A Done Deal? Global Tax Law Part 2

Dear Rich Lifer,

As we showed yesterday, there’s a standoff… the U.S. and Europe want to see who’s actually willing to implement a new global tax scheme before they make a move.

Today we delve into how and if the plan will actually shape law here in America. 

Congress will decide the fate of the law, and the large U.S. corporations that will be affected if the changes are, indeed, passed.

Can it pass? Which sectors will be affected the most?

Legislative Challenges 

Although Treasury Secretary Janet Yellen has successfully convinced most of the major world economies to get on board with the new international tax plan, her biggest challenge may be selling the plan to Congress. 

Both pillars of the agreement will likely move through Congress separately, though it is clear there is an international understanding that both must be passed. 

At home, the emphasis for Ms. Yellen and the Biden administration is on the 15% minimum tax rate, whereas, abroad, there is more of an emphasis on Pillar One, which would expand their power over corporate taxes. 

Multiple foreign companies have imposed digital services taxes on tech companies such as Facebook and Alphabet and have said they will only end the taxes if Pillar One is enacted into law. 

Deloitte LLP’s Robert Stack, the Obama administration’s international tax negotiator, noted that Congress will need to pass both pillars or else the rest of the world will back away from the 15% global minimum tax rate. 

The global minimum tax rate is crucial to President Joe Biden’s plan to raise taxes on U.S. companies in order to raise money for spending on infrastructure, anti-poverty programs and education. Treasury estimates show that doing so would raise $1 trillion of revenue over the next decade.

This will likely motivate Democrats to rally behind the raised rates. But Republicans remain staunchly opposed to raising rates, saying it will only result in slow economic growth and job losses. 

There are also fears that if the U.S. raises its global minimum tax rate and other countries fail to upload their agreement and follow suit, U.S. companies will be at a great disadvantage to foreign countries. 

Sen. Mike Crapo (R-Idaho), the senior Republican on the Finance Committee, and Rep. Kevin Brady (R-Texas), the senior Republican on the House Ways and Means Committee, wrote a letter to Secretary Yellen expressing their concerns, stating:

Congressional support…will hinge on protecting American workers and the U.S. tax base. Other countries have shown that they will aggressively seek to gain market share and strip away our tax base, so U.S. negotiators must be equally aggressive in defending American interests.

How The Agreement Could Become Law 

What will likely occur is that the Biden administration will have to use the process of reconciliation to pass the 15% minimum tax rate into law. This will require a simple majority of Democrats to vote yes on the bill, rather than the traditional majority. 

The parts of the agreement that require changes to international tax treaties will have to be approved with a traditional two-thirds Senate majority, according to observers and congressional aides. This includes much of Pillar One, a contentious sticking point for many. 

As a reminder, Pillar One is targeted at tech companies and would allow countries to tax a company’s profits if they have a customer base in said country. 

The Biden administration has said the Pillar One will have little impact on revenue because the U.S. would cede some taxing authority but gain power over companies selling to Americans.

However, if Pillar One raises too much money or if other countries fail to remove the digital revenue taxes, it could hurt U.S. companies, which would then have to contend with higher rates at home and continued levies from abroad. 

Big Tech On Board

Many business groups are imploring the U.S. to wait to enact new tax minimums until other countries start to do so. They do not want to see a repeat of 2017 when the U.S. imposed minimum taxes on U.S. companies, but other countries didn’t follow suit.

Cathy Schultz, vice president for tax and fiscal policy at Business Roundtable, an association of large-company chief executives, warned, “Are we really going to do it again and increase our rates while we wait and see if they do something?”

Silicon Valley, on the other hand, has largely embraced the changes because it says they would eliminate the separate tax levies in place that hurt Big Tech. 

Nick Clegg, vice president of global affairs at Facebook Inc., stated, “It’s now widely recognized that the tax rules that were built for a brick-and-mortar world just don’t really fit for an increasingly online world.” 

However, tech lobbyists remain firm that a global tax deal must include the withdrawal of digital-services taxes. One should not be supported without the other. 

Final negotiations to smooth out the agreement are likely to continue into the fall, so it is currently unclear if or when a reconciliation vote on the tax rate will occur. 

Senate GOP aides have stated they are eager to receive more detailed information on how the deal will affect U.S. companies and revenue. 

Meanwhile, Secretary Yellen remains hopeful that a treaty regarding Pillar One should be ready for congressional consideration by spring 2022. That date may seem like a long way off, but we will continue to bring you the latest updates on this, especially as Congress returns from recess in August. 

To a Richer Life,

The Rich Life Roadmap Team 

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