Making Sense of the Global Tax Carve-Out for US Companies

The OECD just published the parameters of a deal that would exempt US companies from two key enforcement rules in the global minimum tax framework.

The deal, which spans 88 pages in the form of administrative guidance, includes a slew of safe harbor rules that address everything from how US companies can get the exemption to more advantageous treatment of substance-based tax incentives like the US R&D credit. It includes a permanent, simplified global minimum tax calculation.

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Other countries would be able to get carve-outs like the ones obtained by the US and its multinational companies—if they meet certain criteria.

This week on Talking Tax, reporters Lauren Vella and Somesh Jha discuss why the deal and the timing of its release is important, what it means for multinational businesses, how key US lawmakers reacted, and what the deal means for the efficacy of the global minimum tax going forward.

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This transcript was produced by Bloomberg Law Automation.

Host (David Schultz):

From Washington, I’m David Schultz, and this is Talking Tax.

Back in September, we told you about a game of brinksmanship that was playing out on the global tax stage. The U.S. wanted its own global tax system to sit alongside the OECD’s global minimum tax.

Since then, there’s been a race against the clock to acquiesce to US demands before key, temporary exemptions that insulated US multinationals from the global minimum tax were set to expire at the end of 2025.

But getting to “yes” wasn’t easy. Several countries held out until the last moments of 2025 to extract their own concessions from this deal.

And finally, this week, the OECD announced it has an agreement to exempt U.S. companies from parts of the global minimum tax moving forward. Here to discuss that hot-off-the-presses agreement are Bloomberg tax reporters Lauren Vella and Somesh Jha. Lauren starts us off.

Lauren Vella:

The document that came out on Monday was crucial. The U.S. had set a deadline, basically, to acquiesce to their demands to separate the U.S. tax system and U.S. multinational companies from the global minimum tax framework. I would call what came out on Monday relatively high-level. I think there are a lot of unanswered questions and, potentially, some additional administrative guidance that needs to come out, but, basically, we had been waiting and waiting and waiting all last week, checking our emails constantly, and it just wasn’t showing up, and then, finally, everybody breathed a sigh of relief.

And I think that was because there were several holdouts that wanted to extract their last demands before everybody got on board and said, OK, we can move forward with this package.

Host:

So I want to get to the initial reaction to this in a second, but, first, Lauren, I want to give you a little bit of credit for being very prescient. We spoke about this last in late September, and, at that point, I asked you if you thought this would come down to the wire, if this would really be ... We’d be checking our emails, as you mentioned, on December 31st, and, at the time, you said 110% yes, and so you were exactly right on the timing. So give yourself a pat on the back there.

Lauren Vella:

I think that government officials want as much time as possible to get what they want for their constituency and to get what they want for their administrations and for their own countries, and I think we saw that play out.

Host:

Okay, so, Somesh, let’s turn to you. What has the reaction been in just the initial day or two after this has come out? How are people perceiving this?

Somesh Jha:

When the document came out yesterday, it was more than 80 pages of technical stuff out there in the document, so a lot of people are still churning out the details of it. But what we know initially from talking to a few tax practitioners and seeing some of the commentaries out there is that there is a sigh of relief in this, that this has come through, because there were holdouts and there was an expectation that this could all crumble and fall apart.

So multinational companies from both sides of the Atlantic were nervously waiting for it. For instance, as Lauren explained, from the U.S. side, this is very important because this was a key demand for them, but what was happening when the Trump administration came to power is that they immediately started voicing out their opposition to the deal and threatened retaliatory taxes against countries which press ahead with the global minimum tax.

Host:

Those are the revenge taxes or the so-called Section 899, which really scared a lot of people overseas, and we’re going to get to that in a little bit.

Somesh Jha:

Exactly. The biggest commentary we’re seeing is that there’s a sigh of relief, but on the other hand, there are a few nuances within the deal which basically do not give a lot of confidence to tax practitioners who advise multinational companies that this is in any form a simplified global tax system that they wanted to have in place. It would definitely add to a lot of layers of complexities, but that is what we’re seeing as an initial reaction.

Host:

Lauren, how are people reacting here in the States?

Lauren Vella:

I would say, from a U.S. perspective, there are many industry groups who cheered the announcement. I think, as Somesh had alluded to, there are people who are still working out the particularities. I mean, we’re a little over 24 hours since the package has been released, and I think people are still trying to figure out how it’s going to interact with the model rules, which are the original blueprint for the global minimum tax.

Host:

But I want to now move to Capitol Hill and see what things are going. And again, as you mentioned, it’s only been 24 hours, but I wonder if Republicans in Congress are feeling pretty good about this, and more importantly, if this means that the revenge tax, the retaliatory taxes that you and Somesh have just been talking about, are those off the table now? Is that dead?

Lauren Vella:

For now. So I want to point the audience to two statements that were made by top tax-writing lawmakers in that House and in the Senate yesterday. So Senate Finance Committee Chair Mike Crapo and Ways and Means Chair Jason Smith released a joint statement yesterday saying that this was a vital step in the right direction for the U.S.'s tax sovereignty. This was something that they’ve harped on for a really long time, that the global minimum tax really impinges on U.S. tax sovereignty.

However, they made it very clear towards the end of their statement that they will be watching very closely how this is implemented and whether countries will take the time to slow walk implementation.

The other statement that I’d like to point folks to is from Ron Estes. Both he and Jason Smith were the original architects of Section 899 that wound up in some version of the 2025 GOP tax and spending bill. He also said the same thing, basically. This is a vital step towards tax sovereignty. We’re protecting American businesses and American jobs, but I will operate on the MO of trust but verify that this is going to be applied in a timely manner.

And so they always, to answer your question, David, they’re always going to have 899 in their back pocket. Whether or not it will go anywhere, if it’s reintroduced, is a completely different question, but we’ll cross that bridge when we get to it.

Host:

Okay. I want to now talk about what this will mean for multinational companies across the world. And let’s go back to you, Somesh. So there’s going to be a situation where there’s a 15% minimum tax. All multinationals have to pay at least 15% of their profits in tax. That’s a vast oversimplification, but that seems like the system that we’re under, except for companies based in the United States. I have to imagine that could encourage a lot of companies not based in the United States to move to the United States. Is that something that we could potentially see happen, Somesh?

Somesh Jha:

The way the global minimum tax system was envisaged to work was that every country, as you rightly mentioned, would have to pay a minimum 15% effective tax rate. There’s a clear wording, which is the tax rate should be an effective tax rate. So yes, in a way, the effective tax rate in the US could vary versus all the other jurisdictions. But it’s not as if it’s a silver bullet, which multinationals from anywhere across the world would want to comply with. It’s also a very tough regime to comply with. So I don’t think there would be a big shift that will happen as a result of this. But I would also like to hear what Lauren has to think about this, because this is what my understanding is.

Lauren Vella:

Somesh hit the nail on the head. The only thing that I would add is if a foreign parented company decides that they’re going to redomicile in the US, it is very hard then to extricate yourself from the United States, their exit taxes. Once you’re firmly planted here, it’s very hard to get out.

Host:

So we’ve talked about the reaction to this. It seems like a lot of people are, if not necessarily happy about this, very relieved that this deal was made. I’m wondering who the losers are, who is unhappy and who could really stand to get hurt by this. Let’s start with Lauren and then we’ll go to Somesh.

Lauren Vella:

I won’t say definitively that there are complete winners and complete losers. I think that is a very binary way to look at this and I would like to look at it more on a sliding scale or a spectrum. And Somesh can talk to this more, but one of the obvious losers I think are European businesses because there has been a lot of talk about how if the US gets what it wants in the side-by-side system, that this will just become, the global minimum tax will become a European tax on European companies. And I think the pressure is on now for the EU to figure out simplification methods to ease the compliance burden for their companies.

The only other thing I would say is that the US companies didn’t get everything that they wanted. And so a lot of companies were pushing for this side-by-side system to apply retroactively so they would have wanted to not have to file their global minimum tax returns for the 2024 and 2025 tax years. That’s not happening. But overall, I think the US and US multinational companies won big in this. But I’d love to also hear what Somesh has to add.

Somesh Jha:

I think the winner clearly is the Trump administration because they really got the deal in the way, if not the perfect way, but in the way that they had envisaged it to be. And they got their demands met. The losers would be, to me, most multinationals, or not most, but a lot of multinational companies. And reason why is that if you look at the first point of the package, it says it introduces a series of simplification measures for multinational companies, which nobody’s buying into for now. Nobody’s saying it’s the most simplest system in the world or it really eases compliance burden for us. This is a common commentary, which at least for now in the initial reactions, I’ve observed that this is not an easy route still. And they will be nervously waiting for a lot of things to fall into place.

For instance, a lot of countries still have to implement the package into their domestic laws. And then at the end of, I think in 2029, OECD will do a stockpile measure, which means a stock-taking measure of how these measures are unfolding. And there could be a chance that OECD takes a very different view then. And it only means an added layer of uncertainty for multinationals that this is not the end of the road. This is a beginning of something new. And it’s not, as we know, good for business sentiment to not know what certainty they could be looking at in the coming years.

Host:

Finally, wrapping things up, let’s talk about the near and medium-term future. In the next six months, what are you guys going to be looking for? Somesh, let’s start with you.

Somesh Jha:

First of all, there has to be a lot of clarifications that will come out from OECD. OECD is holding a webinar, as we know, next week, where they’ll be definitely elaborating on the package and kind of answering some of the tough questions that would come up in the run-up to that. So a lot of clarifications will come in from OECD. And countries will have to implement the package into their domestic laws. A lot of countries will have to do it. So we’ll be keeping an eye on which countries are doing it and which countries are kind of facing some issues in doing it.

And then the other thing would be, which are the countries which would go to the OECD with a formal request to enable their tax system to be also akin to what the US got as a side-by-side tax system, because the new deal allows countries to make a formal request to OECD to be able to do that. And OECD said that they would take up requests and try to resolve those requests by the middle of 2026. So, for instance, there are big countries like India, China, out there.

Lauren Vella:

Brazil, Colombia, potentially.

Somesh Jha:

Brazil, Colombia, exactly. Maybe they also want to put in a formal request of their system to be eligible as the US system got eligibility under the side-by-side system. So yeah, these are things I would be definitely looking for.

Lauren Vella:

I think Somesh, from an international perspective, summed it up really well. What I’m going to actually be watching is how lawmakers are going to react to this. Yes, they probably had to accept wholesale the deal that was struck, but I’m not sure that it’s going to satisfy them completely. I think that there are aspects that might bind their legislative hands going forward.

For example, one of the things is that the US has a corporate alternative minimum tax that is hated by the business community, and a lot of congressional Republicans don’t like it. So if this is a requirement that the US has to have in order to be eligible for certain treatment underneath the global minimum tax framework, does that tie lawmakers’ hands that they cannot get rid of it? And I don’t know if you know this, David, but US lawmakers don’t like to be told what to do. So I’m going to kind of be watching that space and how they might be reacting to the details, what the reality is of this deal, and potentially how they might be reacting to the US adversaries may be qualifying for some parts of this special treatment as well, as Somesh said.

Host:

All right. Well, that was Lauren Vella here in DC and Somesh Jha in London, England, speaking with us about the recent OECD deal. Thank you guys so much. This was fascinating.

Lauren Vella:

Thank you so much for having us, David.

Somesh Jha:

Thank you, David. Thank you, Lauren.

Host:

And that’s it for today’s podcast. You can find up-to-the-minute news on the latest tax accounting developments at our website, news.bloombergtax.com. That website, once again, is news.bloombergtax.com. Today’s episode was produced by myself, David Schultz, and our editor was Vandana Mathur. From Washington, I’m David Schultz. Thanks for listening.