Global tax negotiators want to secure US participation in the global minimum tax deal known as Pillar Two, and as new guidance from the OECD shows, they’re willing to make concessions to get there.
Unfortunately, even with the concessions made so far by the Organization for Economic Cooperation and Development, the agreement still isn’t a winner for the US. Its effects on the federal government’s tax collection abilities are mixed at best, and it’s mostly negative for American individuals and American pension plans that invest in US companies. The Treasury Department, which is negotiating the deal abroad, should push for more.
Analysis by the Joint Committee on Taxation shows that the deal’s most immediate effect—if all countries follow through—is to reduce US tax revenue by $56.5 billion, even if the US complies. This is largely because the US will have to offer higher credits for foreign taxes paid.
Corporations may bring income back home to the US and mitigate some of these losses, but it’s far from certain that the Treasury will gain revenue. Furthermore, the agreement’s requirements will constrain the US from writing its own domestic policy—domestic tax incentives may be canceled out by foreign penalties.
From the perspective of American companies or shareholders, it’s mostly a downside. The deal will help, or even require, foreign countries to raise their taxes on large multinational corporations, many of which are American and held by American individuals or American retirement plans. Compliance with yet another system of taxes also will absorb the time and effort of intelligent accountants and lawyers whose time could be spent on more productive endeavors.
In a hearing last week, members of the House Ways and Means Tax Subcommittee grilled a Treasury official on the deal. If this deal is at best a mixed bag for the federal government and a loss for taxpayers, one might question why it’s worth participating.
The best argument for doing so is that much of Pillar Two can happen regardless of whether the US chooses to participate. A critical mass of countries is already involved, and they have the right to raise their own taxes. This will necessarily incur some losses for the Treasury and US taxpayers.
However, the US can choose to fight the deal’s controversial enforcement mechanisms, or at least take a harder negotiating posture, to achieve key concessions. As Treasury noted in the hearing, it has secured some wins. The new OECD guidance released July 17 included two key points seemingly aimed at US domestic politics.
First, the guidance delays a thorny enforcement mechanism until after 2026 for jurisdictions where the tax rate is at least 20%. The US has a corporate rate of 21%. Furthermore, the US is widely expected to address tax policy in some fashion in 2025 or 2026 as large portions of its individual income tax code expire. The OECD provision buys the US time until its next major tax legislation.
Second, certain transferable tax credits, such as those from the Biden administration’s Inflation Reduction Act, received favorable guidance that makes them less likely to trigger penalties. These concessions demonstrate that the US has a substantial ability to shape terms and secure a better outcome for the federal government and taxpayers than the meager outcome the deal currently offers.
Our negotiators should ask for more. US research and development provisions are too likely to be penalized under the deal—that should change. And the US international tax system should be ruled valid for Pillar Two purposes. Our current rules are close enough to Pillar Two requirements and will be even closer after US tax rates on foreign income rise after 2025.
More broadly, the US needs to secure protections for American companies against discriminatory regimes by foreign governments. The US has the lion’s share of the world’s great multinational enterprises. Where possible, their money should return home to US savers or to the Treasury rather than ending up in the grasp of foreign tax collectors.
Foreign tax collectors are already likely to win revenue from Pillar Two. The US government should continue to negotiate more on the interests of it and its citizens.
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
Alan Cole is a senior economist at the Tax Foundation, a Washington, D.C.-based nonprofit tax research organization. His areas of focus include business taxes, cross-border taxes, and macroeconomics.
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