Key Republican tax leaders in the U.S. House of Representatives have ramped up their opposition to a key international tax rule within the OECD’s global tax framework. This comes as the U.S. Treasury moves forward with regulations that may offer companies a way around the provision.
In a letter to the OECD Secretary-General, Mathias Cormann, House Speaker Mike Johnson (R-La.) and Ways and Means Committee Chair Jason Smith (R-Mo.) criticized the OECD’s undertaxed profits rule (UTPR). They argue it infringes on U.S. tax sovereignty. The UTPR allows countries to impose a “top-up” tax if a company’s subsidiary in another jurisdiction pays less than a 15% tax rate.
Johnson and Smith expressed frustration with the Biden administration for pushing ahead with these international tax negotiations without congressional approval. According to them, any such tax deal imposed without Congress would violate the U.S. Constitution.
Treasury’s Potential Workaround with CAMT
Despite Republican resistance, the Treasury Department is taking steps to protect U.S. multinationals from being significantly impacted by the UTPR. The proposed solution comes through the corporate alternative minimum tax (CAMT). Updated as part of the 2022 Inflation Reduction Act, the CAMT applies a 15% minimum tax on large companies, distinct from the OECD’s Pillar Two minimum tax of the same percentage.
Reuven Avi-Yonah, a tax law professor at the University of Michigan, noted that the CAMT could potentially shield U.S. companies from the UTPR’s effects. By ensuring that U.S. multinationals meet the 15% threshold, the chances of triggering a “top-up” tax in other jurisdictions are reduced.
“The corporate AMT will make it less likely that U.S. multinationals will be subject to a top-up tax under the UTPR,” Avi-Yonah wrote in a commentary for Tax Notes earlier this year.
The U.S. Takes Its Own Path in Global Tax Reform
While many countries have begun implementing the OECD’s Pillar Two rules, the U.S. has not. Instead, the Treasury’s focus remains on developing the CAMT regulations, which the department described as one of its most significant projects in years.
“Congress gave Treasury a significant amount of authority to implement the CAMT, and these proposed regulations are consistent with Congress’s intent,” the Treasury Department said.
Meanwhile, the Republican leaders, in their letter to the OECD, highlighted a lawsuit filed in Belgium by the American Free Enterprise Chamber of Commerce. This case seeks to block the UTPR, and the GOP leaders endorsed this legal challenge as part of broader efforts to safeguard U.S. tax autonomy.
Pillar Two vs. Pillar One: Divergent Paths
As the U.S. moves forward with its own minimum tax framework, the broader OECD tax deal faces hurdles. The Pillar Two agreement—focused on setting a global minimum corporate tax rate—appears to be progressing, at least for other countries. In contrast, the OECD’s Pillar One, which deals with the allocation of taxing rights between countries, faces significant opposition, particularly from the U.S.
Pillar One is designed to address the issue of where multinational companies, especially in the tech sector, should be taxed. Many smaller and developing nations support this initiative, seeing it as a way to claim a fairer share of tax revenues from multinationals operating within their borders. However, U.S. reluctance to endorse this part of the deal has stymied progress.
The African Union, among others, sees the U.N.’s involvement in this process as a positive step. The group noted that a U.N. resolution on the issue could help provide much-needed financial resources for developing nations, aligning with global efforts to strengthen tax systems and achieve sustainable development goals.
Challenges Ahead for Global Tax Reform
One of the key unresolved issues in the Pillar One negotiations is how to tax big tech companies, which can generate significant revenue across multiple countries without having a physical presence there. The absence of a comprehensive agreement on this point has led several countries, including Canada, to implement digital services taxes targeting the tech sector. This creates the risk of escalating trade disputes.
In the face of these challenges, the U.S. Treasury appears to be crafting its own path with the CAMT, potentially limiting the impact of the UTPR on U.S. multinationals. As the OECD’s global tax reform effort continues, the interplay between national sovereignty, global tax rules, and multilateral agreements will be closely watched by tax professionals and multinational corporations alike.
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