Peter Barnes co-wrote the May 22, 2023 letter "No Time for Waiting" for Tax Notes Today International. Below is the entire letter. Please visit this link to view the letter as it appears in Tax Notes Today International.
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To the Editor:
Taxpayers and tax advisers clamor for tax certainty. Without certainty, the argument goes, companies cannot project the economic consequences of decisions, and so decisions are either delayed or misguided. Here is some tax certainty:
- Pillar 2, the OECD initiative to ensure that large multinationals' income is taxed at a minimum 15 percent rate, will be enacted by more than 100 countries, including important U.S. trading partners. The rules will take effect in some countries no later than 2025.
- The U.S. political system shows no interest in following the global rules.
- Failing to take modest legislative steps to modify existing U.S. international tax rules to converge with the global standard will subject U.S. taxpayers to stunningly burdensome compliance.
- Further, the United States will forgo tax revenue, which will be paid to foreign governments instead of our own.
Most surprising of all: Multinational U.S. companies threatened by pillar 2 are sitting on the political sidelines in the United States, refusing to get involved. To be blunt, we see no awareness by the leadership of American corporations that a train wreck is coming and that the wreck is completely avoidable. Tax professionals certainly see the challenge. At every tax conference, there is a presentation on pillar 2 with a slide that reads: "United States — ???"
While pillar 2 is exceedingly complex, the conundrum facing U.S. taxpayers is not. The OECD proposal urges countries to adopt a minimum 15 percent tax rate on income earned within that country. Further, countries are encouraged to adopt a "top-up" tax on a country's corporations who are shareholders in nonresident companies that are not subject to a minimum 15 percent tax. If the United States does not follow pillar 2, foreign subsidiaries of U.S. companies will be hit with top-up taxes collected by other countries that do follow pillar 2.
The proposed rule is modeled on the U.S. global intangible low-taxed income rule, known by its acronym GILTI, which taxes low-taxed foreign income of certain U.S. taxpayers' foreign subsidiaries. But the OECD proposal goes beyond the existing U.S. rule in two important ways. First, the OECD proposes a 15 percent minimum tax, while the U.S. minimum tax is at 10.5 percent. Second, the OECD applies its minimum tax on a country-by-country basis, while GILTI calculates the minimum tax on a blended basis that includes all of a taxpayer's non-U.S. subsidiaries' income.
The Biden administration proposes to align the U.S. rule with the OECD proposal. But there has been little to no support from the business community and tepid enthusiasm among Democrats in Congress. Congressional Republicans have expressed outright opposition to aligning the U.S. law with pillar 2 and criticized the entire OECD exercise.
The merits of pillar 2 and its details are fruitful topics for debate. But pillar 2 will not go away, no matter the outcome of the 2024 election. U.S. taxpayers and their representatives in Congress must take steps to prepare for other countries' inevitable adoption of pillar 2.
U.S. companies must make clear to Congress that they need and support changes to rationalize the U.S. GILTI rules and the new corporate alternative minimum tax on financial statement income with pillar 2. This should be the highest Washington tax priority of every multinational company, ranking with (or above) extension of expensing research and development costs.
Companies and trade groups are experts at tax lobbying. The message in this case is simple: No matter what the United States thinks of pillar 2, it is coming. Failing to rationalize GILTI and the corporate AMT with the OECD proposal will mean massive compliance burdens for U.S. taxpayers and revenue that will go to other countries when it could be paid to the U.S. fisc. U.S. companies, working together, can lessen their compliance burdens while increasing net U.S. revenues that can be used for other priorities.
What will happen if U.S. companies do not make pillar 2 a priority? Nothing, at least on the legislative front. Congressional leadership has shown no interest in this issue. Given Republican opposition to the OECD and pillar 2, rationalization of U.S. rules with pillar 2 will not move without multinational companies' engagement, direction, and leadership.
But if Congress fails to act legislatively, a lot will occur for U.S. multinational companies. Other jurisdictions, most notably the countries of the European Union, will begin to impose top-up taxes on foreign subsidiaries of U.S. companies. Companies will necessarily pay the top-up taxes, even if they believe that tax treaties should protect them. Companies must calculate these additional costs and reflect them in financial statements, thereby reducing net income. Debates over and even challenges to the legitimacy of imposing pillar 2 taxes on affiliates of U.S. companies will extend for years, with the attendant uncertainty and costs.
Why have U.S. companies failed to lobby in support of U.S. alignment with the OECD rules? Certainly, a reluctance to spend their limited lobbying capital on higher taxes is one reason. And a fear of upsetting Republican members of Congress who oppose pillar 2 is a strong disincentive to be vocal on this issue. Yet another reason for the passivity of U.S. companies is the hope, a desperate hope, that some other company or trade group will take the lead.
Waiting is fatal. Companies need to act now. In 2025, when pillar 2 is implemented, blame for the U.S. failure to align with the global norms will rest on the taxpayers who remained silent.
Peter A. Barnes
Stephen E. Shay
May 12, 2023
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.