Sovereignty Wins in OECD’s Side-by-Side Global Minimum Tax Deal

The OECD’s proposed side-by-side alternative to the 15% global minimum tax would be a win not just for the US, but also for global tax sovereignty and certainty.

From day one, the Trump administration set its sights on securing better treatment for US companies abroad. As a direct result of that focus, negotiations at the OECD and the dynamics of the global minimum tax known as Pillar Two shifted dramatically—from an assumed-final deal to a partial reevaluation.

The first real signal of this global shift was the G7 statement shortly before passage of the reconciliation bill indicating support for a side-by-side system. As the name suggests, the system could allow any country to subject their companies to a domestic tax system instead of the international minimum tax system, as long as the domestic system meets certain requirements.

Full details about the rules that would govern the interaction of the US and Pillar Two systems aren’t known yet. Excerpts from Organization for Economic and Community Development documents obtained by Bloomberg Tax shed some light as to what this new deal might look like and clarify that the new system maintains the progress made by the two-pillar Inclusive Framework.

The G7 statement is a positive development for the US system and for the business community, which has long advocated that our already complex and robust tax system is adept at preventing base-erosion—the original focus of creating a global minimum tax.

As it stands now, the global minimum tax is riddled with complexity, compliance burdens, and concerns about the treatment of confidential taxpayer information. This reevaluation offers the OECD a chance to address these concerns and rethink the goals of the global minimum tax system and how to meet them.

It’s unclear whether other jurisdictions would be permitted to adopt separate global minimum tax systems akin to the US system and receive an exemption for their multinationals.

Either way, the Inclusive Framework should agree on a set of conditions that ensures such systems allow for companies (and countries) to get out from under the complexities of the global information return and associated tax without opening the door to abusive tax schemes.

Anecdotally, many NFTC members owed little or no additional tax under the OECD system but were saddled with compliance costs amounting to millions of dollars. This proves that great strides have been made toward curbing tax avoidance since the beginning of the OECD’s Base Erosion and Profit Shifting work 15 years ago.

Most US companies already are paying the appropriate rate of taxes due because of the 2017 Tax Cuts and Jobs Act, changes in foreign law, and an array of US rules and regulations, including anti-inversion rules, transfer pricing, and corporate taxes.

Since the G7 agreement announcement, the Trump administration’s reconciliation bill, signed into law July 4, raised the effective US global minimum tax rate and eliminated the benefit for tangible assets abroad. An analogous provision still remains under Pillar Two.

The OECD’s new proposal appears to address a critical item for US companies: The treatment of nonrefundable tax credits on which the US system relies but that previous OECD guidance disfavored.

In its final months, the Biden administration advocated to change these rules so that the US research and development credit and other incentives enacted by Congress—as well as incentives duly enacted by other countries—could work as intended. The Trump administration’s approach to the OECD provides an opportunity for this needed rationalization.

While negotiations are far from complete, it will be important for all parties to consider timing and adjusting local laws, finalizing what constitutes a “robust” enough system, and addressing the interplay among at least two side-by-side systems.

As part of this process, providing additional tax data and further understanding of the potential effects of this new system are crucial. None of these reasons should justify delays or not pursuing a side-by-side path. Instead, they should be considerations as the OECD finalizes this alternative.

Countries have expressed concerns about competitiveness and sovereignty under the new side-by-side system, which were two of the main concerns that Congress had expressed with the previous OECD plan.

Those countries should view this as an opportunity to ensure this new proposal drives a globally competitive pro-growth tax system that preserves local sovereignty and forecloses potential abuse. The side-by-side system is an elegant solution through which all countries can attain these goals.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Anne Gordon is vice president for international tax policy at the National Foreign Trade Council. She has worked on international tax matters in the private and public sectors.

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