Bloomberg Tax
Aug. 21, 2023, 8:45 AM

Critics of Biden’s Global Minimum Tax Deal Miss the Big Picture

Rebecca Kysar
Rebecca Kysar
Fordham University School of Law

The US Treasury Department recently won hard-fought victories in the global minimum tax multilateral negotiations, which US lawmakers and stakeholders should applaud. Instead, some of them are now attempting to use that win against Treasury negotiators.

Until recently, two of the Biden administration’s signature achievements sat uneasily together. The global minimum tax, agreed to by nearly 140 countries around the world, ensures that the world’s largest multinational corporations pay at least an effective 15% tax rate instead of shifting profits to tax havens.

Meanwhile, the tax provisions in the Inflation Reduction Act deploy hundreds of billions of dollars in incentives to accelerate the deployment of clean energy to combat climate change. This allows energy developers to sell credits they can’t use to buyers who can, thus making the incentives as robust as possible. But what if the clean energy incentives caused US companies that use the credits to fall below the 15% rate?

To protect against defection, the global minimum tax includes an enforcement rule that allows countries to impose taxes on foreign corporations operating within their borders that pay less than the 15% tax rate anywhere in the world. The worry was that, under this rule, other countries would impose taxes on US companies who purchased the credits to make up for any shortfall.

Treasury convinced the other participating countries that, because the transferability of the credits allowed them to be monetized, they’re like other credits that push cash into a company’s pockets, regardless of their tax liability. Such “refundable” credits don’t reduce a company’s tax liability under the global minimum tax rules, thereby insulating them almost entirely from the reach of the enforcement rule.

The new global minimum tax guidance secured by Treasury and issued by the OECD should bolster financing for clean energy projects in the US. Taxpayers who can’t use clean energy credits can sell them to other taxpayers, with the incentives largely preserved by the global minimum tax enforcement rule. One law firm partner called the guidance a “game-changer” for the market.

In another victory, Treasury secured a delay of certain aspects of the enforcement rule to 2026. This gives lawmakers time to address US implementation of the global minimum tax without other jurisdictions imposing the top-up tax on the US profits of US companies in the meantime.

Now, lawmakers have accused Treasury of giving up the store in failing to secure grandfathering of the US’s existing version of the minimum tax—the global intangible low-taxed income—even though it differs from the global minimum tax. Under the global minimum tax rules, US companies get credit for the taxes paid under GILTI, but this doesn’t obviate them of the need to meet the 15% test.

Commentators have argued that Treasury should go back to other countries and ask for GILTI grandfathering, leveraging Treasury’s other successes. This would mean that a US corporation escapes the global minimum tax regime even if the looseness of GILTI allows it to pay under a 15% effective tax rate in each jurisdiction.

It’s one thing to ask the international community to bless transferable credits, or to secure a temporary reprieve to increase chances of successful US implementation. It’s quite another to ask that GILTI be deemed compliant with the global regime when its structure would sabotage it.

In a particularly un-American feature, GILTI allows taxpayers to blend taxes paid in both high and low tax countries to get below the minimum rate. Thus, high taxes paid in Germany can offset low taxes paid in a tax haven, allowing GILTI liability to be skirted altogether and incentivizing companies to shift income anywhere but the US.

This is bad policy, which is why the Biden administration proposed to change it. It also goes against the global minimum tax deal’s goal, which is to level the playing field among countries and companies so that they compete on the basis of economic fundamentals, rather than on rock bottom tax rates.

Unlike GILTI’s blending structure, the global minimum tax is imposed on a country-by-country basis, meaning that corporate income paid in each jurisdiction must have an effective 15% tax rate. This removes incentives to shift profits to tax havens, since taxes paid in high-tax countries can’t offset the minimum tax liability in low-tax ones.

If GILTI were deemed compliant with the global minimum tax, US companies could still benefit from shifting profits to tax havens while meeting their obligations under the global minimum tax. No other country’s entities would be allowed to do so. This would mean that tax havens would still have an incentive to undercut other country’s tax rates, and the companies of other countries would have an incentive to invert here.

These competitive advantages would undermine the purposes of the global minimum tax, likely causing the regime to unravel and, ironically, leaving US companies in the uncompetitive position as the only ones paying a minimum tax on their foreign earnings. It also would mean less revenue for the US.

Soon, House Ways and Means Committee lawmakers will visit OECD headquarters in Paris. Although they’ll likely press to grandfather GILTI, the argument is a non-starter. Their firepower would be better spent addressing other important issues, such as the enforcement rule’s treatment of tax credits that incentivize research and development.

Treasury has kept its eye on the prize in winning guidance that better accommodates US interests. It hasn’t asked for concessions that would fundamentally undermine the goals of the minimum tax. Those criticizing Treasury right now fail to understand this distinction.

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

Author Information

Rebecca Kysar is a visiting professor at New York University School of Law and a professor at Fordham University School of Law. She served as counselor to the assistant secretary for tax policy in the Treasury Department from 2021 to 2022, and co-led the global tax negotiations for the US.

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