U.S. Risks Losing Billions in Taxes

The groundbreaking global corporate-tax agreement secured last year by Treasury Secretary Janet Yellen included a “failsafe” measure to encourage compliance by its 137 signatories.

That tripwire now looks to be tested by its biggest member economy: the United States.

Just as some negotiators feared, Congress has shown little appetite for enacting the 15 percent worldwide minimum tax. Democratic Senator Joe Manchin—a swing voter in the 50-50 chamber—said this month he’s not prepared to go ahead with a legislative package that contains the measure.

That now leaves the U.S. at risk of forgoing billions of dollars of tax revenue from its own corporations. Overseas authorities would be able to top up taxes for any American firms that end up paying less than 15 percent to the IRS on their earnings in that location. The bigger the take-up of the agreement abroad, the better the chances of eventual American enactment—even in face of concerted Republican opposition, observers say.

“It’s not fatal” if Congress fails to endorse the deal now, said Ruth Mason, a University of Virginia School of Law professor who specializes in cross-border tax issues. “Negotiators anticipated that there might be holdouts, and they built into the structure what I call ‘fiscal failsafe,’ which says if the home country doesn’t tax, then some other country is going to tax.”

Yellen herself has pointed to the dynamic, saying in a recent interview that “the money’s not going into U.S. coffers. It seems stupid. Effectively, we’re subject to it,” she said of the minimum tax, given how many U.S. firms would be paying it abroad. “But it’s a dumb way to be subject to it.”

How quickly that will happen isn’t immediately clear, with other key economies moving at different speeds.

The U.K. recently released draft rules to implement the deal. Japan’s Finance Minister Shunichi Suzuki said on July 19 that he’s aiming for “swift implementation” of the deal—likely in time for the wider 2024 implementation.

The European Union (EU), meantime, has been held up by Hungary, which opposes raising its taxes to meet the 15 percent minimum. The Czech Republic, which holds the rotating presidency of bloc through year-end, aims to get a formal agreement among the region’s finance chiefs in October, according to Czech Finance Minister Zbynek Stanjura.

The 15 percent minimum is one piece of a two-part global deal, brokered by the Organization for Economic Cooperation and Development (OECD), aimed at stopping “race-to-the-bottom” competition among countries trying to offer the lowest corporate tax rates.

Tactics by multinational firms to shift profits and tax liabilities can cost countries up to $240 billion annually, according to OECD estimates.

See also:

• Why We Are Considering a Corporate Minimum Tax
• Global Minimum Tax May Not Make It Past Congress
• How Much Would Corporate Taxes Rise Under a Global Minimum Tax?
• Corporate Concerns over Global Tax Deal

Known as Pillar Two, the minimum tax works primarily through a mechanism called the income inclusion rule—which allows the country where a company is headquartered to apply an extra levy if that firm isn’t paying a full 15 percent in another jurisdiction.

However, if the headquarters country doesn’t apply that rule, other countries can go in to grab that top-up revenue, under the so-called undertaxed profits rule. That gives countries an incentive to adopt the minimum tax, and ensures companies are facing the 15 percent rate in every jurisdiction.

“If the U.S. continues to not act, other jurisdictions will have an opportunity to claim revenue off the U.S. tax base,” said Daniel Bunn, executive vice president at the Tax Foundation, a right-leaning think tank.

On July 25, the congressional Joint Committee on Taxation released estimates that the U.S. would collect an additional $318.7 billion over the next 10 years by implementing the 15 percent global minimum tax and exercising the undertaxed-profit rule.

The other component of the global deal, known as Pillar One, seeks to tax a portion of the profits earned by multinational giants based on where they generate revenue, rather than where they’re domiciled. Details on that piece are still being hammered out, and the agreement potentially faces an even tougher route toward global adoption.

Both pillars are now expected to be in place by 2024, according to OECD estimates.

“Secretary Yellen and U.S. Treasury continue to be very supportive of other countries adopting the global minimum-tax regime, even in the face of U.S. congressional inaction,” said Manal Corwin at KPMG. That suggests “that adoption by other countries might motivate Congressional action,” she said.

—With assistance from Yuko Takeo, William Horobin, James Mayger & Christopher Condon.

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