Tax Update Blog

Tax News & View Global Tax Deal Roundup

October 11, 2021 | Blog
By Jay Heflin

Global Deal to End Tax Havens Moves Ahead as Nations Back 15% Rate – Alan Rappeport and Liz Alderman, New York Times ($). “The world’s most powerful nations agreed on Friday to a sweeping overhaul of international tax rules… The accord would represent a sea change in the way the world’s largest corporations have been taxed for decades, and is likely to make them pay more taxes while spreading revenue more evenly to countries where those businesses earn sales.”

Republicans, who have opposed Mr. Biden’s domestic tax agenda, immediately objected to the global deal and threatened to block it in Congress, suggesting a looming fight as the United States tries to ratify the agreement… Democrats expect that they can pass a global tax increase along party lines using a legislative procedure called budget reconciliation. Republicans disagree, and on Friday several Republican senators warned that the administration’s negotiations appeared to ‘undermine the Senate’s constitutional authority, as well as the United States’ role as a reliable trading partner.’

International community strikes a ground-breaking tax deal for the digital age – OECD:

The two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington D.C. on 13 October, then to the G20 Leaders Summit in Rome at the end of the month…

Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.  Specifically, multinational enterprises with global sales above EUR 20 billion [USD 23 billion] and profitability above 10% - that can be considered as the winners of globalisation - will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions…

Pillar Two introduces a global minimum corporate tax rate set at 15%.  The new minimum tax rate will apply to companies with revenue above EUR 750 million [USD 867 million] and is estimated to generate around USD 150 billion in additional global tax revenues annually.

The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide...

Global Corporate-Tax Overhaul Advances as 136 Nations Sign On – William Horobin and Isabel Gottlieb, Bloomberg ($). “A vast overhaul of corporate taxation won support from 136 countries, as governments resolved key differences over the level of a global minimum rate and an end to new digital taxes that the U.S. has deemed discriminatory."

The Group of 20 looks to approve the plans at meetings of finance officials next week and a summit at the end of the month. The Organization for Economic Cooperation and Development, which has chaired the talks, is aiming for a multilateral convention next year and implementation in 2023. That could still prove ambitious in some countries, not least the U.S.

OECD Plans to Have Model Rules for Minimum Tax Next Month – Hamza Ali and Isabel Gottlieb, Bloomberg ($). “The OECD has published an ambitious timeline for how it plans to implement a new global deal to rewrite tax rules.”

More than 130 countries around the world signed up Friday to an agreement to dramatically overhaul where and how much tax multinationals pay.

The implementation plan sets out the tasks the Organization for Economic Cooperation and Development must complete by 2023, and includes technical deliberations as well as resolution of some thorny political issues.

 

Getting this agreement through Congress will be no cakewalk.

Brady, Crapo: Biden Global Tax Deal Puts Politics Over Progress, Surrenders Fate of U.S. Economy to Foreign Competitors – Senate Finance Committee:

In a joint statement, Congress’s top Republican tax writers, Senate Finance Committee Republican Leader Mike Crapo (R-Idaho) and House Committee on Ways and Means Republican Leader Representative Kevin Brady (R-Texas), blasted the Biden Administration’s announcement that it had reached an agreement with the Organization for Economic Cooperation and Development: 

'Rather than securing an agreement that would provide certainty and immediately eliminate digital services taxes, the Administration has instead used this global forum to advance its short-sighted domestic tax agenda.' 

Corporate Taxes Poised to Rise After 136-Country Deal – Paul Hannon and Richard Rubin, Wall Street Journal ($):

Congress’ work on the deal will be divided into two phases. The first, this year, will be to change the minimum tax on U.S. companies’ foreign income that the U.S. approved in 2017. To comply with the agreement, Democrats intend to raise the rate—the House plan calls for 16.6%—and implement it on a country-by-country basis. Democrats can advance this on their own and they are trying to do so as part of President Biden’s broader policy agenda.

The second phase will be trickier, and the timing is less certain. That is where the U.S. would have to agree to the international deal changing the rules for where income is taxed. Many analysts say that would require a treaty, which would need a two-thirds vote in the Senate and thus some support from Republicans.

Global Tax Reform Isn’t Yet a Done Deal – Rochelle Toplensky, Wall Street Journal ($). “Europe has mustered an almost united front behind global tax reform. Now it is the U.S. that needs to get its house in order… The Biden administration has been a key advocate of the agreement, and has worked hard and twisted a few arms to get one. But the required tax changes are mostly tucked into the White House’s contentious $3.5 trillion spending bill. While legislating new U.S. tax rules was never going to be easy, the obstacles seem to have grown in recent weeks and failure could feasibly trip up the global overhaul."

The reform makes two big changes. First, it creates a global minimum corporate tax. Second, it will tax the world’s largest companies slightly differently: A percentage of their profits will be taxed based on where they make sales rather than where they have assets such as factories, employees or patents. Currently asset location determines taxing rights…

Recent drafts included implementation of the deal by sometime in 2023. With Dublin on board, the timing seems ambitious but possible for Europe. President Biden’s path seems less certain. The final agreement on when to roll back the DSTs will offer a useful indication of how confident Europeans and Americans are that this reform is a done deal.

Global Tax Plan Has Work Remaining, Japan Finance Minister Says - Yuko Takeo. Bloomberg ($). “The overhaul of corporate taxation around the world still has work ahead, Japan’s Finance Minister said as he welcomed the latest agreement on the plan.”

‘There still remains works to be done, including the development and ratification of a multilateral convention as well as introducing domestic tax legislations,’ Shunichi Suzuki said in a statement late Friday.

The Progressive Case Against Pillar 1 – Mindy Herzfeld, Tax Notes ($). “International taxation is in turmoil on two fronts: The United States has proposed largely rewriting the rules put in place just four years ago as part of the Tax Cuts and Jobs Act, and globally, the century-old regime for allocating taxes across jurisdictions is being renegotiated under the guise of rewriting the rules for digital businesses.”

While in the United States, it’s the progressive wing of the Democratic Party that’s driving many of the proposed changes, on the global front, developing countries and those who purport to speak on their behalf are deeply wary of the agenda supposed to be agreed to this week by the G-20. The divide shows that international tax rules have become key to the platform for social equity, even though they have different implications domestically and globally. 

 

While the global tax agreement has grabbed a lot of headlines, Democrats on Capitol Hill have started to home-in on the top line number for the budget reconciliation bill being $2 trillion (down from $3.5 trillion). But that number could be based on benefits lasting fewer years. No official number has been announced, so stay tuned. 

Yellen Confident Congress Will Follow Through on Global Tax Deal – Christopher Condon, Bloomberg ($). “Treasury Secretary Janet Yellen said she expects Congress to take action soon to bring the U.S. into line with a global minimum tax agreed on last week by 136 countries."

'I am confident that what we need to do to come into compliance with the minimum tax will be included in a reconciliation package,' Yellen said Sunday on ABC’s 'This Week,' referring to a spending bill Democrats are preparing… Yellen also expressed confidence that Democrats would come to an agreement over the content and size of a long-term spending package. Party moderates have rejected the $3.5 trillion headline number President Joe Biden had proposed. Senator Chris Coons, a Delaware Democrat, said on 'Fox News Sunday' he expects the number to be whittled down to about $2 trillion.

Top Progressive Says Five-Year Tax Bill OK for Starters – Doug Sword, Tax Notes ($). “A leading House progressive said he’d be willing to slash the cost of the 10-year, $3.5 trillion proposed reconciliation bill by reducing the time it covers to five years.”

That would mean that new spending and tax cuts would expire after five years, although perhaps not the tax increases proposed to pay for them. The House Ways and Means Committee advanced tax increases estimated to generate $2.3 trillion over 10 years, which congressional leaders point to as adequate to largely pay for whatever compromise is reached.

Other congressional Democrats do not support shortening the timeline:

Liberal Democrats have become the mainstream of the party and less willing to compromise with dwindling moderates – Marianna Sotomayor, Washington Post:

For now, House liberals remain united — from members of the liberal ‘Squad’ to the less vocal veterans of Congress — in telling Democratic leaders that their preferred course of action is to lower the $3.5 trillion price tag of Biden’s Build Back Better proposal not by getting rid of priorities but by having them expire after a few years, which would make them less costly on paper...

[S]ome moderate members said they are wary of this approach for a number of reasons. One is that it doesn’t address the concerns of some about government spending and is essentially a gimmick. Second, centrists who support some of these programs worry that a Republican-led Congress would let them expire and that Democrats would be better off focusing on producing fewer but more durable policies. And third, several members contend creating programs that would sunset creates a confusing message to sell to voters during the 2022 midterm elections.

 

Democrats have not gotten credit for legislation they have already passed, and some of them question rushing to pass additional legislation. 

Dems thought giving voters cash was the key to success. So what happened? – Sam Stein, Politico. “When they took power this past winter, Democrats made a commitment to not repeat what many viewed as a critical misstep of the Obama years. The legislation they passed would do two things well: make sure that the benefits were frontloaded and that the impact was tangible. The result was a Covid relief package that included direct payments of up to $1,400 to most Americans, $300 per week in unemployment insurance supplements, and an expansion of the child tax credit for a year.”

Nine months later, whatever political benefits were supposed to accrue from that package have seemingly faded… And while Democrats are seeking to extend the expanded child tax credit past its expiration date this December, recent polling data suggests that they are getting little credit for it.

A POLITICO/Morning Consult poll released last week showed that 61 percent of respondents said they’d received the credit — a $300 payment per month for every child under the age of 7 and a $250-per-month payment for every child under the age of 17. But only 39 percent of respondents said that the payment had a major impact on their lives. And while 47 percent of respondents credited Democrats for passing the expanded child tax credit, just 38 percent credited President Joe Biden.

Those numbers are causing agita on Capitol Hill, where there is growing concern that in a rush to continue legislative momentum around infrastructure and Biden’s Build Back Better social spending plan, the party has failed to hammer home the benefits of their first big bill: the American Rescue Plan.

 

Is the Income-Tax Rate on the Rich 8%, or 23%? Depends on Whose Math You Use – Richard Rubin and Rachel Louise Ensign, Wall Street Journal ($). “What do the wealthy pay in federal taxes? On paper, the top marginal income-tax rate is 37% on ordinary income and 23.8% on capital gains. Government estimates put high-income filers’ average rates in the mid-20s. A new Biden administration analysis, however, pegs the average tax rate for the 400 wealthiest households at 8.2% from 2010 to 2018. If that is right, the administration has a firmer case to raise taxes on the ultrarich.”

In writing the White House study, administration economists Greg Leiserson and Danny Yagan chose a numerator and denominator reflecting their approach to analyzing tax policy.

First, the denominator.

They include increases in unrealized capital gains. That is the change in the value of assets, including stocks, that haven’t been sold. Such gains are a significant part of the wealthiest Americans’ net worth; the administration approach effectively assumes those paper gains should be income subject to taxation.

Conventional analyses and the current income-tax law don’t include unrealized gains. Advocates of the conventional approach note that such gains fluctuate with markets and that taxpayers might be forced to sell assets to pay the taxes. However, ‘it’s another thing if they’re using that to borrow against to buy a yacht,’ said Garrett Watson, senior policy analyst at the Tax Foundation.

 

Kentucky judge blocks public tax credits for private schools – Associated Press via U.S. News and World Report. "A judge ruled Friday that Kentucky’s constitution prohibits a part of a new state law enabling donors to get tax credits for supporting private school tuition."

Franklin Circuit Court Judge Phillip Shepherd said the state cannot implement the 'school choice' elements of House Bill 563. The ruling prohibits the creation of any account-granting organizations or education opportunity accounts, nor can the state grant any tax credits for these purposes, according to media reports.

Many students could indeed benefit from the legislation's financial assistance, the judge acknowledged, but he said that points to another constitutional failure.

'The very fact that so many children need additional educational assistance, beyond what is presently funded and appropriated for the public schools, is an indication that we, as a state, may well be falling short of the constitutional mandate of ‘an efficient system of common schools,’' Shepherd wrote.

 

Happy National Sausage Pizza Day! What does this mean? Pizza for lunch AND dinner! Also, it’s okay to add other toppings, like pepperoni, mushrooms, and, yes, even anchovies. Have at it!


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This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.