The Biden government has made international tax negotiations a top priority, particularly the part of the talks that focuses on establishing a global minimum tax.
The administration sees a minimum tax agreement as a way to prevent companies from making decisions about where to set up based on corporate tax rates. Administrative officials also see an agreement as a way to prevent US multinational corporations from becoming less competitive when the US increases its corporate taxes.
Finance minister Janet YellenJanet Louise YellenWhat You Need to Know About International Tax Talks Top inflation rate is 0.6 percent, above expectations Senate Republicans raise $ 8 billion in infrastructure | Biden faces a dilemma over Trump steel tariffs MORE At a House hearing on Thursday, he said the US is trying to reach an agreement on a global minimum tax “that would stop a race to the bottom so that different countries’ competitive attractions influence location decisions, not tax competition.”
The countries involved in the negotiations between the Organization for Economic Co-operation and Development (OECD) and the group of 20, two groups of industrialized countries, hope for a political agreement in July.
Here’s what you need to know about international tax negotiations:
Two main topics are discussed
The OECD has been dealing with international tax issues for a number of years and its current efforts focus on two key issues.
The area that the Biden government has highlighted the most, known as Pillar 2, focuses on a global minimum effective tax rate on companies’ overseas profits. This part of the negotiations aims to prevent corporate profits from escaping taxation.
There is no global minimum tax rate, and countries have different rules for their domestic corporate tax rates and for the taxation of their corporations’ foreign income.
An agreement on a global minimum tax would not oblige countries to raise their corporate tax rate to a certain level. Instead, it would encourage companies to have ways of subjecting their companies’ foreign profits to a minimum tax rate at least as high as the tax rate set out in the agreement.
For example, a country could require its companies to pay it the difference between its minimum tax rate and the tax rate it paid overseas on foreign income. The US has introduced this type of minimum tax known as Global Low Intangible Income Tax (GILTI) President TrumpDonald TrumpWhat You Need To Know About International Tax Talks 9 Senate seats are expected to move in 2022. Biden breaks the Texas electoral law: “An attack on democracy” MOREThe 2017 tax law officially ranks between 10.5 and 13.125 percent.
Countries could also prohibit deductions when companies make payments to related parties in countries that do not set a minimum tax rate. President BidenJoe BidenWhat Do You Need To Know About International Tax Discussions? 9 Senate seats are expected to change in 2022. Is Biden trying to avoid Congress reviewing Russian sanctions? MORE has proposed this type of mechanism to fund its $ 2.25 trillion infrastructure plan.
The other area discussed, known as Pillar 1, seeks to make changes to the rules by which corporations’ profits are taxed.
This problem arises from the fact that there are some large corporations, especially US tech companies, that have not paid taxes in countries where they generate significant income but do not do business. This has led some countries to enact unilateral taxes on digital services (DST) that the US claims discriminate against their businesses. US politicians and technology companies would prefer an agreement at the OECD.
The two pillars are “linked,” said Daniel Bunn, vice president of global projects at the Tax Foundation. Some countries are more interested in one pillar than the other, and the OECD wants to reach an agreement on both points at the same time, he said.
Biden has once again brought the talks to the fore
The Trump administration had weighed the negotiations but had some concerns. She supported a global minimum tax agreement but wanted to ensure that the US would not have to make any changes to GILTI if such an agreement was reached. She wanted an agreement on where corporate profits are taxed to be optional for corporations.
The Biden government gave more support to the negotiations and sought to reach an agreement. The Trump administration’s suggestion that an agreement on the location of taxes be optional has been dropped. And it has signaled that an agreement on a global minimum tax is a top agenda item, with Yellen frequently raising the issue in speeches and hearings in Congress.
The Biden administration “came very early to say we were advocating a consensus-based solution,” said Manal Corwin, a former Obama administration finance officer who is now responsible for KPMG’s Washington National Tax Practice.
Biden has proposed paying $ 2.25 trillion for his infrastructure plan by increasing the U.S. corporate tax rate from 21 to 28 percent and the GILTI rate to 21 percent. The government sees a global minimum tax deal as a way to address concerns that the proposed corporate tax increases would make US businesses less competitive.
In recent discussions with OECD countries, the US noted that the tax rate for a global minimum tax should be at least 15 percent, which is less than the 21 percent rate the government is proposing for its own minimum tax.
Some other countries like Germany and France have responded positively to the US proposal. However, others such as Ireland and Hungary have raised concerns.
Republicans have concerns
Republicans in Congress have raised some concerns over the past few days about the negotiations over the past few days and raised some of their priorities with Treasury officials and candidates.
Republicans don’t want the US to raise the tax rate on GILTI until other countries take action to introduce similar types of taxes. They argue that doing so would put US companies at a disadvantage compared to foreign companies. They also want to make sure that a minimum tax agreement doesn’t include spin-offs for countries that are rivals to the US, including China.
Additionally, Republicans want the Treasury Department to accept a Pillar 1 agreement only if countries need to lift their daylight saving time.
Democrats in Congress are also firmly against the unilateral summer times that countries have enacted in recent years.
Implementation won’t be quick
The OECD hopes to reach a political agreement in July. More details will follow later.
Tax experts said after the negotiations that it will take some time for the US and other countries to implement an agreement once one is finalized.
It is voluntary for the countries to implement the agreement. To make this happen, the US and other countries will have to make changes to national laws and possibly tax treaties, according to experts.