The Republican-controlled House of Representatives told the Biden administration in no uncertain terms last week that it won’t approve the deal that Treasury Secretary Janet Yellen negotiated with more than 130 other countries to align U.S. corporate tax laws with those developed by the Organisation for Economic Co-Operation and Development (OECD).
In one of the more unusual tactics to bring the United States into compliance with international agreements, the Biden administration signed on to a global tax agreement that includes establishing a minimum corporate tax rate on multinationals of 15 percent, which gives Congress the choice of either approving the deal or watching U.S. companies suffer from foreign tax penalties.
While Yellen called the move “a once-in-a-generation accomplishment for economic diplomacy,” the agreement has its critics.
“The OECD agreement is a bad deal for American workers and families, and it has no path forward in Congress. The Biden Administration cannot override Congress’s sole tax-writing authority under the Constitution or turn that power over to foreign bureaucrats,” Rep. Jason Smith (R-Mo.), chair of the tax-writing House Ways and Means Committee, stated on Feb. 2.
“I think the Biden administration thought they had more political leverage than they did with these rules,” Daniel Bunn, president of the Tax Foundation, a nonprofit analytical group, told The Epoch Times. “I think that was a key mistake that they thought they could get it through Congress with the majority they had, and that was an error on their part.”
However, Bunn believes Congress will likely approve at least some parts of the deal.
“I think Congress doing nothing is probably a bad option,” he said, because of the risk of foreign tax penalties on U.S. companies that are built into the deal.
The new global tax agreement is a complex package that seeks to do away with tax havens and impose minimum taxes in all countries. The plan is divided into two “pillars.”
Pillar One allows countries to tax a company’s profits if its products are sold in that country, regardless of where the company itself is based, and would affect an estimated $125 billion in profits. Pillar Two establishes a global minimum tax of 15 percent, which could raise an estimated $150 billion worldwide.
Broadly speaking, the plan seeks to increase corporate taxes and redistribute tax income globally, allowing for more tax revenue to go to less developed countries. But Yellen has argued that it could be revenue-neutral for Americans if the United States can collect enough new taxes from foreign companies under the plan.
The measures were originally scheduled to be implemented in mid-2023 and would initially apply only to companies earning at least 20 billion euros (about $21.6 billion), although that threshold will likely come down in the future. The implementation now appears to be delayed until 2024 as national governments attempt to work through the details of how it will be implemented and revise existing tax treaties.
Some say there is more at stake than corporate tax rates.
More About National Sovereignty Than Tax
“The OECD tax pillars, especially Pillar Two, are nominally about tax, but they’re much more about sovereignty; that is, who gets to make a country’s tax laws,” Aharon Friedman, a former staffer at the House Ways and Means Committee and the Treasury Department, told The Epoch Times.
“The [Biden] administration requested that Congress enact numerous tax increases, and even the Democrats refused to enact most of them, so the Treasury Department went to the OECD and the EU and asked them to enact tax increases on American companies on the income they earned in the United States,” in an attempt to force Congress to follow suit.
Joe Hughes, federal policy analyst at the Institute on Taxation and Economic Policy (ITEP), says the purpose of the OECD tax deal is to stop big corporations from arbitraging different countries’ tax laws to avoid paying taxes.
“A company like Nike might set up subsidiaries in a tax haven where they register the trademarks to their brands,” Hughes told The Epoch Times. “They tell the IRS they earned their profits where the trademark was registered, rather than where they’re making and selling the shoes.”
To close this “loophole,” the OECD agreement would force companies to pay taxes in countries where they sell products. If a country refuses to implement the OECD tax rules, particularly regarding the 15 percent minimum tax, other countries can then tax that country’s corporate profits at a higher rate to make up the difference.
“If a country doesn’t implement the agreement, its companies could still end up paying the global minimum tax, just to a foreign government instead,” Hughes said. “So if Congress takes no action on it and the EU and UK carry through with implementation, the U.S. will lose tax revenue to those countries.”
Congress Says It Will Fight Back
Friedman says he expects the House won’t approve the OECD plan, and if other countries attempt to target U.S. companies for retaliation, that will violate existing tax treaties and the United States will respond in kind.
“They’re not going to be intimidated or bullied by the Treasury Department or by other countries,” he said. “Congress is not going to enact Pillar Two because it doesn’t believe in ceding its sovereignty or its authority under the Constitution, and it will take whatever countermeasures are necessary to make sure other countries don’t attempt to attack or tax American companies in violation of our tax treaties.”
A joint letter (pdf) from Republican lawmakers to Yellen on Dec. 14, 2022, appears to support this view.
“For the past two years, the Biden Administration has routinely made commitments in the OECD negotiations it has no authority to fulfill,” the letter states. “Despite Treasury’s actions to date, it cannot dictate U.S. tax law or compel Congress to act.”
“While some may believe that implementation by foreign countries of the model rules … will lead the United States to follow suit, Congress’s hand will not be forced,” the lawmakers wrote. “Nor will Congress sit idly by as U.S. companies and profits are taxed in a manner inconsistent with U.S. law and our bilateral tax treaties.”
Some see the OECD deal as a Trojan horse. The concern is that, if the United States cedes its corporate taxing authority in this case to foreign organizations, there may be more measures to come.
“The OECD itself has stated, even boasted, that this is just the first step,” Friedman said. “Their next step is to open a similar project with regard to carbon taxes, and they also want to examine the taxation of individuals. So one could imagine, just like we are imposing a minimum tax on corporations, they could also impose a minimum tax on individuals around the world.”
GOP Reviewing Administration’s Foreign Agreements
The House, now with a Republican majority, is seeking to check the Biden administration’s global agreements that may put the United States at a disadvantage. Last week, the House Committee on Oversight and Accountability issued a strongly worded letter to Biden’s climate czar John Kerry, demanding to know details of his secretive negotiations with the Chinese Communist Party (CCP).
“You continue to engage in activities that could undermine our economic health, skirt congressional authority, and threaten foreign policy under the guise of climate advocacy,” committee Chair James Comer (R-Ky.), stated in the letter.
Noting that Kerry told The Associated Press that he was working with the CCP to “form a group to reduce greenhouse gas emissions,” Comer wrote:
“As a member of the President’s cabinet, you should be representing the United States’ interests. Your statements, however, consistently show disregard for American national security and taxpayer dollars.”
At the World Economic Forum summit in Davos, Switzerland, last month, Kerry said that the way to stabilize the climate was “money, money, money, money, money.”
“We have to unleash the trillions of dollars for bankable deals,” he said. “It’s so almost extraterrestrial to think about saving the planet, and if you said that to most people, they’d think you’re just a crazy tree-hugging lefty, liberal, you know, do-gooder or whatever.”