Tax News & Views International Weekly: The Stakes of Side-by-Side

The Organization for Economic Cooperation and Development’s “side-by-side” agreement with the U.S. over the 15 percent global minimum tax was announced in January, but still hasn’t quite been put into operation. As everyone awaits the beginning of the system’s first filing season, some are still wondering who ultimately won out from the negotiations.

Last month, the European Union Director for Direct Taxation Benjamin Angel admitted a key, but often unspoken, undercurrent through these entire negotiations—it’s still unclear how much potential revenue was ever at stake.

“No one has a figure” on how much revenue will be lost due to the exemptions granted to the U.S., he said, while speaking during a Tax Notes podcast.

The U.S. will not strictly comply with the OECD’s minimum tax rules, but it will leave its own system in place, including the 14 percent tax on net CFC tested income (previously the global intangible low-taxed income or GILTI tax), as well as the 15 percent corporate alternative minimum tax.

The analysis underpinning the OECD’s designation of the U.S. side-by-side exemption states that it achieves a ”minimum level of taxation" on domestic and foreign operations of its taxpayers. That leaves a lot of grey area, however.

Australia recently announced it would lose $173 million (in U.S. dollars) due to the U.S. exemption, as the country’s under-taxed profits rule would not apply to U.S. companies with Australian subsidiaries. That’s an eye-catching number, although not astronomical given the country’s $600 billion in annual revenue. It also assumes that there would be no behavioral responses from U.S. companies due to the system being in place—some would perhaps try to raise their effective tax rates, or move out of the country entirely.

Ultimately, the differences between the revenue collected under the U.S. and OECD systems come down to several key details. Despite giving the tax a new name, a higher rate and a broader base, the One Big Beautiful Bill Act kept GILTI’s framework the same, including how it aggregates global income to calculate whether a company falls under it. That is in contrast to the OECD system, which looks at effective tax rates in each jurisdiction.

While critics of the TCJA and OBBBA say this is a fatal flaw in the system, defenders of the current framework say it’s necessary to keep the system manageable, and distinguishes between true profit-shifting structures, and brief inadvertent dips in taxes paid due to other factors. But there have been few analyses which pinpoint how much would be raised through a country-by-country system, especially if it includes other changes to conform to the OECD model, such as allowing net operating losses and foreign tax credit carryforwards.

One key way to test which system is more workable will be to see how many countries, if any, try to gain the side-by-side exemption for themselves. Countries cannot apply for the treatment until 2029.

Noteworthy Items This Week

Where Are the Tariff Refunds for American Consumers? – John Cassidy, The New Yorker:

But the relief has only been partial. With the Supreme Court ruling came a dissenting opinion by Justice Brett Kavanaugh, who wrote that there were plenty of other federal statutes that might justify the President in imposing “most (if not all) of the tariffs at issue in this case.” Citing one of these laws, the Administration promptly announced new global duties of ten per cent, and although it has recently suffered another legal setback—the U.S. Court of International Trade ruled against those tariffs—the tariff saga is far from over. In the coming months, Trump is widely expected to declare a whole new round of duties based on Section 301 of the Trade Act of 1974, which empowers Presidents to impose tariffs on countries that have been shown to employ “unfair” trading practices. To meet this requirement, in form if not in substance, the Administration has been carrying out a fresh set of investigations into China and many other countries.

OECD Global Tax Adopters to Waive Some Late Return Penalties – Ryan Hogg, Bloomberg Tax ($):

However, multiple jurisdictions have yet to launch operational portals for companies to file their GIRs. A number of anticipated information sharing agreements have also yet to be implemented, leaving multinationals at risk of facing penalties and reprisals.

“In recognition of the compliance and co-ordination challenges” arising from such delays, multinationals will be relived of filing a local GIR in each jurisdiction where they operate if they file a central GIR in their ultimate parent entity, or in a designated filing entity for companies not signed up to the rules, the Organization for Economic Cooperation and Development said.

The director of the OECD’s Center for Tax Policy and Administration, Manal Corwin, said at a conference Friday the body would release guidance intended to provide relief for companies.

Cross-Border Remittance Tax Rules Give Opening for Prepaid Cards – Erin Slowery, Bloomberg Tax ($):

“The exception for prepaid cards creates a profit opportunity for the transfer providers to sell such cards,” said Mark Leeds, a partner at Pillsbury Winthrop Shaw Pittman.

The finance companies have been collecting the tax from customers. They were required to start filing returns on the collections to the IRS by the end of April. The tax was meant to create more oversight over the billion-dollar remittance transfer sector to curb drug activity and money laundering. It’s a tax that will affect those living in the US, including citizens, green card holders, and other non-citizens.

The IRS, though, is counting on the extra fees on prepaid cards to deter taxpayers from choosing this route as a way to dodge the tax. It “would not be economical for most senders and is unlikely to become economical in the future,” the rules said.

Nations Are Angling for Ways to Tax AI. Defining How Is Elusive – Lauren Vella, Bloomberg Tax ($):

Companies, US lawmakers, and members of Parliament have proposed a raft of levies to make up for the potential labor displacement caused by AI. But these proposals are extremely vague, starting with governments’ struggles to define the aspects of AI that would be taxed.

Douglas Holtz-Eakin, president of the American Action Forum, pointed to terms like an AI “token” or a “robot” tax. In AI parlance, a token is piece of data, like a word, that a large language model uses to process information and produce responses.

“What counts as one robot?” he said. “How do you actually identify one token in a digital world where things can be multiplied, divided, rearranged infinite number of ways? It’s hard to figure out what one token is, and if you can’t identify the base of a tax, you’re in trouble.”

Inverting the Tax Landscape: Domestications – Mindy Herzfeld, Tax Notes ($):

The inversion trend arose largely because of the lack of parity between the U.S. tax system and those of most other countries. Not only was the statutory corporate U.S. rate much higher than the rates of most other developed countries, but other quirks of the U.S. system (such as full taxation of foreign dividends at a 35 percent rate) made it an imperative for U.S. companies to consider becoming headquartered elsewhere — first in zero-taxed island countries such as Bermuda, and when that lost appeal, under more advantageous tax regimes where the United States had a tax treaty, such as the United Kingdom or Ireland.

How the world has changed — in fact, flipped on its head (or inverted, if you will) — in the past decade. At this month’s American Bar Association Section of Taxation meeting, inversions received nary a mention during the cross-border M&A session. Instead, a segment of the panel was dedicated to a new topic: the challenges that U.S. tax rules pose to domestications, or to foreign companies wishing to reincorporate into the United States — a category that includes previously inverted companies returning to the United States. The tax focus follows announcements of some high-profile transactions involving multinationals returning to the United States.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Fantom of the Fair

Debut Year:1939

Debut Publication: Amazing Mystery Funnies #7

Origin Story: Unclear--all that is known about this early superhero is that he protects the 1939 New York World's Fair from an underground lair and lab..

Superpowers: He has not only great strength and speed--enough to bend gun barrels--but he can also control people's minds and memories with hypnosis.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.