Yellen’s grand global corporate tax plan risks congressional flop

The success of Treasury Secretary Janet Yellen’s biggest global corporate-tax reform in decades, risking a flop in her own country’s legislature, could sow new seeds of international tension in the coming years.

Announced as a “historic agreement” when the two-party agreement was reached last October, the framework would set a global minimum tax rate of 15% and rewrite rules for how countries would tax corporate profits.

Until the Russia-Ukraine war brings a big set of new challenges, it was the biggest victory of Yellen’s term. However, part of the agreement between the 140 countries may never be effective. It needs congressional approval, but Democrats lack universal support and face widespread Republican opposition.

Predicting that the GOP would win at least one of the two congressional chambers in the November election, it abandoned the agreement on tentacles in the United States worldwide, with part of the agreement on the risk of renewed war taking action by foreign countries. To collect more from US corporate giants.

The 15% minimum rate, known as Pillar Two, has been included in a comprehensive bill incorporating President Joe Biden’s long-term economic agenda. But just months away from full-campaign mode, which will shut down most legal work, there are no signs of involvement in the White House package of two moderate Democratic senators – Joe Manchin of West Virginia and Kirsten Cinema of Arizona.

Possible breakdown

Pillar One will reshape the rules on how corporate profits are allocated across borders, a plan that would require amendments to a number of global tax treaties. In the United States, this is especially true because at least 67 senators may be needed to vote to change the agreement – a highly unlikely outcome in that supra-party chamber.

“Even if the United States does not implement Pillar One, Pillar Two will be widely used around the world,” said Chip Harter, PwC’s senior policy adviser and former Deputy Assistant Secretary of the Treasury for International Taxes. But the U.S. failure to follow Pillar One is likely to hamper its implementation, “renewing concerns about the global expansion of an integrated, unilateral tax system and the impact on international trade and investment.”

Republicans have made their opposition clear.

Senator Mike Krapo

“I certainly hope the agreement will not be implemented by the United States,” said Idaho Sen. Mike Krappo, a top Republican in the Senate Finance Committee. “That would be a terrible mistake.”

Yellen argues that there should be support from both sides in the global agreement to stop global corporate tax avoidance.

“I think this is an important initiative and I want to see bipartisan support for it. This is broadly in the interests of the United States and is not biased, “Yellen said earlier this month.

But the final passage of the global minimum tax congress cannot be ruled out, says Ruth Mason, a professor at the University of Virginia School of Law. U.S. companies will still be subject to the Pillar to Rule imposed by other countries, which will top-up their tax rates to a minimum.

“At some point, Congress is going to look at it and say, ‘We’re leaving money on the table,'” Mason said.

Yellen hopes to advance global efforts to implement the agreement at a meeting of heads of finance of the Group of Seven advanced economies in Bonn, Germany, on May 19-20.

Location in Europe

Krappo, who will be the first to lead the Senate tax-policy portfolio next year with a Republican majority, has vowed to stop planning if his party is in charge. It would effectively suspend any move to implement any aspect of the global tax treaty in Washington.

Yellen hoped that progress towards implementation in the European Union would help create some momentum. But there are also obstacles on that road, with Poland cutting off support – insisting on the simultaneous progress of the two pillars, which has kept other countries at bay.

Yellen, on a European tour this week, failed to keep his promise to recapture Warsaw while in Poland. It is unclear whether Poland could change its position at the EU meeting next month, where a unanimous support would be needed for a tax deal.

Janet Yellen.

Some still see global support as helping to build interest in Washington.

Corporate lobby

Massachusetts Democrat Senator Elizabeth Warren praised Yellen’s role in the deal earlier this month, saying “international taxes don’t work unless you get a lot of countries that really have it.” “He really pushed and reached an agreement with countries around the world who realized that tax havens were killing everyone.”

Yellen further argued that American businesses would lobby Congress for pressure for change, which he said would increase their confidence. That has not happened yet. Instead, corporations are asking the Treasury to delay implementation or abandon the plan altogether.

“They see a lot of compliance costs and effort and time,” said Jeff Vanderwalk, a partner at law firm Square Patton Boggs and a former official at the OECD, a Paris-based organization that acted as a broker for the deal.

While theoretically businesses would appreciate simple and clear international tax rules, it is unlikely that the global minimum tax could pay it – because each country would apply the rules in the most convenient way for them, Vanderwalk said. Political changes in other countries could see changes in the rules abroad, he said.

At the same time, the draft agreement would make expected countries hesitant to sign, so they wrote it in a way that gives companies an incentive to join the global minimum tax system, Mason said.

© 2022 Bloomberg

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