Washington,
D.C.–Senate
Finance Committee Republicans, led by Ranking Member Mike Crapo (R-Idaho),
wrote U.S. Department of the Treasury Secretary Janet Yellen raising questions and
concerns with recent developments in global tax negotiations. The request
for information follows a prior request, sent in December
2021, which has gone unanswered. Since that time, there have been a
number of alarming developments that raise additional concerns regarding the
effect of the OECD agreement on U.S. competitiveness and tax revenue.
The
senators again stress the importance of ensuring U.S. businesses and workers
remain globally competitive in any agreement, and the need for transparency and
bipartisan engagement with Congress throughout the process.
Highlighted
in the letter:
- The Pillar 2 Model Rules, released in late December,
confirm that the proposed global minimum tax would apply far more broadly to
U.S. companies than previously conveyed by Treasury.
“Without evidence to the contrary, we are
increasingly concerned that Treasury has negotiated a deal that will harm U.S.
businesses and jobs.”
- Other countries appear to have negotiated more successfully
to receive exemptions from the global minimum tax.
“[T]his Administration appears intent on
thwarting Congress’s constitutional tax-writing authority, including its
authority to provide effective incentives that both parties agree are
meaningful and necessary to promote U.S. investment and innovation.”
- As a result of Treasury’s negotiating strategy, it is now
clear that other countries believe the U.S. global minimum tax—GILTI–does not
comply with Pillar 2 in its current form.
“Despite the United States having the world’s
only global minimum tax, Treasury continues to take the position that Congress
should make the U.S. global minimum tax harsher before other countries take any
action. It is one thing for the Administration to advocate for higher
taxes as part of its domestic tax agenda, but quite another to explicitly
negotiate an international agreement that would subject U.S. companies to
double taxation unless Congress acts accordingly.”
Despite growing evidence that the OECD agreement would
surrender a share of the U.S. tax base to foreign countries, Treasury continues
to argue that it will not harm the U.S. fisc.
“Despite repeated requests . . . Treasury has
declined to provide any data or analysis of the effect of the OECD agreement on
U.S. revenue, not even to the nonpartisan experts at the Joint Committee on
Taxation, so that independent estimates and analysis can be developed and
provided to members of Congress on a bipartisan basis.”
Read
the full letter, signed by all Senate Finance Committee Republican members, here
or below.
____________________________________
Dear Secretary Yellen,
We have yet to receive a response to the important questions
we raised in our letter dated December 22, 2021. In the intervening
weeks, there have been a number of alarming developments that raise additional
concerns regarding the effect of the OECD agreement on U.S. competitiveness and
tax revenue. In particular, the Pillar 2 Model Rules, released in late
December, confirm that the OECD Pillar 2 agreement would apply to U.S.
companies far more broadly and adversely than the Treasury Department has
represented. Without evidence to the contrary, we are increasingly
concerned that Treasury has negotiated a deal that will harm U.S. businesses
and jobs.
Last month, the Assistant Secretary of the Treasury for Tax
Policy spoke about the “problem” of tax competition, fixable, in Treasury’s
view, by Pillar 2’s minimum tax on foreign earnings. The minimum
tax, she stated, “sets a floor so that multinational corporations, whether
headquartered in the United States or abroad, will pay taxes on their foreign
earnings of at least 15 percent.” While acknowledging that the United
States is currently the only country with a minimum tax on foreign earnings,
the Assistant Secretary asserted that Pillar 2 would create a “level playing
field” that “will enhance [U.S. corporations’] competitiveness relative to
foreign corporations.”
The Model Rules, however, confirm a much different result,
suggesting that the Treasury Department has not been fully transparent about
the potential effects of the “global minimum tax” on U.S. companies and the
U.S. fisc. As an initial matter, the Assistant Secretary failed to
mention that the Pillar 2 Model Rules would also permit foreign countries to
impose tax on American companies’ U.S. profits. For example, under the
Model Rules, a U.S. company with operations abroad could face additional tax
liability – referred to as a top-up tax – in those foreign jurisdictions if it
was determined the U.S. company did not pay adequate tax on its U.S. profits
because of the Rules’ treatment of U.S. tax credits and deductions.
Ultimately, under the Treasury-negotiated agreement, foreign countries could
effectively capture the benefit of congressionally-provided tax credits and
deductions targeted at domestic innovation, investment, and job creation.
It appears that some countries, such as the United Kingdom,
negotiated more successfully to protect their domestic tax laws and
companies. For example, based on the recently released UK Pillar 2
consultation document, the benefit of the UK research and development (R&D)
credit would not be eliminated or reduced, allowing it to remain “an effective
instrument for promoting R&D activity in the UK.” However, in
stark contrast, the U.S. R&D credit would not receive the same preferential
treatment, nor would the low-income housing tax credit, new markets tax credit,
or foreign derived intangible income. Congress specifically enacted these
provisions to encourage U.S. jobs and investment. Yet, this
Administration appears intent on thwarting Congress’s constitutional
tax-writing authority, including its authority to provide effective incentives
that both parties agree are meaningful and necessary to promote U.S. investment
and innovation.
The Treasury Department’s failure to protect U.S. businesses
and jobs also extends to the apparent treatment of the U.S. global minimum tax
as a non-qualified regime. Despite the United States having the world’s
only global minimum tax, Treasury continues to take the position that Congress
should make the U.S. global minimum tax harsher before other countries take any
action. It is one thing for the Administration to advocate for higher
taxes as part of its domestic tax agenda, but quite another to explicitly
negotiate an international agreement that would subject U.S. companies to
double taxation unless Congress acts accordingly. The European
Commission’s Pillar 2 directive confirms that EU countries are prepared to take
advantage of Treasury’s negotiating strategy. Nonetheless, we
believe the focus on Congress to make the U.S. global minimum tax harsher when
it in a number of ways already exceeds the standards of the Pillar 2 minimum
tax is misplaced. The United States has had a global minimum tax for four
years. Rather than mounting a pressure campaign against Congress, the
focus should be on whether other countries enact a global minimum tax in the
first place.
Despite growing evidence that the OECD agreement would
surrender a share of the U.S. tax base to foreign countries, Treasury continues
to argue that it will not harm the U.S. fisc. In fact, the Assistant
Secretary contends that “over the long term, the global minimum tax will
benefit the US fisc … [and] ensure our corporate revenue stream is
sustainable.” Despite repeated requests, however, Treasury has declined
to provide any data or analysis of the effect of the OECD agreement on U.S.
revenue, not even to the nonpartisan experts at the Joint Committee on
Taxation, so that independent estimates and analysis can be developed and
provided to members of Congress on a bipartisan basis. The Assistant
Secretary also neglected to mention the fact that 2021 corporate tax revenues
are at a record high, and higher as a percentage of GDP than the average for
the decade prior to the Tax Cuts and Jobs Act, calling into question what
problem the Administration is attempting to solve.
While Treasury has long argued that the agreement would end
a supposed “race to the bottom” and “put a floor on tax competition once and
for all,” the Model Rules appear to open the door to another form of tax
competition – to further reduce corporate tax rates and provide exemptions for
tax subsidies in an effort to remain internationally competitive while still
operating within the confines of the Model Rules. A recent Oxford University
Policy Brief has concluded that not only will countries have an incentive to
lower their tax rates, potentially to zero, but that incentive may become
stronger with a Pillar 2 minimum tax in place. As the brief states,
for countries “to improve their competitive position over competitors they will
have to reduce the Corporation Tax liability they impose by more than they
would have had to do in the absence of Pillar 2. This implies that
following the introduction of Pillar 2 there is an increased probability that
some countries will compete down the Corporation Tax, perhaps even all the way
to zero.” Rest assured that China and other aggressive economic
competitors will leverage that opportunity.
We, along with many other Republican and Democratic members
of Congress, have highlighted the importance of ensuring U.S. businesses and
workers remain globally competitive. The concerns highlighted above,
while not exhaustive, raise serious questions about the effect of the Pillar 2
agreement on the competitiveness of U.S. businesses and workers, and of the
United States as a location for investment. If this agreement is as
critical to U.S. competitiveness as the Assistant Secretary recently argued,
why has the Treasury Department not provided substantive responses to our
repeated questions, and why have there been no public consultations or hearings
in either congressional tax-writing committee to discuss these important
issues?
In light of recent developments, we believe the best course
of action for engaging Congress at this stage is for you or your lead
negotiators to appear publicly before this Committee. At the very least,
we request an in-person briefing to address these issues as well as written
responses to our unanswered questions.
Sincerely,