House leaders and top Republican tax policymakers this week stepped up their opposition to international tax provisions within the Organization for Economic Cooperation and Development framework, as the Treasury Department moves forward with rules that could help companies avoid international taxation.
House Speaker Mike Johnson (R-Louisiana) and Ways and Means Committee Chairman Jason Smith (R-Missouri) sent a letter to OECD Secretary-General Mathias Cormann on Tuesday arguing that the provision, known as the undertaxed benefits rule (UTPR), “abandons U.S. tax sovereignty.”
They slammed the Biden administration for forcing through negotiations on the international agreement without congressional approval.
“The Biden-Harris Administration lacks the authority to impose any tax agreements on American citizens without the approval of the U.S. Congress, and doing so would violate the U.S. Constitution. For these reasons, we continue to oppose the OECD's global tax agreement,” they wrote.
But despite opposition from Republicans, the Biden administration last week launched a rulemaking process that could allow U.S. multinational companies to avoid paying the UTPR.
Also known as a “surcharge,” the UTPR allows countries to increase tax on parent companies if a subsidiary in another jurisdiction does not pay the 15% basic rate.
The workaround comes in the form of a Corporate Alternative Minimum Tax (CAMT), which was updated in the Anti-Inflation Act of 2022 as a 15% minimum tax on large companies, separate from the 15% tax in the OECD's so-called Pillar 2 agreement.
“The corporate AMT will make it less likely that U.S. multinational corporations will be subject to additional tax under the UTPR,” Ruben Abiyona, a tax professor at the University of Michigan Law School, wrote in a January Tax Notes op-ed.
Many of the signatories have begun implementing the Pillar 2 agreement, but not the U.S. The Treasury Department said last week that the competing AMT rules are one of its biggest projects in years.
“Developing regulations to implement this tax is one of the most significant projects the Treasury Department has undertaken in decades. Congress has delegated significant authority to the Treasury Department to implement the CAMT, and the Treasury Department and the IRS are implementing the law through these proposed regulations consistent with Congress' statutory direction and intent,” the Treasury Department said.
In a letter to the OECD secretary-general this week, the Republicans said: Litigation The Wyoming-based American Chamber of Free Enterprise has filed suit in a Belgian court to block implementation of the undertaxed profits rule.
“We encourage and support all efforts to uphold countries' tax sovereignty and prevent the implementation of unfair rules like the UTPR, including the latest challenge filed before the Belgian Constitutional Court,” they wrote.
But because the U.S. has its own 15% minimum tax provision and the UTPR is potentially neutral for U.S. multinationals, the U.S. may now have a clearer path to implementing the OECD Pillar 2 agreement. Reuven Abiyona of the University of Michigan described Pillar 2 as a “fait accompli.”
Another element of the OECD tax agreement is a different story: it has to do with where companies are taxed, not the minimum level of corporate tax. This part, called Pillar 1, has been stalled by U.S. opposition, leading to a contentious negotiating process at the United Nations.
Part of the problem is tax havens, with small and developing countries eager to get a bigger share of the tax revenues from multinational companies operating in their jurisdictions. The African Union last year called a U.N. resolution on the effort a “ray of hope.”
“This will facilitate access to much-needed financing, which is crucial to addressing the current debt crisis, and advance the pursuit towards achieving sustainable development,” the group said in a statement. “It also fits with Africa's aspirations to strengthen its tax systems and promote tax fairness.”
Another issue relevant to the UN process, which was a major motivation for the OECD process launched several years ago, is the taxation of large technology companies, which, due to the nature of their products, may generate significant sales across borders even where they have no physical presence.
Absent broad agreement on where those revenues can be taxed, tech-specific taxes known as digital services taxes could proliferate, leading to retaliatory, localized trade disputes.
“A draft multilateral treaty for Pillar 1 was published in October 2023, and the June 30 deadline for a final agreement has passed,” Tax Foundation analysts Daniel Bunn and Sean Bray wrote in a July commentary. “The U.S.'s agreement with several countries that impose discriminatory digital services taxes has also expired. Canada, which was not part of that agreement, has implemented its own digital services tax.”
