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Biden tax proposals fall short of OECD standards for minimum rate

The US played a key role in encouraging 136 countries to join a global tax deal filed by the OECD in October and hailed as the most significant tax reform in more than a century.

But in recent days it has become clear that the way Washington plans to apply one of the two parts of the proposals — a minimum corporate tax rate of 15 percent — is at odds with how the agreement is likely to work elsewhere.

In the stripped-down version of Joe Biden’s tax plans featured in the Inflation Reduction Act, the White House’s key economic legislation that narrowly passed the Senate last week and is expected to pass in the House this week, key elements are of the deal inked in Paris.

That has raised concerns that multinationals will face a web of complexity that will leave them struggling to comply with a set of rules to ensure they pay a fairer amount of tax. “Companies all want this alignment that they’ve been working on, but now it’s not what they thought it would be,” said Kate Barton, global vice chair of tax at accounting firm EY. “Are all countries just going to do their own thing now?”

Where does the Inflation Reduction Act fall short?

The global minimum tax rules, as set by the OECD, require multinational companies with an annual turnover of more than €750 million to pay additional tax up to an effective rate of 15 percent in each country in which they operate.

Known in tax circles as “Pillar Two,” this part of the deal aims to “end what has been a decades-long race to the bottom in corporate tax,” as U.S. Treasury Secretary Janet Yellen put it. when the deal was signed.

To bring the US into line with the second pillar, the Biden administration originally proposed reforms to the US’s global intangible low-tax income – or Gilti – regime. Under Gilti, an additional tax of approximately 10.5 percent is currently levied on the profits of subsidiaries of US companies in low-tax jurisdictions.

Gilti was introduced in the US in 2017 to prevent US companies from shifting profits abroad, and Biden’s original proposal was to raise the Gilti rate to 15 percent to bring the US into line with the OECD agreement.

However, these proposals failed to gain Senate approval, with Joe Manchin, the West Virginian Democrat crucial to the passing of the bill, asking for their removal.

Instead, a 15 percent corporate tax minimum will only apply to the “book income” — the amount reported in financial accounts — of companies with revenues over $1 billion. It will also only apply at the group level, rather than on a country-by-country basis — which falls short of the deal’s goal of eliminating the practice of setting up subsidiaries in tax havens.

It is “questionable” that what is in the law will be deemed to comply with the global minimum tax, said Ross Robertson, international tax partner at accounting firm BDO.

“Ultimately, the complexity for global companies could increase in applying the rules once in place – or worse, it could increase the risk of double taxation,” Robertson added.

How are other signatories likely to react?

Peter Barnes, a tax specialist at Washington law firm Caplin & Drysdale, called Congressional change to Biden’s tax proposals “disappointing” but “certainly not fatal” to the deal.

One reason why is that if the US implements the 15 percent minimum rate in the form outlined in the law and not in the deal, other tax authorities could potentially reap more revenue from US companies for themselves. That’s because the deal includes a complex mechanism that allows other countries to effectively levy a tax of up to 15 percent on the income of a subsidiary based there if – as is the case in the US – the parent company’s home country does not. impose a top-up tax.

“The[4.5 percentage point]the difference between the Gilti rate of 10.5 percent and 15 percent will be absorbed by other jurisdictions,” explains Reuven Avi-Yonah, a law professor at the University of Michigan.

Pascal Saint-Amans, director of tax administration at the OECD, said: “If you think seriously about [the design of] Pillar two you realize that it will happen anyway.”

Barnes agrees and believes that US multinationals could eventually push Congress to adopt Pillar Two in a form closer to the one agreed upon by the OECD.

However, progress in implementing the global minimum tax has slowed across the board with all countries not yet passing legislation despite initially agreeing to do so by the end of 2022.

What is causing the delays elsewhere?

The EU issued a draft directive in December to implement Pillar Two, but political divisions have failed to gain unanimous approval from member states. Hungary, a Member State often at odds with Brussels, is currently blocking progress.

The remaining 26 European countries may be able to implement Pillar Two without Hungary, however by enshrining it in their own national legislation.

“There remains significant political will in Europe to move forward,” Robertson said, adding that he expected most of Europe to adopt the second pillar from January 2024.

Once the EU moves forward, other countries are likely to follow suit to avoid missing out on the additional taxes.

The other part of the deal, Pillar One, which aims to make the world’s largest multinationals pay more taxes in the countries where they sell, is even further behind schedule.

While the delays and setbacks have proved frustrating to those desperate for companies to pay their fair share, practitioners stress how fundamental a deal reform is.

“We basically need to design an entirely new global tax base,” said Heydon Wardell-Burrus, a researcher at the Oxford Center for Business Taxation.

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