WASHINGTON – In June, months after reluctantly signing a global tax deal brokered by the United States, Ireland’s Chancellor of the Exchequer met privately with Chancellor of the Exchequer Janet L. Yellen to reassure the Biden administration end of the deal.
Ms. Yellen assured the Secretary, Paschal Donohoe, that the administration could get enough votes in Congress to ensure that the United States adhered to the pact, which aimed to tackle companies that evade tax by cutting jobs and profits. shift. around the world.
It turns out that Mrs. Yellen was too optimistic. Late last week, Senator Joe Manchin III, Democrat of West Virginia, scuttled the Biden administration’s tax agenda in Congress — at least for now — by saying he couldn’t immediately support a climate, energy and tax package he wanted. negotiated with the Democratic leadership for months. He expressed deep doubts about the international tax deal, which he had previously stated he could support, and said it would penalize American companies.
“I said we’re not going to go down that road now, because the rest of the countries won’t follow, and we’re going to put all our international businesses at risk, hurting the US economy,” Mr Manchin said. told a radio station in West Virginia on Friday. “So we took that off the table.”
Mr. Manchin’s turnaround, expressed in the language used by Republican opponents of the deal, is a blow to Ms. Yellen, who has brought more than 130 countries on board for months. It is also a defeat for President Biden and the Democratic leaders in the Senate, who have worked hard to raise tax rates for many multinational corporations in hopes of leading the world in an effort to stop companies from switching jobs and incomes. to minimize their tax bills.
The agreement would have led to the most sweeping changes in global taxation in decades, including raising taxes on many large companies and changing the way tech companies are taxed. The two-pronged approach involves countries introducing a minimum tax of 15 percent, so that companies pay a rate of at least that amount on their global profits, regardless of where they locate. It would also allow governments to tax the world’s largest and most profitable companies based on where their goods and services were sold, not where their headquarters were.
Failure to reach an agreement at home will create a mess for both the Biden administration and multinational corporations. Many other countries are likely to push through to ratify the deal, but some may now be encouraged to stick with it, breaking the coalition and potentially opening the door for some countries to continue promoting themselves as corporate tax havens.
For now, the situation will allow for the continued aggressive use of global tax avoidance strategies by companies such as pharmaceutical giant AbbVie. A report from the Senate Finance Committee this month found that in 2020 the company made three-quarters of its sales to U.S. customers, but reported only 1 percent of its earnings in the United States for tax purposes — a move that allowed it to increase its effective tax rate. to about half the US corporate tax rate of 21 percent.
Failure to change international tax laws could also create new uncertainty for major tech companies, such as Google and Amazon, and other companies that monetize consumers in countries where they don’t have many employees or physical offices. Part of the global agreement was intended to give those companies more certainty about which countries they can tax and how much they should pay.
America’s refusal to participate would be a major setback for Ms. Yellen, whose role in closing the deal was seen as her signature diplomatic achievement. Last year she lobbied countries around the world, from Ireland to India, about the merits of the tax deal for months, but her own political party saw her decline to heed her calls to join.
Following Mr Manchin’s comments, the Ministry of Finance said it was not giving up on the agreement.
“The United States remains committed to finalizing a global minimum tax,” said Michael Kikukawa, a spokesman for the Treasury Department, in a statement. “It is too important to our economic strength and competitiveness not to complete this agreement, and we will continue to look at every possible way to make it happen.”
The US’s path to adopting the global pact has faced challenges from the start, given Republican opposition to parts of the plan and Democrats’ limited control in the Senate.
To comply with the agreement, the United States would have to increase the tax rate that companies pay on their foreign income from 10.5 percent to 15 percent. Congress should also change the way the tax was applied, imposing it on a country-by-country basis, so that companies couldn’t lower their tax bills simply by seeking out tax havens and “mixing” their tax rates.
The Biden administration had hoped to make those changes through its stalled Build Back Better legislation or a smaller spending bill that Democrats hoped would push through a budget process that didn’t require Republican backing.
“Secretary Yellen and her team have always advocated the necessary changes,” Donohoe said in an interview in June. “Secretary Yellen has reiterated all the work they’ve done to try and get the votes they needed for this change in the House of Representatives and Senate.”
Congress should also revise tax treaties to give other countries the power to tax large U.S. multinationals based on where their products were sold. That legislation would require the support of Republicans, who have shown no inclination to vote for it.
US tech giants such as Google and Amazon have largely backed the proposed tax changes as a way to end the complex thicket of European digital services taxes that have been introduced in recent years. As the agreement unravels, they face a new wave of uncertainty.
The entire project has been on shaky ground in recent months amid continued opposition in the European Union, delays due to technical fine print and concerns about whether the United States would actually join. Nevertheless, it remains possible that the European Union and other countries could still go ahead with the deal, leaving the United States an uneasy outlier from a deal that revived it last year.
“With or without the US, there seems to be a very high probability that that architecture will be sustained,” said Manal Corwin, a Treasury Department official in the Obama administration who now heads the national tax practice in the United States. Washington at KPMG. “Once you have a few countries taking those first steps, be it the EU or some other critical mass, I think others will follow pretty quickly.”
That poses risks for US companies, including the chance of their tax bills going up, given an enforcement mechanism the Treasury Department has helped create to push unwilling countries into the deal. If the United States does not introduce a 15 percent minimum tax, U.S. companies with subsidiaries in participating countries can pay fines to those foreign governments.
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“If Congress doesn’t approve it, that won’t stop the European Union and Japan and others from making progress in this area. are also affected by this enforcement principle,” Kimberly Clausing, who recently resigned from her job as the Treasury’s deputy assistant secretary for tax analysis, said at a Tax Policy Center event last month.
Barbara Angus, the global tax policy leader at Ernst & Young, said the United States’ failure to comply with the deal would have “significant consequences” for US companies.
“For this framework to work as intended, there really needs to be consistency and coordination,” said Ms Angus, who is also a former chief tax adviser on the House Ways and Means Committee.
The Treasury Department could not estimate how much additional tax US companies would have to pay to foreign governments if the United States were left out of the global agreement. When fully enacted, the agreement is expected to bring approximately $200 billion in tax revenue to the United States in a decade.
Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the Organization for Economic Co-operation and Development, said he thought the European Union would find a way to move beyond the opposition of member states and that once they ratified that agreement, the United States would come under pressure to join.
“Once the EU has moved, the US will have a choice: either move or leave the tax law on US multinational companies to Europeans,” Mr Saint-Amans said in a text message. “Even the Republicans wouldn’t let this go.”
For now, it seems unlikely that Republican opposition to the tax deal will bow. Over the past year, lawmakers have complained about being banned from international negotiations and have attacked Ms Yellen for giving foreign countries new powers to tax US companies.
“The world should know that despite what the Biden administration is urging, the US will not economically surrender to our foreign competitors by raising our global minimum tax rate on the basis of an agreement that is unenforceable, incomplete, and not in our best interest. “, he said. Representative Kevin Brady of Texas, top Republican on the Ways and Means Committee. Congress will not ratify an OECD deal that renounces our constitutional authority to set tax rules or does not protect important U.S. tax incentives.
Mr Brady, who will retire at the end of his term, added: “There is little political support for an agreement that would make the US less competitive and cede our tax base to foreign competitors.”