta, said tax incentives would no longer drive the “race to the bottom” among developing countries trying to attract corporate investment. 

“High taxes would not necessarily be a stumbling block or the main consideration for foreign investors,” the Philippine-born Ms. Peralta told the Sun.

Support for the global rate is cast as a reset for developing nations, particularly after the Covid pandemic, when these nations spent 30 percent of GDP on relief efforts compared to developed nations’ average of about 6 percent. 

Several organizations, though, say the 15 percent rate is too low. They support a 25 percent global rate, implemented by the United Nations.

“This is a proposal that still in some ways will benefit wealthy countries. We will have a more equitable global corporate tax regime if this is within the United Nations,” Ms. Peralta said. 

The minimum tax rules offer several carve-outs that could undermine conformity. For one, it allows for exclusions for government entities, charities, pension funds, real estate, and other investment funds. It also allows deductions for real property and salaries. 

Yet another exception allows China to exclude companies that are just starting to expand internationally, a rule that has Republican lawmakers in Congress steaming. 

“The OECD global tax deal reflects a tenuous political negotiation that relies heavily on U.S. concessions and allows China to gain a competitive edge in the global economy,” Representative Jason Smith of Missouri, the chairman of the House Ways and Means Committee, wrote to the OECD secretary-general, Mathias Cornman. 

Approval in America, regardless of whether necessary, is unlikely. Congress already created a minimum 15 percent tax rule on billion-dollar American firms last year when it approved the Inflation Reduction Act that Mr. Biden promoted. The American tax structure was designed very differently from the international rules that the Biden administration is supporting globally.

“It’s not clear to me that the one hand was aware of what the other hand was doing,” Mr. Bunn said, adding that the push for a global minimum has created “a lot of concern in Congress that their authority on tax rules has been subverted.” 

“It has frustrated members of Congress on both sides of the aisle,” he said.

The New York Sun

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