With midterm elections fast approaching, Democrats’ window to follow through on the Biden administration’s plan for rooting out tax havens and raising taxes on global companies’ foreign profits may be closing.
If congressional leaders can’t scrape together a filibuster-proof tax and spending package that includes implementation of the 15% global minimum tax, it could complicate international tax negotiations Treasury officials have touted as a top priority.
That this could be Democrats’ sole shot to act on the plan adds to the pressure to pass some form of a budget reconciliation bill this summer, some lawmakers and supporters of the effort say, after opposition from Sen. Joe Manchin III, D-W.Va., to the $2.2 trillion package put talks on ice for almost six months.
Some Democrats view June as their final opportunity to get Manchin on board with a reconciliation bill they could pass before the August recess. Then, they have elections to deal with and the possibility their control of Congress slips away.
Sen. Sherrod Brown, D-Ohio, a Finance panel member who helped write the international tax provisions, said he’s concerned particularly given how much else Democrats have to do, limited time and the difficulty of getting any Republicans on board.
He was uncertain whether getting in line with the global minimum tax agreement will be a must-do item in the months ahead. “I don’t know,” Brown said. “We’re going to do our best.”
More than 130 countries signed onto an agreement last fall brokered by the Organization for Economic Cooperation and Development to set a 15% minimum tax rate for the largest multinational corporations.
The landmark deal intends to stop companies from parking profits overseas to avoid higher tax rates at home, and to nudge countries toward charging a corporate rate of at least 15%. Governments lose $312 billion in tax revenue annually due to multinationals shifting their earnings to countries considered tax havens, according to a November study by the U.K.-based Tax Justice Network based on OECD data.
Guidelines for getting compliant tax policies in place aim for a 2023 start date, though that timeline appears to be slipping.
The U.S. has a minimum tax established in Republicans’ 2017 tax law: the “global intangible low-taxed income” rate. It’s a 10.5% charge on corporations’ foreign profits, though the effective rate also depends on allowances for tangible assets like factories, whether a company is operating in other countries where it has paid higher rates and other factors.
Democrats proposed a slate of changes to the current system in their reconciliation bill that intend to align the tax with the world’s efforts, including raising the GILTI rate to around 15%, charging it on a country-by-country basis and adjusting existing rules to enforce the system.
Under current rules, tax paid and profits or losses everywhere but the U.S. are lumped together for calculating GILTI. Under Democrats’ new rules, which are in line with the OECD effort, companies would have to assess their tax in each country where they operate and pay at least 15% in each location, which would mean losses or high tax payments in one location couldn’t offset taxes owed for business elsewhere.
It’s clear the effort is an administration priority. Treasury Assistant Secretary for Tax Policy Lily Batchelder described the global minimum tax agreement as one of the Biden administration’s biggest accomplishments during a Brookings Institution and Tax Policy Center virtual event last month.
Treasury Secretary Janet Yellen spent a chunk of May in Europe where she called for forward motion on the international deal. During a speech at the Brussels Economic Forum, Yellen said the European Union and U.S. “must show leadership by expeditiously implementing the global minimum tax in our domestic laws,” according to her prepared remarks.
The EU could be on the precipice of rolling out its version of the 15% minimum tax, but that requires unanimity that Poland is blocking. During her trip, Yellen discussed the issue with Polish officials. She told reporters the talks didn’t produce a breakthrough but held out hope Poland will soon agree, according to Reuters.
Treasury officials declined an interview for this story and referred to Yellen’s recent public comments.
As Treasury continues to vow progress, some say following through is critical to advancing the global minimum tax and related, slower-moving negotiations which aim to redistribute countries’ rights to tax large multinationals. The Biden administration aims to use the latter to fend off digital services taxes that largely hit U.S. tech companies.
Kyle Pomerleau, a senior fellow studying tax policy at the right-leaning American Enterprise Institute, said in an interview the U.S. commitment to the minimum tax gave Europe political cover to move forward and assuaged competitiveness concerns for those countries. But he pointed out that global officials always knew the Biden administration was making a promise it couldn’t guarantee.
The Center for American Progress’ Seth Hanlon, a former Obama administration tax official and tax aide to congressional Democrats, said in an interview that it’s hugely important for Democrats to pass changes aligning with the global minimum tax this year in order to preserve momentum for the deal, get other countries to act and maintain trust for other negotiations like those on distributing tax rights.
“It would be fumbling a great opportunity and I think it would be a big setback if the U.S. fails to act,” he said.
Others on the left also describe the possibility of congressional inaction as a failure.
“The United States showed real leadership on the global minimum tax,” Sen. Elizabeth Warren, D-Mass., said. “It would be a terrible embarrassment for our country for Congress not to be able to pass it just because Republicans want to be able to protect billion-dollar corporations who don’t want to pay any taxes at all.”
Congress’ top Republican tax writers, Senate Finance ranking member Michael D. Crapo of Idaho and House Ways and Means ranking member Kevin Brady of Texas said in separate interviews that the administration failed to keep them informed on the global tax talks. They won’t support the Democrats’ international tax plans when it comes to moving away from how they structured the international tax system in 2017 or raising taxes generally.
But Democrats can act on their own because reconciliation requires only a simple majority vote in the 50-50 Senate. Ways and Means Chairman Richard E. Neal, D-Mass., said the need to implement the global tax deal is an “important consideration” in trying to finally get the reconciliation bill done.
Backing for the international tax changes in Democrats’ House-passed bill appears to be there. Whether Democrats can revive the larger package remains unclear.
Hanlon said if Democrats turn to a smaller version of their reconciliation bill, the international tax provisions and multiyear funding for the IRS should be their tax priorities, because of global pressure and the unique chance to act on both.
“We don’t know what the future will hold, but we have no idea whether we’ll have another chance like this,” Hanlon said.
If Democrats don’t move on the reconciliation bill, they’re likely to face similar resistance from Republicans and companies to their proposals in the next Congress.
Some of the largest business trade groups, like the U.S. Chamber of Commerce and National Association of Manufacturers, oppose Democrats’ proposals to charge U.S. corporations more on profits abroad.
NAM’s Senior Director of Tax Policy David Eiselsberg said in an interview that the group will continue to fight the legislation if it’s in the mix next Congress, arguing it’s harsher than what the rest of the world may do under the OECD deal because that allows an exclusion for payroll expenses. He said NAM will insist the U.S. shouldn’t make any changes before other countries act.
The U.S. Chamber will continue to battle the changes even if the world moves ahead, the group’s chief economist, Curtis Dubay, said in an interview. The Chamber is already warning that if Democrats’ reconciliation push fails and Treasury tries to make conforming changes on its own, they’ll face lawsuits.
But Dubay also believes one element could shift the debate in Democrats’ favor. If other countries move forward with a minimum tax penalizing countries operating in their borders that pay less than 15% in tax elsewhere, U.S. companies could end up subject to higher taxes regardless. It’s irrelevant to corporations where they owe that tax, but it could change the stakes for U.S. lawmakers, Dubay said.
In that case, U.S. law changes might not increase taxes companies owe but instead ensure the U.S. gets the tax revenue rather than other nations. “It’s kind of a nonsensical thing to allow so you can see that it would become a political football,” Dubay said.
While still committed to the reconciliation route, Neal didn’t rule out eventually bringing Republicans on board for a bipartisan deal. “We’re going to do international tax one way or another,” he said.
