Global Tax Deal Continues to Spur Debate

The widely publicized “global tax deal” is an expansive agreement that would, among other things, establish a worldwide minimum tax on profits of large multinational corporations. As one might expect, it’s the subject of vigorous debate across countries and continents — including right here in the United States.

In July, both sides of the argument were given voice during the confirmation hearing of Jay Shambaugh, who’s been nominated as undersecretary for international affairs of the U.S. Department of the Treasury.

The Nominee's Defense

Shambaugh testified that the 15% global minimum tax, which is included as one of two “pillars” of the deal being negotiated through the Organization for Economic Cooperation and Development (OECD), would discourage the use of tax havens and give U.S.-based multinationals more incentive to keep earnings at home or in closely allied countries.

Under “Pillar One,” income that U.S. multinationals booked abroad would still face some sort of tax — even beyond provisions enacted in the Tax Cuts and Jobs Act of 2017 (TCJA). So said Shambaugh in response to a question from the Finance Committee chair, Sen. Ron Wyden, a Democrat from Oregon, who pointed to his recent investigation into pharmaceutical companies’ use of tax havens.

Shambaugh, a professor of economics and international affairs at George Washington University, who was an economic advisor to President Barack Obama, agreed with Wyden that the TCJA measures allow room for drug companies to stash money offshore. In contrast, noted the nominee, the OECD deal would give multinationals less incentive to do so by raising the TCJA-created global intangible low-taxed income rate from 10.5% to closer to the U.S. domestic corporate income tax of 21%.

Moreover, he said, because the final deal will have been negotiated among 140-plus countries and territories, each jurisdiction’s enforcement of its own minimum would preclude U.S. giants from being undercut by overseas rivals that face no foreign-profits tax at home.

“We would try to harmonize policies across the world and have less of a ‘race to the bottom’ setup and, frankly, really less of an incentive to use tax havens,” Shambaugh told the committee.

Across the Aisle

His defense of the global minimum tax, however, didn’t stop Republicans on the panel from ongoing criticism of the deal. Recent partisan attacks have come in response to the Treasury Department’s July 8 announcement that the Biden administration is abandoning a 43-year-old tax treaty between the United States and Hungary. The Hungarian government recently blocked fellow European Union members from finalizing details of the global tax deal in protest against the 15% minimum tax, which Hungarian officials say would harm their national economy.

The Finance Committee’s ranking Republican, Sen. Mike Crapo of Idaho, had joined in the criticism of the treaty decision. He labeled it an “attempt to bully Hungary” into moving quickly on the OECD deal and called it U.S. interference in policymaking of the European Union. Crapo and others in his party urged Treasury officials to involve congressional Republicans in further negotiations of the global tax deal.

“We get to read about the negotiations other countries actually get to participate in,” said Sen. James Lankford, an Oklahoma Republican who serves on the committee. “I think that’s a problem and that needs to be corrected.”

At Shambaugh’s confirmation hearing, Crapo asked about increases in consumer prices since the advent of the COVID-19 pandemic. He asked the nominee whether the $1.9 trillion American Rescue Plan Act of 2021, passed by Democrats to provide relief during the public health crisis, had contributed to inflation.

“I think inflation is generally seen by most economists to be a function of supply and demand in the economy,” Shambaugh said, adding that studies have shown the legislation added demand “somewhat at the margins.” He later said inflation has recently been driven up by Russia’s invasion of Ukraine.

A Major Change

As of this writing, the global tax deal is in jeopardy. Sen. Joe Manchin of West Virginia has stated publicly that he won’t support the 15% global minimum tax, among other measures set forth by the Democratic Party. Manchin, of course, holds the pivotal Democratic vote in the evenly divided U.S. Senate.

If finalized and widely followed, the global tax deal would be a major change to international taxation for big companies. But whether that will occur remains to be seen. Contact us with any questions regarding this or other International financial matters.

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