Countries Rework Minimum Tax to Appease US as Concerns Mount

Negotiators at the OECD are racing to rewrite large parts of the global minimum tax framework by year-end to placate the US, a goal that appears elusive as dozens of countries raise concerns about being put at a competitive disadvantage.

The US Treasury Department gave negotiating partners until Dec. 31 to agree on a plan that would exempt US companies from two of the three main global minimum tax rules, to fulfill an understanding the US reached with its fellow Group of Seven nations. But roadblocks to forging an agreement in just four months—on which over 140 countries must sign off—are numerous.

Comments on the US demands, seen in confidential documents previously obtained by Bloomberg Tax, laid bare the concerns of countries including China, India, and Brazil. They said exempting US companies from the global framework would be unfair and impinge on their sovereign right to tax corporations doing business on their shores.

“Agreement on this timetable seems unlikely without broadening the negotiating table and giving large emerging economies other things they want,” said Itai Grinberg, former deputy assistant secretary for international tax affairs at Treasury in the Biden administration and a professor at Georgetown University Law School.

“Another possibility is that a deal is reached outside the OECD’s Inclusive Framework,” Grinberg said, referring to representatives of countries involved in the global tax deal negotiations.

Without a deal, countries and foreign-owned businesses run the risk of congressional Republicans resurrecting the “revenge tax”, also known as proposed Section 899—a retaliatory measure against the OECD’s minimum tax that prompted a lobbying frenzy earlier this year.

Rep. Ron Estes (R-Kansas), a member of the tax-writing House Ways and Means Committee, said that while he expects positive news from negotiations at the OECD, he and his colleagues are operating under the posture of “trust but verify.”

“As it survived the procedural rules in the Senate, I have no doubt that Section 899 is a viable path forward should other countries attempt to steal our tax base,” Estes said.

US About-Face

Abdul Chowdhary, senior program officer at the South Centre, said the “general tone” of the US-G7 so-called side-by-side plan presumes that negotiators are already willing to accept a carve-out for American companies.

Any changes to the system increase the cost of applying the minimum levy’s rules and reduce the revenue countries are able to collect, he said.

“This can further reduce its appeal to developing countries thinking of implementing it, while also making those already implementing it begin to think twice about whether they made the right choice.”

Countries are frustrated by the US’s 180-degree turn away from a global minimum tax framework that it had a heavy hand in negotiating.

“The US had sort of been leading the charge on this project,” said Michael Plowgian, a tax principal at KPMG and former top US delegate to the OECD. “And then obviously, with the elections, people knew that things were going in a different direction.”

“But you can’t blame other countries for having whiplash. It takes people time to process that,” Plowgian said. “So it’s going to be a challenge.”

The Indian delegation wrote in the confidential document dated Aug. 14 that “India supports greater flexibility to address the concerns of all jurisdictions, and accordingly suggests that concerns of jurisdictions other than United States may also be considered in this exercise, and accommodated in its outcomes.”

G20 Communique

The global minimum tax—Pillar Two of the OECD-led tax pact—seeks to impose a 15% minimum levy on multinational companies in every country where they operate.

The “side-by-side” system would exempt US companies from Pillar Two’s income inclusion rule and undertaxed profits rule.

But an OECD communique to the Group of 20 finance ministers didn’t mention US exemption from these rules—the crux of US demands.

The income inclusion rule allows the parent country of a multinational company to collect tax from a subsidiary if its local jurisdiction is charging below a 15% rate.

The undertaxed profits rule—the key enforcement mechanism of the global minimum tax—allows any country applying the measure to collect tax from a multinational if it isn’t paying at least 15% in both its parent country and the local jurisdiction.

The omission in the communique is “a pretty good indication that at least some countries had some qualms about some big picture issues,” Plowgian said.

Brazil, in its confidential comments to the OECD Secretariat, bristled at exempting US companies from these rules.

“Carving out only US-parented groups or US companies from the scope of the IIR and UTPR would present significant implementation challenges in jurisdictions such as Brazil, where legal frameworks are founded on principles of fairness and isonomy. Such an approach would, therefore, be both legally and politically unfeasible,” the Brazilian delegation wrote.

Political Squabbles

Internal dynamics in the EU may pose a hurdle for negotiators to get to “yes” on a side-by-side solution.

Daniel Bunn, CEO of the Tax Foundation, said there’s “scar tissue” among EU jurisdictions that felt forced into agreeing to and applying the EU’s global minimum tax directive.

“It’s not necessarily in the US’s interest to have to solve all that in the process of trying to get the side-by-side,” Bunn said.

In the EU, a directive is binding and must be agreed to by all 27 countries to enter into force. It also needs the support of all 27 to undo or change a directive.

Still, Plowgian said he believes that the OECD Inclusive Framework will come to an agreement by year’s end.

“I think because of the pressure on countries to get to a deal, and because this is a system that already exists, having this uncertainty out there about how the rules apply isn’t good for anybody. And so I think countries are going to want to put this to bed.”