The US’ role in global adoption of Pillar 1 and Pillar 2 / ongoing conversations in the US on tax reform / a status update on US tax reform

US tax reform is linked to the ongoing conversations at the OECD. On 8 October 2021, the OECD announced that 136 Inclusive Framework members signed onto its Pillar 1 and Pillar 2 deals. Among other provisions, this includes: a special purpose nexus rule granting the right to tax a portion of digital profits in the absence of a traditional taxable presence (i.e. Amount A), reallocation of 25% of profits above a 10% profit before tax margin to market jurisdictions and a 15% global minimum tax (GMT) rate.

The Biden Administration’s initial tax reform proposal differed from that of the OECD. It proposed raising global intangible low-taxed income (GILTI) to 21% and specifies it should be calculated on a country-by-country basis. It also eliminates the exemption of the 10% return on tangible investment abroad and repeals deductions for foreign-derived intangible income (FDII). In response, three Democratic Senators introduced a draft bill overhauling GILTI and FDII entirely, as well as Base Erosion and Anti-Abuse Tax (BEAT). The bill equalizes the GILTI minimum rate with the FDII rate and switches to country-by-country calculations for GILTI. It also alters the calculation method for FDII to a percentage of R&D and worker training expenses.

The Biden Administration later conceded on the 15% GILTI provision. US Treasury Secretary Yellen stated on 10 October that she is “confident that what we need to do to come into compliance with the minimum tax will be included in a reconciliation package.” Prior to 8 October, the Department of the Treasury had called for a 21% minimum tax citing the need to fund improvements in infrastructure, education, research, and clean energy. Now, Biden and Congressional Democrats are seeking alternatives to fund such initiatives, including a wealth tax or a tax on stock buybacks, but no official statements have been made.

Congressional opposition is that the benefits under Pillar 2 don’t offset the compromises under Pillar 1 where the US cedes much of its tax base to market jurisdictions. Almost half of the multinationals (MNEs) subject to Amount A are US-headquartered and as the future revenue threshold decreases, more US MNEs will be subject to Amount A.

The US is expected to benefit from Pillar 2. The Global Anti-Base Erosion (GloBE) rules are designed to co-exist with President Biden’s GILTI updates and a GMT rate would decrease the differential between US and foreign tax rates, reducing the incentive for profit shifting. However, the 15% rate coupled with US state taxes have lessened this differential. Moreover, the Biden Administration had been pushing for 20% profit reallocation under Amount A, lower than the 25% agreed by the OECD Inclusive Framework.

Thus, the treaty could hit a blockade in the US. Democrats maintain a Senate majority via a tie-breaker vote by Vice President Harris. This slim majority could be enough to pass the 15% GILTI provision. On the other hand, Pillar 1 would be implemented via treaty ratification, which requires a super-majority of 67 Senate votes. Some have suggested legislation as a workaround if a super-majority is not reached.

14 October saw the French Finance Minister announce that the US had reached an agreement with certain European countries to withdraw unilateral digital services taxes (DSTs). The US has not made an official statement, but this is a necessary step to adopt Pillar 1. A decision on Pillar 2 is possible by the end of this year or early next, but several aspects of Pillar 1 have yet to be agreed.

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