Washington, D.C.–U.S. Senator Mike Crapo (R-Idaho),
Ranking Member of the Senate Finance Committee, sent a letter to U.S.
Department of Treasury Secretary Janet Yellen outlining priorities and raising
questions regarding Treasury’s approach to international tax negotiations with
the Organisation for Economic Co-operation and Development (OECD).
From the letter:
“The United States should not be willing
to accept an agreement that continues to target American companies and lets our
biggest competitors off the hook. Nor should the United States act to
raise the GILTI rate – the sole international minimum tax in place – before our
OECD competitors take action to implement their own global minimum taxes.
These issues must be resolved in order for Congress to understand whether the
current strategy will discriminate against U.S. companies and adversely affect
the U.S. fisc. They are even more significant now as the success of
American businesses at home and abroad is critical to our country’s economic
recovery from the largest economic shock on record stemming from the COVID-19
pandemic.”
Key points:
- A Pillar 1 agreement redrawing international taxing rights
should be based on clearly articulated and well-established tax
principles. No agreement should be based on the United States ceding
taxing rights without comparable cessions on the part of other jurisdictions. - An OECD agreement must not discriminate against, or
disproportionately affect, American businesses. - Digital Services Taxes (DSTs) unfairly discriminate against
U.S. companies, and their elimination must be a precondition for any agreement
on Pillar 1. - There is bipartisan consensus for ensuring that “every
country plays by the same rules, including China” – as President Biden recently
said. No OECD agreement should provide carve-outs or exceptions for our
biggest foreign competitors, including China.
A copy of the letter is linked here and pasted below.
Dear
Secretary Yellen,
The
Organisation for Economic Cooperation and Development (OECD) and the G20 have
been working through the Inclusive Framework (IF) for more than five years to
develop solutions to address perceived tax challenges from digitalization of
the global economy. I appreciate the Treasury Department’s continued
efforts during the ongoing OECD negotiations to ensure that any agreement does
not discriminate against U.S. businesses or adversely affect American jobs and
investment.
In
recent weeks, Treasury has proposed significant changes to the OECD approach on
both Pillar 1 and Pillar 2. These new
proposals still appear to be in very early stages. Many details are under consideration, and
there has been no public release or formal request for comment. While your staff has shared certain information
about these proposals, significant unaddressed questions remain, particularly
given the aggressive timeline being suggested for reaching agreement.
The
questions and concerns outlined below are rooted in the bipartisan objectives
and priorities that served as the foundation for the United States entering
into the OECD negotiations. Consistent
with these objectives, U.S. engagement should be based on achieving results
that (1) do not harm U.S. businesses and the workers they employ, (2) do not
undermine the United States’ tax sovereignty and recognize Congress’
constitutional role in setting domestic tax policy, and (3) ultimately protect
the U.S. fisc. Additional information is
needed to assess whether the OECD negotiations are moving in a direction that
is consistent with these principles.
A Pillar 1 agreement
redrawing international taxing rights should be based on clearly articulated
and well-established tax principles. No
agreement should be based on the United States ceding taxing rights without
comparable cessions on the part of other jurisdictions.
At
a high level, the original objective of Pillar 1 was to identify companies that
have active and sustained participation in market jurisdictions, regardless of
physical presence.
Treasury’s
proposed Pillar 1 strategy, on the other hand, would identify companies
exclusively based on thresholds of high revenue and profit margins. Treasury has suggested that reallocating
profits of “large” corporations is “consistent with popular concerns in all our
countries about mega-corporations.”
Further, Treasury’s approach would focus “only on those companies that
benefit most from global markets, are most intangibles-driven, and are equipped
to handle the compliance burden that Pillar 1 entails.” While this approach would set quantitative
standards for determining which companies would be subject to Pillar 1, the
rationale deviates from the original intent and appears to lack an articulated
foundation in tax principles beyond populist appeal.
Given the thresholds being considered, a
disproportionate amount of the reallocated profits of in-scope companies may be
those of market-leading U.S. companies – namely, American technology,
pharmaceutical and consumer products companies that are “intangibles-driven”
because of successful research and product development activities performed in
the United States. Because a Pillar 1
agreement would fundamentally alter the international tax landscape and
primarily affect innovative U.S. companies, to be sustainable, any agreement
must be based on sound international tax principles, and not arbitrary
thresholds rooted in politics or popular opinion of the day. Treasury must clearly articulate to Congress
the underlying tax policy of its proposed approach and demonstrate why the new
strategy justifies ceding U.S. taxing rights over profitable U.S. companies to
foreign jurisdictions.
An OECD agreement must
not discriminate against, or disproportionately affect, American
businesses.
There
continues to be strong bipartisan, bicameral agreement that the United States
must not agree to an OECD approach that discriminates against American
companies – a point Treasury clearly acknowledges. This principle is a red line.
To
evaluate whether the new proposal crosses this bipartisan, bicameral red line,
additional information must be provided to Congress regarding the proposed
Pillar 1 strategy. Congress needs a
detailed analysis of how many U.S. companies would be affected, which companies
likely would be treated as “in scope,” the magnitude of profits that would be
reallocated, and the effect on U.S. tax revenues. It is clear the OECD and IF countries would
not be willing to agree to a Pillar 1 agreement without knowing the degree to
which U.S. digital companies would be covered; likewise, it is imperative
Congress know how this approach would affect U.S. businesses, their workers,
and the U.S. fisc.
Digital Services Taxes
(DSTs) unfairly discriminate against U.S. companies, and their elimination must
be a precondition for any agreement on Pillar 1.
An
important condition for any Pillar 1 agreement is the repeal of unilateral DSTs
and other discriminatory unilateral measures already imposed by other
countries. As Members of Congress have
said repeatedly and on a bipartisan basis, DSTs unfairly discriminate against
American businesses. The elimination of
unilateral measures and the shared goal of tax certainty remain a key outcome
offered by the OECD for engaging in multilateral discussions.
However,
recent reports suggest these concerns are not being taken seriously. Several weeks ago, the EU tax commissioner
reportedly stated that an OECD agreement “should not prevent the EU and its
member states from adopting a digital levy.” More recently, a European Commission
communication asserted that the EU digital levy—which “will ensure a fair
contribution of the digital sector to the financing of the recovery in the
EU”—will be “independent of” and “coexist with” an OECD agreement.
These
EU statements are directly counter to the OECD’s key objective of the current
negotiations. It would be unacceptable
for the United States to endorse any agreement that would allow DSTs or similar
unilateral measures to continue to be imposed on U.S. companies.
There is bipartisan
consensus for ensuring that “every country plays by the same rules, including
China” – as President Biden recently said.
No OECD agreement should provide carve-outs or exceptions for our
biggest foreign competitors, including China.
Not
only was the United States the first to enact a global minimum tax when it
enacted the global intangible low-taxed income (GILTI) regime, we continue to
be the only country to date that has enacted a global minimum tax. Because the United States already has a
robust minimum tax, the IF acknowledged in 2020 there was good reason to treat
GILTI as a “deemed compliant regime” – in large part because GILTI, in its
current form, is already harsher in many respects than the Pillar 2 minimum tax
under consideration at the OECD.
Now,
Treasury has proposed a significantly higher global minimum tax rate of 21
percent as part of the Pillar 2 global minimum tax, as well as a number of
changes to make the global minimum tax rules far more stringent for U.S.-based
businesses. Numerous countries have
suggested they are not aligned with these changes, and others are reportedly
seeking a carve-out or exception from Pillar 2.
While Treasury has now proposed a 15 percent rate floor in recognition
of the unlikelihood that 21 percent would be agreed to by other countries, it
remains to be seen whether other countries will agree to implement a minimum
tax. Pascal Saint-Amans, Director of the
Centre for Tax Policy and Administration at the OECD, recently stated that not
all countries will have to sign on to Pillar 2.
He has also suggested that China may receive a carve-out or exception to
Pillar 2. An agreement that provides
exceptions for our biggest competitors would be inconsistent with the principle
that all countries should be playing by the same rules. It would also hamstring the U.S. economy
while simultaneously advancing the economies of its closest competitors.
Consistent with these
principles, please address the following questions:
1)
A
Pillar 1 agreement would require Congress to cede U.S. taxing rights over
profitable U.S. companies to foreign jurisdictions. What will the United States receive in
return? What are the sound tax
principles that underlie Treasury’s proposed Pillar 1 approach? How does the determination that a company is
large and profitable justify the reallocation of U.S. taxing rights to certain
foreign jurisdictions? How sustainable
would such an approach be?
2)
Please
provide Treasury’s analysis of companies that would be identified as in-scope
using the proposed Pillar 1 quantitative scope approach, based on publicly
available information, such as from the Compustat database. Please provide such information assuming a
$10 billion revenue threshold and 15 percent profit margin, as well as under a
$20 billion revenue threshold and 10 percent profit margin, both with and
without carve-outs for extractives, financial services, and real estate (with
the carve-outs as defined in the Report on the Pillar 1 Blueprint). Treasury’s summary should include an estimate
of the amount allocated from U.S. companies to foreign market jurisdictions as
well as amounts reallocated from foreign jurisdictions to the United
States.
3)
An
OECD agreement that allows continued imposition of DSTs would result in unfair
discrimination against U.S. companies, which is plainly inconsistent with
bipartisan objectives that serve as the basis for the negotiations. Will Treasury commit to accept only an
agreement that requires foreign countries to repeal (and the EU to refrain from
enacting) DSTs or similar unilateral measures once an initial OECD agreement is
reached (currently scheduled for July 2021)?
4)
If
our foreign competitors are not subject to Pillar 2, U.S. companies will be at
a significant competitive disadvantage in the global marketplace should the
Administration’s GILTI proposals become law.
The United States already moved first by enacting GILTI. Will Treasury and the Administration commit
not to take the second step of making GILTI far more stringent before other
countries even take their first step of enacting a global minimum tax? Will Treasury and the Administration also
commit that no agreement will be reached on Pillar 2 if the United States’ biggest
competitors, like China, are not subject to the same terms as the United
States?
The issues being addressed at the OECD are
complex, and I appreciate the work you and your team are doing to make progress
and seek areas of agreement. However,
the stakes for the United States and our national economy are high. The United States should not be willing to
accept an agreement that continues to target American companies and lets our
biggest competitors off the hook. Nor
should the United States act to raise the GILTI rate – the sole international
minimum tax in place – before our OECD competitors take action to implement
their own global minimum taxes. These
issues must be resolved in order for Congress to understand whether the current
strategy will discriminate against U.S. companies and adversely affect the U.S.
fisc. They are even more significant now
as the success of American businesses at home and abroad is critical to our
country’s economic recovery from the largest economic shock on record stemming
from the COVID-19 pandemic.
Thank
you in advance for your prompt and detailed response to this request. We ask that you provide your reply by Friday,
June 4, 2021.
Sincerely,