What you need to know about the international tax talks

The Biden administration has been making international tax negotiations a top priority, particularly the portion of the talks focused on the creation of a global minimum tax.

The administration sees an agreement on a minimum tax as a way to prevent companies from making decisions about where to locate based on corporate tax rates. Administration officials also see an agreement as a way to prevent U.S. multinational corporations from becoming less competitive if the U.S. raises its corporate taxes.

Treasury Secretary Janet Yellen said at a House hearing on Thursday that the U.S. is attempting to reach an agreement on a global minimum tax “that would stop what’s been essentially a race to the bottom, so that it’s competitive attractions of different countries that influence location decisions, and not tax competition.”

Countries participating in the negotiations at the Organization for Economic Cooperation and Development (OECD) and the Group of 20, two groups of industrial countries, are hoping to reach a political agreement in July. 

Here’s what you need to know about the international tax negotiations.

There are two main topics under discussion

The OECD has been working on international tax issues for a number of years, and their current efforts focus on two key issues.

The area that the Biden administration has most emphasized, known as Pillar 2, focuses on a global minimum effective tax rate for companies’ foreign earnings. This part of the negotiations is aimed at preventing corporate profits from escaping taxation.

There is no global minimum tax rate, and countries have varying rules about their domestic corporate tax rates and how they tax their corporations’ foreign income.

An agreement on a global minimum tax would not require countries to raise their corporate tax rate to a certain level. Instead, it would encourage companies to have ways to subject their corporations’ foreign earnings to a minimum level of tax that’s at least as high as the rate the agreement specifies.

For example, a country could require its companies to pay to it the difference between its minimum tax rate and the tax rate that it paid on foreign earnings to foreign countries. The U.S. enacted this type of minimum tax, known as the global intangible low-taxed income (GILTI) tax, as part of President Trump’s 2017 tax law, and it has a rate that officially ranges from 10.5 percent to 13.125 percent.

Countries could also disallow deductions when companies make payments to related parties in countries that don’t adopt a minimum tax rate. President Biden has proposed establishing this type of mechanism as a way to help pay for his $2.25 trillion infrastructure plan.

The other area under discussion, known as Pillar 1, seeks to make changes to rules about where companies’ profits are taxed. 

This issue stems from the fact that there are some large companies, notably U.S. tech companies, that had not been paying taxes in countries where they generate significant revenue but don’t have operations. That has prompted some countries to enact unilateral digital services taxes (DSTs), which the U.S. argues are discriminatory against its businesses. U.S. policymakers and tech companies would prefer an agreement at the OECD.

The two pillars are “tied together,” 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 items at the same time, he said.

Biden has put renewed emphasis on talks

The Trump administration had weighed in on the negotiations but had some concerns. It was supportive of an agreement on a global minimum tax, but wanted to ensure that such an agreement would not require the U.S. to make changes to GILTI. It wanted an agreement related to where corporate profits are taxed to be optional for companies.

The Biden administration has been more supportive of the negotiations and more eager to reach an agreement. It has dropped the Trump administration’s proposal for a location-of-taxes agreement to be optional. And it has signaled that an agreement on a global minimum tax is a top agenda item, with Yellen frequently discussing the issue in speeches and congressional hearings.

The Biden administration “came in really strongly early on to say we’re committed to getting to a consensus-based solution,” said Manal Corwin, a former Obama administration Treasury official who is now principal in charge for KPMG’s Washington National Tax practice.

Biden has proposed paying for his $2.25 trillion infrastructure plan in part by raising the U.S. corporate tax rate from 21 percent to 28 percent and by raising the GILTI rate to 21 percent. The administration views an agreement on a global minimum tax as a way to address concerns that its proposed corporate tax increases would make U.S. companies less competitive.

In recent discussions with OECD countries, the U.S. pitched that the rate for a global minimum tax should be at least 15 percent, which is less than the 21 percent rate the administration is proposing for its own minimum tax.

Some other countries, such as Germany and France, have reacted positively to the U.S. proposal. But others, such as Ireland and Hungary, have raised concerns.

Republicans have concerns

Congressional Republicans in recent days have expressed some concerns about the negotiations in recent days and have raised some of their priorities to Treasury Department officials and nominees.

Republicans do not want the U.S. to raise the rate for GILTI before other countries take actions to implement similar types of taxes. They argue that doing so would put U.S. companies at a disadvantage compared to foreign companies. They also want to ensure that an agreement on a minimum tax doesn’t include any carve outs for countries that are competitors of the U.S., including China.

Additionally, Republicans want Treasury to only accept an agreement relating to Pillar 1 if it requires countries to repeal their DSTs.

Democrats in Congress also strongly oppose the unilateral DSTs that countries have been enacting in recent years.

Implementation won’t be quick

The OECD is hoping to reach a political agreement in July, with more details to follow later. 

Tax experts following the negotiations said that it will take time for the U.S. and other countries to implement any agreement once one is finalized.

It is voluntary for countries to implement the agreement. To implement it, the U.S. and other countries will need to make changes to domestic laws and possibly also tax treaties, experts said.