American companies may face dizzyingly complex tax bills from countries around the world, while Republicans in Congress fight against the plan that their own country championed.
“This is a lose-lose deal negotiated by the Biden administration,” Sen. Mike Crapo (R-Ind.), the top Republican on the tax-focused Finance Committee, said in a recent statement. “The Biden administration handed each foreign country a model vacuum to suck away tens of billions from our tax base.”
The deal, which 130 countries signed onto in 2021, included a pledge to set corporate tax rates at no less than 15 percent, closing loopholes that let multinational companies move their operations to different nations in search of low tax rates.
Japan, South Korea, the European Union and other major economies have followed the pledge, adopting or preparing to adopt legislation that raises their tax rates. But in the United States, Congress hasn’t made any real moves to adjust tax law to make sure no U.S. company pays less than 15 percent as required by the deal.
The U.S. corporate tax rate is 21 percent, well above the 15 percent minimum. But without additional laws, some companies can find ways to reduce their tax burden below what’s allowed under the terms of the agreement.
Congress’s inaction along with the structure of the agreement itself could bring many consequences: The largest American companies might find their already complicated tax returns will become far more complex. Corporate tax revenue paid to the United States might shrink, as American companies pay more to other countries. And in a strange new maneuver, foreign countries might even tax American companies to penalize them for not paying their fair share of taxes to the IRS.
“If I were a U.S. business, I’d rather pay one minimum tax that’s sensible and aligned with what the rest of the world is doing than pay three or four,” said UCLA law professor Kimberly Clausing, who was formerly the Biden administration’s lead economist in the Office of Tax Policy.
Recent tax law changes have imposed more and more administrative burdens on companies. Republicans under President Donald Trump imposed a first-of-its-kind tax on profits that U.S. companies earn abroad, called GILTI. Then Democrats added a new minimum tax meant to ensure that billion-dollar corporations pay at least 15 percent domestically, which is set to go into effect this year. And now there’s the global minimum tax, even if there’s no U.S. component of it yet.
The Biden administration had hoped Congress would restructure GILTI to match the global agreement. Republicans are adamantly opposed. Crapo last month called the agreement an “America Last” policy that will “undermine U.S. sovereignty to enact its own tax policy and vault foreign countries ahead.” House Republicans signed on to a bill that would actively oppose the deal by retaliating against countries that exercise the agreement’s enforcement mechanism.
The Biden administration still expresses optimism about getting lawmakers onboard, especially as other nations go along with the idea.
“The more countries adopt the global minimum tax… the greater the interest in the United States will be in adopting it, too,” Treasury Secretary Janet L. Yellen told a reporter last week, in a recording obtained by The Washington Post. Yellen said she thinks Congress will eventually adopt legislation in 2025, as part of a deal when the 2017 Trump tax cuts expire.
The Joint Committee on Taxation added fuel to the fire last month with an analysis, requested by congressional Republicans, that predicted that the United States would see a $122 billion decline in tax revenue over the next decade if the rest of the world enacts legislation complying with the agreement while the United States does not. On the other hand, if the U.S. adopts a law while more countries refuse, the Joint Committee predicted a $236.5 billion boost in American tax revenue.
Some economists question the assumptions underlying the Joint Committee’s math, and the deal wasn’t necessarily designed to make money for the United States, at least not right away. The foremost goal was preventing global business from moving to tax havens that offered ultra-low rates.
Does reducing offshoring help or hurt the United States’s bottom line? On the one hand: If U.S. companies pay more tax abroad, they get a larger credit for the foreign taxes they’ve paid, thereby reducing their U.S. tax bill. On the other hand, some economists say the business that stays in the United States instead of leaving the country in search of lower tax rates will eventually more than make up the difference.
“I think it just defies logic to say it’s better for the U.S. tax base to have everybody racing to zero. It’s definitely not true,” Clausing said.
The global minimum tax is the second plank or “pillar” of the 2021 agreement.
“The effects of Pillar 2 will almost certainly involve more profits shifting back to the U.S., potentially bringing lots of revenue with it,” said Fordham University law professor Rebecca Kysar, a former Treasury official who helped lead the negotiations that crafted the deal.
Others doubt that the United States will make money, though they note that the deal is important for key European allies.
“There’s the possibility that this just isn’t a very good deal for the U.S.,” said Alan Cole, an economist at the conservative-leaning Tax Foundation. “This is a deal that really helps foreign countries raise their corporate tax rate. … A knock-on effect of them raising their tax rates is that we have to offer more foreign tax credits, and that’s one of the ways our revenue gets stripped away.”
He added, though, that how much money the IRS takes in isn’t the only way to measure the success of the agreement. “Relationships with Europe are important. Cooperation is important. You’ve got Russia misbehaving pretty badly and you want the tighter North Atlantic alliance.”
To give the global agreement teeth, the countries that signed on agreed to a novel approach: If a country does not tax its own companies at the minimum rate, other countries can tax those companies’ subsidiaries to make up the difference.
“The crazy thing is … Romania can actually reach into the entire U.S. tax base and say, ‘Hey, this whole gigantic U.S. conglomerate with millions of workers and subsidiaries in hundreds of countries — we don’t think it’s paying enough,’” Cole said, using Romania as a hypothetical example. “Any country can say, ‘Well, if you’re not going to do it, we’re going to do it ourselves.’”
Economists and policymakers aren’t sure how likely that is to actually happen.
“If I were Estonia or Latvia or some place like that, I would not be wild about being the first country to go pick a fight with the U.S.,” Cole said.
Plus, it’s unclear how many American companies would even be considered noncompliant. Any companies that end up paying an effective tax rate below 15 percent in the United States usually do it by moving much of their income offshore. And the deal will end some of those opportunities.
At the request of The Post, Columbia Business School professor Shivaram Rajgopal came up with a list of companies that could theoretically face a punitive tax bill from another country on their American income. To make the list, a company must meet three criteria: annual revenue above about $800 million, subsidiaries outside the United States, and an effective tax rate below 15 percent.
Rajgopal found about 100 companies that are large enough and pay low enough taxes that they could be subject to a foreign tax on their American income, including well-known names like Netflix, Boeing, Warner Bros. Discovery, Pfizer, Royal Caribbean Cruises, Keurig, Dr. Pepper and General Electric. GE lobbyist Lisa Wolski said at a conference last year that she thinks U.S. law should not change until other countries first start collecting the new taxes. (Boeing and Walgreens declined to comment; the other companies did not respond.)
That list will shrink, however, when the new U.S. corporate alternative minimum tax passed by Congress last year kicks in, and when offshore tax havens raise their rates.
Clausing, the former Biden official, says some American corporations intended to oppose new taxes and ended up getting more complicated taxes. “They lobbied against the U.S. adoption of the agreement, thinking it would sink it everywhere,” she said.
Instead, the rest of the world is moving ahead with implementing the deal.