House Bill Raises Chance for Global Pact to Curb Corporate Tax Havens
Several big details remain to be worked out before an international October deadline.,
WASHINGTON — The prospect of the largest overhaul to the global tax system in a century took a step forward this week as top Democrats introduced a plan to rewrite tax rules for multinational companies in a way that would allow the United States to join the rest of the world in an effort to crack down on tax havens.
Passing such legislation will be critical for the Biden administration, which is leading global negotiations aimed at limiting the ability of companies to minimize their tax bills by setting up offices in low-tax jurisdictions. The White House says this corporate strategy deprives economies of much-needed revenue.
Finance ministers from around the world have been working for months to complete a plan to end what they describe as a race to the bottom on corporate taxation before an October deadline. More than 130 countries have agreed to adopt a global minimum tax of at least 15 percent and are discussing a change in how taxing rights are allocated so that large businesses, including technology giants like Amazon and Facebook, pay taxes in countries where their goods or services are sold, even if they have no physical presence there.
House Democrats, as part of their plan to raise as much as $2.9 trillion to finance President Biden’s social safety net package, proposed raising the tax rate on companies’ overseas earnings to 16.6 percent from 10.5 percent and calculating the tax on a country-by-country basis. The plan would meet the primary commitments of the global agreement that is being negotiated through the Organization for Economic Cooperation and Development.
“This is more than just tweaks,” said Craig A. Hillier, an international tax expert at Ernst & Young. “These are material moves being proposed on how foreign income is taxed.”
However, the legislation offered by the House Democrats would in some ways be less revolutionary than what the Biden administration envisioned and less onerous for companies.
The Treasury Department has called for a 21 percent tax on corporate foreign earnings, a higher rate than the House proposal or what the finance ministers have so far agreed to support. Part of the reason for the push is that Mr. Biden has proposed raising the corporate tax rate in the United States to 28 percent from 21 percent, and administration officials say a higher global minimum tax would reduce the incentive for U.S. companies to shift profits overseas.
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House Democrats are also offering more generous exclusions than what the Treasury Department proposed this year. Under their proposal, companies could exclude 5 percent of their foreign tangible assets, such as property and equipment, from the global minimum tax. The Biden administration wanted to eliminate the exclusion, which currently allows 10 percent of those assets to be carved out.
Chye-Ching Huang, executive director of the Tax Law Center at New York University’s law school, said retaining the benefit “is an incentive to locate profits and investments offshore” and argued that the overall plan should be strengthened.
Other international measures that have been under discussion would also be eased under the plan produced by House Democrats.
Companies would be able to claim more foreign tax credits than they would under the White House plan, said Monika Loving, who leads the international tax services group at BDO U.S. She added that a plan to deny deductions to corporations with headquarters in low-tax countries was also left out.
“It had a stinging reaction from the business community,” Ms. Loving said of the idea, known as Stopping Harmful Inversions and Ending Low-Tax Developments, or SHIELD.
The Biden administration had hoped that other countries would adopt similar mechanisms as a way of penalizing any countries that might try to remain low-tax havens. It is not clear if the plan in the House bill to make changes to existing tools for deterring “base erosion” will have that effect.
Treasury officials are continuing to work with their international counterparts to put the finishing touches on the global tax agreement so that leaders of the Group of 20 nations can sign off on the pact when they meet for a summit in Rome at the end of October. But many questions must still be resolved in the next six weeks.
Three countries with tax rates below 15 percent — Ireland, Hungary and Estonia — have yet to join the agreement. That poses a problem for the European Union, which needs all of its member countries to sign on for the tax changes to take effect there.
A senior Treasury official said last week that negotiators were still refining details for how to tax the most profitable companies and when European countries would then roll back their digital services taxes, which have angered companies and lawmakers in the United States. They must also establish the exact rate of the global minimum tax. In addition to the United States, France has been agitating to go above 15 percent.
Itai Grinberg and Rebecca Kysar, the Treasury officials who have been leading the global negotiations for the United States, argued in an essay last week that with a rate of 21 percent, “jobs and investment can flourish in the United States.”
After a virtual meeting with her counterparts of the Group of 7 nations last week, Treasury Secretary Janet L. Yellen said the higher rate would “generate funding for a sustained increase in critical investments in education, research and clean energy.”
More details about those plans are expected to be unveiled in early and mid-October. However, it is not clear how and when the United States would enact that part of the agreement, known as Pillar 1, and there are lingering concerns among business groups and Republicans that American companies would bear the brunt of the new taxes.
The October deadline is self-imposed, and it could be pushed back. Countries have set a goal of fully activating the agreement by 2023, as it will take time for countries to change their tax laws.
The House proposal, laid out by Democrats on the Ways and Means Committee, could still undergo substantial changes before a final vote. Ultimately it will have to be melded with a proposal by Senate Democrats, who have yet to settle on a tax rate for corporate foreign earnings.
Manal Corwin, a Treasury official in the Obama administration who now heads the Washington national tax practice at KPMG, said it was possible that the rate could still inch higher despite pushback from companies.
“You never know how these things play out when they need more revenue,” Ms. Corwin said.
Any changes could come in tandem with adjustments to the House Democrats’ proposal for the domestic corporate tax rates. Despite Mr. Biden’s call for 28 percent, the House has proposed a graduated structure, ranging from 18 percent for the smallest businesses, with income below $400,000, to 26.5 percent for companies with taxable income above $5 million.