Global Tax Deal Marks Big Advance for Cooperation, but Tougher Tasks Lie Ahead – Paul Hannon and Giovanni Legorano, Wall Street Journal. “Finance chiefs from the Group of 20 leading economies on Saturday endorsed an overhaul of the rules for taxing international companies, a landmark achievement of global cooperation after years of tensions.”
G-20 members have rarely been able to agree to such ambitious changes over the past decade of disputes over trade, investment and jobs, although they did work together to offset the economic impact of the Covid-19 pandemic. The tax agreement, negotiated earlier this month by 130 countries, has raised hopes that major economies can find common approaches to tackling other global problems, such as climate change and trade.
The tax overhaul breaks new ground in two ways. It is the first time that governments have set a floor for the tax rate faced by big international companies. G-20 governments have also overturned a longstanding principle under which profits are taxed where businesses have a physical presence—known as a permanent establishment—rather than where their sales are made.
Getting all countries onboard will be no cakewalk:
The tax overhaul is also a reminder that even if the G-20 can agree on something that doesn’t mean all other countries are on board. Among those that reject the overhaul are Nigeria and Kenya, two of Africa’s most populous countries… Many developing countries want the minimum tax rate to be set higher than the 15% agreed by the G-20. Meanwhile, three European countries want it to be lower.
Especially Congress:
And one of the greatest challenges to implementing the new rules could be navigating the deal through the U.S. Congress. With Republicans objecting to tax increases, Democrats will need full support from within their ranks to enact the minimum corporate tax this year as a way to help pay for the Biden administration’s antipoverty programs. It is far from certain whether the president’s full tax increases will get through. Business groups are urging the U.S. to wait for other countries to deliver their part of the global tax deal rather than move first.
Should Congress reject the deal, it would be a major blow to prospects for global cooperation on other issues, warned Adam Posen, president of the Peterson Institute for International Economics in Washington. He said that would be analogous to the U.S.’s refusal to join the League of Nations after President Woodrow Wilson had secured international backing to create the institution in the aftermath of World War I.
It is not clear which country will make the first move in enacting this tax deal:
Global Tax Deal Heads Down Perilous Path in Congress – Richard Rubin, Wall Street Journal ($). “As detailed negotiations continue, other countries will look to see if U.S. lawmakers implement a minimum corporate tax of at least 15% and embrace new rules for dividing the power to tax the largest companies. Congress will stare back, monitoring how quickly other countries create minimum taxes and remove unilateral taxes on digital companies that have drawn bipartisan U.S. opposition.”
For those playing at home, this agreement basically involves two things:
- Pillar One: taxing companies where sales are made instead of where the company is located (aka: profit allocation)
- Pillar Two: enacting a tax of at least 15% on companies’ international earnings
Eyes will be on Congress to see how it handles Pillar Two:
‘The role of Congress will be very important, because if the rest of the world doesn’t think it’s going to get what it bargained for on [profit-allocation rules], then it will lose its appetite’ for the rest of the deal, said Deloitte LLP’s Robert Stack, the Obama administration’s international tax negotiator.
Pillar Two is expected to be in the reconciliation package that congressional Democrats hope to pass in the fall along party lines (i.e., no Republican support).
Pillar One is expected to be “enacted” via treaty, which does not require a House vote, but does require two-thirds support in the Senate, meaning Republican support (like, a lot of them) will be needed to approve it. Unclear if that will happen.
If Pillar One raises too much money, it looks like a tax increase Republicans would oppose. If it loses too much revenue, it looks like a giveaway of the U.S. tax base. If much of the burden falls on U.S. companies, as early estimates suggest, that also may spur opposition from lawmakers.
In short, this international tax agreement has a long way to go before becoming law. In fact, Treasury Secretary Janet Yellen doesn’t expect action on Pillar One until next year.
Ms. Yellen said Sunday that it could be ready for congressional consideration by spring 2022.
Yellen’s 2022 timeline means implementation in 2023, which seems optimistic to some.
G-20 Backs Global Tax Deal, Epic Revamp of Rules Lies Ahead – Isabel Gottlieb and Hamza Ali, Bloomberg ($). “To meet the 2023 deadline, negotiators will have to secure agreement on remaining political questions on the plan’s design by October, and then spend 2022 crafting the treaty and legislative changes used to implement it. But that deadline may end up being too ambitious, tax advisers and former officials from the Organization for Economic Cooperation and Development said.”
‘Essentially if they are talking about implementation by 2023, which strikes me as slightly ludicrously optimistic, then they’re talking about the whole package of both domestic law changes and treaty changes,’ said Richard Collier, associate fellow at the University of Oxford’s Saïd Business School’s Centre for Business Taxation and a tax adviser at the OECD until May.
It may take longer than 2023 for all countries to ratify a multilateral treaty instrument after signing it, said Carlos Protto, director of international tax relations at Argentina’s Ministry of Economy and a member of the OECD’s Steering Group of the Inclusive Framework, speaking in his own capacity and not representing the government.
Here's the rub: if negotiations slip into 2023, Republicans are expected (by just about everyone) to take the House majority. This means no tax increases - period - pass Congress. If Pillar Two is not enacted does that mean that Pillar One also falls to the wayside?
Yellen: Compete on economic strengths, not low tax rates – Davic McHugh, Associated Press. “U.S. Treasury Secretary Janet Yellen said Sunday that deterring the use of tax havens will let countries compete on economic fundamentals — instead of by offering ever-lower tax rates that deprive governments of money for infrastructure and education. Yellen spoke after finance ministers from the Group of 20 major economies endorsed a global minimum corporate tax of at least 15%, a measure aimed at putting a floor under tax rates and discouraging companies from using low-rate countries as tax havens.
‘This deal will end the race to the bottom,’ she said at a news conference after the end of the meeting in Venice. ‘Instead of asking the question: ‘Who can offer the lowest tax rate?,’ it will allow all of our countries to compete on the basis of economic fundamentals – on the skill of our workforces, our capacity to innovate, and the strength of our legal and economic institutions… And this deal will give our nations the ability to raise the necessary funding for important public goods like infrastructure, R&D, and education.”
Yellen’s full statement can be found here.
Insights from the UN World Investment Report for Global Tax Reform – Elke Asen, Tax Foundation. “The United Nations (UN) recently released its annual ‘World Investment Report,’ which shows the dramatic fall in global foreign direct investment (FDI) caused by the COVID-19 crisis. A partial recovery is expected for 2021, with the most optimistic scenario showing a return to 2019 FDI levels by 2022. However, uncertainty remains high, with the ongoing international tax negotiations at the OECD being a contributing factor. Clarity on the details of the new rules, as well as a policy design that minimizes the impact on global FDI, would provide international investors with some certainty in today’s highly uncertain global economy.”
Sen. Mitch McConnell: Bipartisan infrastructure bill stands 'decent chance' of coming together – Todd Dykes, WLWT5 news. “During a forum Thursday hosted by the Northern Kentucky Chamber of Commerce, Senate Minority Leader Mitch McConnell talked about an issue drivers find hard to escape when their cars are crawling across the Brent Spence Bridge.”
‘It's a subject you all care a great deal about. And that's infrastructure,’ he said. McConnell's views on a proposed $1 trillion bipartisan infrastructure bill are vital because he has the power to make or break legislative agendas. ‘My friend and colleague, Rob Portman, from across the river has been the leader of our side,’ McConnell said. ‘I think there's a decent chance that may come together.’
Business, labor groups endorse bipartisan infrastructure deal – Alexander Bolton, The Hill. “The U.S. Chamber of Commerce, the AFL-CIO and a group of other prominent business groups on Thursday endorsed a $1.2 trillion, eight-year bipartisan infrastructure framework endorsed by President Biden and a group of Senate moderates. The joint endorsement by business and labor groups that are often opponents in the political arena is a major boost for Sens. Rob Portman (R-Ohio) and Kyrsten Sinema (D-Ariz.), the leaders of the bipartisan group of 21 senators now backing the proposal.”
‘We urge Congress to turn this framework into legislation that will be signed into law, and our organizations are committed to helping see this cross the finish line,’ the groups said in a joint statement.
Biden-allied group warns: Voters are largely clueless about POTUS’ accomplishments – Natasha Korecki, Politico. “A pro-Biden super PAC has issued a dire warning to Democrats: Voters are largely clueless about the big policy measures they’ve passed and on which their 2022 electoral hopes rest. The message, delivered in a late June strategy memo by Unite the Country, advised Democrats that they could face midterm losses unless they took a more aggressive approach in touting the president’s $2 trillion Covid-relief bill and defining his infrastructure proposal.
‘Unfortunately, the [American Rescue Plan] and these other proposals remain worryingly undefined in the public consciousness and voters are primed with misinformation that helps Republican justify their opposition,’ the memo reads. ‘Democrats must communicate much more aggressively to define success for the ARP and to explain why it is important to pass the American Jobs Act and the American Families Plan.’
Let’s review, there are two bills Democratic congressional leaders want to pass: 1. An infrastructure bill that will require Republican support to pass and is not expected to include tax increases; 2. A social/infrastructure/Medicare/housing/climate bill that can pass with only Democratic support.
Senator McConnell and the business groups mentioned above are suggesting support for the infrastructure bill. That does not mean they will ultimately support what is presented to Congress, so take their cheers with a grain of salt. The reason why is support is being offered for legislation that is not yet written. Offering praise for something that is not yet created gives an entity (or person) the perception that they are open to supporting it. But when the details are nailed down, and they come out against it, they can blame others (usually the bill's author) for the change in their position.
As for the second package, no Republican support is expected, but it will require the support of all Senate Democrats to pass it. At the moment, full Democratic support is not looking good because the legislation is expected to include tax increases.
Brewing battle over tax hikes to test Democratic unity – Alexander Bolton, The Hill. “An emerging proposal from the White House and Senate Democratic leaders to pay for President Biden’s infrastructure agenda is setting the stage for a major battle in Congress that will test the support of moderates concerned about hiking taxes.
Key centrists such as Sens. Joe Manchin (D-W.Va.), Kyrsten Sinema (D-Ariz.), Jon Tester (D-Mont.), Maggie Hassan (D-N.H.) and Mark Kelly (D-Ariz.) have largely avoided questions about Biden’s tax agenda, which is focused on raising hundreds of billions of dollars from corporations and wealthy Americans. But the brewing battle over tax policy is starting to heat up as lawmakers return to Washington for a crucial work period when Democrats will begin hashing out the budget resolution that sets in motion the legislative vehicle Democrats intend to use to pass some of the party’s biggest priorities, without any GOP support.
IRS controversies of the present, past haunt lawmaker talks – Alexander Bolton, The Hill. “IRS controversies from the Obama era and much more recently that have left Republicans even more disillusioned with the nation’s tax collecting army are emerging as a real problem for getting a $1.2 trillion bipartisan infrastructure deal done.”
The IRS has long been a favorite boogeyman among conservative politicians who love to bash it, and Democrats might see it as a convenient target for GOP lawmakers who in their view do not want to back an infrastructure deal that if passed by Congress would be a significant victory for President Biden. But there are also legitimately negative feelings among GOP senators and House members over the 2013 controversy when the IRS gave extra scrutiny to conservative groups applying for tax-exempt status.
Group Wants Details From IRS About Proposed Exemption Denial – Fred Stokeld, Tax Notes ($). “A conservative legal group is demanding answers from the IRS about the agency’s treatment of a religious nonprofit whose application for tax-exempt status was initially denied because the nonprofit allegedly intervened in political campaigns on behalf of Republicans. The American Center for Law and Justice (ACLJ) will file a Freedom of Information Act request in the next several days to find out more about the IRS’s proposed denial of exemption to Christians Engaged, which sought exempt status as a section 501(c)(3) organization, the ACLJ’s Jay Sekulow said on a July 8 webcast.”
‘We’re going to get that information,’ Sekulow said, adding that the ACLJ will probably have to go to court to obtain it.
Democrats Make Politically Risky Bet on Monthly Child Tax Credit – Laura Davison, Bloomberg ($). “Democratic lawmakers are betting that an expanded child tax credit, paid out monthly for the first time, will prove to be a successful campaign message in the 2022 midterm elections, but the policy also has political risks that could alienate some taxpayers.”
Tax Community, IRS Brace for Advance Child Tax Credit Confusion – William Hoffman, Tax Notes ($). “The IRS may not be prepared for the deluge of taxpayer questions about periodic advance child tax credit (ACTC) payments scheduled to start July 15 — even as reports emerge that some individuals are already getting them. ‘After individuals begin receiving the first round of monthly payments, I believe they will start flooding the IRS phone lines to try to understand why they are receiving a check, the amount received, how the advance CTC works, whether they get to keep the money, and what they need to do or when to make changes,’ National Taxpayer Advocate Erin M. Collins told Tax Notes July 9.
Why Sales Tax Holidays Are A Headache for Tax Administrators, Shoppers, And Retailers – John Buhl, Tax Policy Center. “Whether to celebrate July 4, remind people to stock up on emergency supplies, or entice back-to-school shoppers, sales tax holidays are perennially popular. Yet they often fail at their main objective – making products more affordable – and they can turn sales tax administration into a time-consuming mess. This post will focus on the administrative piece, although there is no shortage of analysis, including from the Tax Policy Center, showing that sales tax holidays don’t really benefit consumers or the economy. Instead they simply shift the timing of purchases and give retailers more flexibility to raise prices.”
Netflix, Hulu Seek to Block Cities’ Streaming Tax Class Action – Alex Ebert, Bloomberg ($). “Netflix, Inc. and Hulu LLC are fighting in federal court Monday to prevent the formation of a massive class of Ohio municipalities seeking to extract up to 5% of revenue that streaming services receive from cord-cutting residents. The hearing in the U.S. District Court for the Northern District of Ohio is a proving ground for whether companies that offer streaming services can be taxed in the same way as cable companies that use the wires in cities’ and towns’ right-of-way. In that sense, the case could expose popular streaming services to multimillion dollar tax bills across states where towns impose fees on internet and cable providers."
New Jersey Explores Tax Strategies to Target Tech Giants – Michael Bologna, Bloomberg ($). “We’ve heard a lot about Maryland and New York tinkering with strategies to tax tech giants such as Amazon, Facebook and Google, but is New Jersey the next state to target the digital economy? New Jersey’s Division of Taxation will study that question next year under a provision in the Fiscal Year 2022 appropriations law, signed by Gov. Phil Murphy (D). The action comes after Maryland enacted a first-in-the-nation tax on digital advertising, and New York vigorously debated legislation imposing an excise tax on data collection by search engine and social media companies.”
Henry David Thoreau fans rejoice! It is National Simplicity Day, which celebrates the transcendentalist’s life. Thoreau authored “Walden,” which documents his two years living on Walden Pond. I read that book – without it being required school reading – and found it pretty interesting. One of my memories about the book was his lengthy justification for needing shelter from inclement weather. I was like, it’s cold outside - which infers that I am inside and therefore have shelter. End of story. He was also a tax resister and went to jail for it (among other reasons). The guy was complicated.
It’s also National Pecan Pie Day, which needs no explanation.
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