Date: Wednesday, July 18, 2023
Source: Wall Street Journal
WASHINGTON—U.S.-based companies won relief from two pieces of the global minimum tax deal, and the changes will delay or reduce the taxes they are set to pay to foreign countries.
Under the updated agreement negotiated by the Treasury Department, companies will have an extra year—until 2026—before foreign countries can start imposing new taxes on any U.S. companies deemed to pay too little tax in the U.S. And the clean-energy tax credits at the core of last year’s Inflation Reduction Act will be counted in a more favorable way than some companies had feared, offering certainty as a tax-credit trading market gets under way.
The Organization for Economic Cooperation and Development, which is leading the talks, detailed the changes Monday in technical guidance after negotiations among countries.
The U.S. and about 140 other jurisdictions agreed in late 2021 to impose a 15% minimum tax on large companies in each country where they operate. Negotiators, including Treasury Secretary Janet Yellen, hailed the deal as a landmark achievement in international cooperation and a bulwark against corporate tax dodging.
But implementation has been slow and messy.
The 15% minimum tax must be calculated consistently across countries and companies, requiring clear definitions of income and taxes. That has led to a series of technical rules, including Monday’s 91-page update.
Some countries—Japan, South Korea and members of the European Union—are forging ahead with minimum taxes under the deal, but the U.S. isn’t. After negotiating the deal, the Biden administration couldn’t push the changes through the Democratic-controlled Congress last year. Republicans, who now lead the House, oppose the deal, calling it a global tax surrender.
The U.S. has a 10.5% minimum tax on U.S. companies’ foreign income that was created in 2017 and a 15% minimum tax on large companies’ global profits that was enacted last year. Neither conforms to the global deal, however. So as the OECD hammers out the rules, the U.S. has looked for ways to make the country’s system fit the international framework.
“The U.S. hasn’t done anything to adopt these rules and yet it’s clear that they are still able to exercise some leverage over how these rules are being adjusted to accommodate U.S. considerations,” said Daniel Bunn, president of the Tax Foundation, a Washington group that favors lower tax rates and a simpler tax system.
If other countries move ahead and the U.S. doesn’t, the U.S. could lose $122 billion in revenue over a decade compared with less widespread implementation, according to the nonpartisan Joint Committee on Taxation.
Part of Monday’s guidance addresses a provision scheduled for 2025 called the Undertaxed Profits Rule, or UTPR. The UTPR is a way to make sure companies based in countries outside the deal still have to pay 15%.
Under the UTPR, a foreign country can look at a company’s tax rate in every country and, if that isn’t 15%, charge more in taxes. For example, France could see that a U.S. tech company is paying a 10% rate to the U.S. and require it to pay more to France. Monday’s guidance delays that rule until 2026 in countries where the tax rate is at least 20%. The U.S. corporate tax rate is 21%; the delay gives Congress time to address this with other expiring tax provisions in 2025.
“It made sense to create a safe harbor to give jurisdictions with different legislative processes time to adapt,” said Manal Corwin, who leads the OECD’s tax project.
Congressional Republicans oppose the global deal as a giveaway of the U.S. tax base and warn that taxes will go up on U.S. companies, with the money going to foreign countries. The top Republicans on congressional tax-writing committees said Monday that the UTPR remains unworkable and warned that it creates incentives for companies to shift investment abroad.
“If other countries move forward to attack U.S. jobs and tax revenues through the UTPR, Congress will be forced to pursue additional remedial measures to protect American interests,” said Rep. Jason Smith (R., Mo.) and Sen. Mike Crapo (R., Idaho).
Monday’s second major decision affects the treatment of tax credits. Under the OECD rules, regular tax credits—such as the research tax credit—are treated as tax reductions. So a company using such an incentive might lower its rate below the 15% minimum. It could thus effectively lose the benefit of the tax credit because it would pay higher taxes to other countries as a result of having a low U.S. tax rate.
U.S. lawmakers have objected, arguing that the deal undermines Congress’ ability to offer tax incentives. Monday’s guidance doesn’t change what happens to research credits. But it acknowledges a need to respond to the size and scale of the IRA tax credits, which are worth hundreds of billions of dollars and can be sold from renewable-energy developers without tax liability to companies looking for tax breaks.
That market—where large companies will likely buy tax credits for 90 to 95 cents on the dollar—is just getting started. The update to the deal set out rules for all tradable tax credits, including IRA credits. For those buyers, the U.S. credits likely will be treated so that only the net benefit—the gap between the tax credit and the purchase price—is considered a tax cut.
That will give more confidence to companies considering purchasing the credits, ensuring that they can use them without pushing their tax rates too low and triggering foreign taxes.
The Treasury Department said that it welcomed the guidance and that the IRA’s transferable credits would be treated like refundable credits, which companies can convert into cash.
“This guidance makes clear that buying transferable credits usually won’t trigger the global minimum tax enforcement rule, nor will developing these green projects,” said Itai Grinberg, a Georgetown University law professor who was one of the administration’s chief tax-deal negotiators in 2021.
Even with the new rules, some companies building projects that generate large IRA tax credits will find themselves under 15% and thus subject to foreign taxes that negate the benefits, said Pat Brown of accounting firm PwC.
“The certainty is very welcome,” he said. “The outcome is positive but short of a home run.”