OECD’s ‘Side-by-Side’ Tax Deal for US Critiqued by 28 Countries

More than two dozen countries criticized a system that would exempt American multinational companies from key parts of the global minimum tax, saying it would risk undermining the tax’s effectiveness, put non-US companies at a disadvantage, and challenge their own tax sovereignty.

The comments, compiled in a confidential OECD document dated Aug. 14 and seen by Bloomberg Tax, indicate that US attempts to have its companies exempted from a global 15% minimum tax agreement signed by 140 countries won’t be easy. Tax agreements at the OECD require consensus.

The 28 countries—including China, Germany, France, Italy, and the UK—expressed the concerns in comments submitted to the Organization for Economic Cooperation and Development secretariat in July. Some were responding directly to a July 22 slide presentation given by the US delegation on a “side-by-side” approach, which envisions the 15% global minimum tax existing alongside the US’s own minimum tax law.

The US and its Group of Seven allies reached an understanding on that approach in late June in exchange for removal of the so-called “revenge tax” from Republicans’ $3.4 trillion tax-and-spending law. The tax would have levied higher taxes on companies from countries that imposed “unfair” taxes on US businesses.

But the G7’s understanding needs to be blessed by the rest of the 140 countries taking part in global tax talks at the OECD.

The US’s July presentation predated a proposal for the “side-by-side” approach also seen by Bloomberg Tax, dated Aug. 13 and circulated among nations participating in the global tax talks. Countries will discuss the proposal in September, according to documents also seen by Bloomberg Tax.

The compiled comments from countries are highly technical, but three main themes stand out.

Global Minimum Tax Rules

Nations expressed concern that making an exception for US companies would hurt the integrity of the global minimum tax rules.

Belgium said a solution that fully exempts US companies from the minimum tax’s provisions—application of both the income inclusion rule and the undertaxed profits rule—would pose a “potential risk to the overall integrity and coherence” of the global minimum tax.

The minimum tax, Pillar Two of the global tax deal, seeks to impose a 15% minimum rate on multinationals with annual turnover of €750 million ($875 million) in every country where they operate.

The rules are designed to encourage countries to adopt a minimum level of taxation that would discourage profit shifting from high-tax countries to low-tax countries.

The income inclusion rule is the second of three rules that make up the minimum tax. It allows the parent country of a multinational to collect tax from its subsidiary if the local jurisdiction isn’t charging at least 15%.

The undertaxed profits rule acts as the ultimate enforcement measure, and allows a country with this measure in place to collect tax from a company if both its parent country and its local subsidiary aren’t charging the 15% minimum rate.

Competitiveness

Countries thus expressed worry that their companies, which would still be obliged to comply with the global minimum tax, would be put at a competitive disadvantage compared with US multinationals if an exemption is made.

The UK, France, Italy, and Germany — all members of the G7 that helped reach the side-by-side understanding — said the US should provide more data-driven economic analysis on the side-by-side system.

China went further, stating that any approach that targets one country “is a violation of the principle of fair competition. The solution should ensure that equal treatment be given in similar circumstances.” The country also argued the negotiation should demonstrate inclusiveness and ensure a level playing field.

Finland, which already has the global minimum tax in its laws—like all EU countries—said it is “still not convinced” that the side-by-side system promotes a level playing field.

Tax Sovereignty

Reaching a solution on a side-by-side system with the US challenges the right to tax sovereignty—the concept that nations are able to tax companies in their country the way they’d like—a number of countries said.

“The US’s refusal to accept the application of the UTPR to US headquartered groups’ non-US profits is not consistent with tax sovereignty. Countries have the right to determine how much tax is imposed on income that is sourced in their country, or derived by their residents,” the New Zealand delegation wrote.

Belgium and Estonia also said the side-by-side system could impact the tax sovereignty of certain countries.

The Estonian delegation, in a comment illustrative of the detailed technical nature of all the submissions, underscored that it doesn’t support a system that allows the US minimum tax on foreign income, known as GILTI, to be “pushed down” in jurisdictions.

Under a “push-down” system, GILTI taxes paid by the US parent company would be designated to foreign subsidiaries. Therefore, less domestic minimum tax would be collected by that jurisdiction.

In recent months, US officials have proposed making the GILTI push-down optional for countries to adopt.

“It is the right of each jurisdiction to tax the profits of its residents earned in this jurisdiction, and it is not acceptable that the jurisdiction would have to give credit for the taxes paid by the US parent before being able to impose its own tax,” the Estonians said.

“Even if it were optional, it could put pressure on certain jurisdictions to introduce this option for non-tax reasons and would jeopardize tax sovereignty of certain jurisdictions.

The OECD didn’t respond immediately to a request for comment on the document.