US agrees to 15% global minimum tax rate, boosting odds for Pillar 2 agreement

By Doug Connolly, MNE Tax

The US, which has been leading the push for a global agreement on a minimum corporate tax, has proposed a minimum tax rate of 15% – a concession from the 21% rate that the Biden Administration previously sought, a May 20 Treasury document reveals.

Officials from several countries have already publicly signaled their support for the new 15% proposal as an important step forward in negotiations. However, it remains unclear whether the concession will sway minimum tax opponents.

US compromise

The US compromise followed meetings with international leaders this week in which “discussions on the global corporate minimum tax began in earnest,” Treasury said.

Treasury, which made the 15% offer in the meetings, stated that it “was heartened by the positive reception to its proposals.”

The US has not abandoned efforts for a higher rate, however. Treasury emphasized that 15% is a floor and “discussions should continue to be ambitious and push that rate higher.”

US Treasury Secretary Janet Yellen has been working since early spring to build consensus on a global minimum corporate tax to stop a “race to the bottom” in which international tax rate competition erodes countries’ corporate tax bases and public revenues.

Yellen and the Biden Administration had, up to this point, been calling for a 21% global minimum tax rate while they concurrently work to increase the US corporate tax rate from 21% to 28%.

Country reactions

Not every country has been enthusiastic about the idea of a global minimum tax, however. Ireland, for one, has been a leading opponent of a minimum tax – at least one set any higher than its 12.5% corporate tax rate.

In this respect, Irish Finance Minister Paschal Donohoe has argued that smaller countries need lower tax rates to compete with larger countries that benefit from advantages of scale. In fact, he made similar arguments in a speech today, reiterating his resistance to “a high minimum effective tax rate” without acknowledging the US concession.

Although Ireland has perhaps been the most vocal opponent of the global minimum tax proposal, it has not been the only one. Hungary, for instance, with a 9% corporate tax rate, has criticized the proposal as an infringement of sovereignty.

Other countries have been more supportive, including France and Germany; both have relatively high corporate tax rates. Officials from France and Germany had previously suggested that they would support the higher 21% rate that was initially proposed by the Biden Administration.

Nonetheless, CNBC reported May 21 German Finance Minister Olaf Scholz as saying that he was “very happy” with the new 15% proposal from the US and that it was a mark of “big progress.”

Meanwhile, Reuters reported that French Finance Minister Bruno Le Maire said the proposal “could be a good compromise,” and Italian Economy Minister Daniele Franco said the possibility of reaching a global consensus solution “is now concrete.”

Where the debate goes from here

The international negotiations on a global minimum tax are closely tied to parallel negotiations on partially re-allocating taxing rights between countries to address issues related to the digitalization of the economy. These two negotiations are known as the OECD’s “Pillar Two” and “Pillar One” talks, respectively.

A number of countries, the UK among them, are much more interested in Pillar One and addressing the allocation of taxing rights. However, many countries also seem to acknowledge that Pillar One and Pillar Two are going to be a package deal and will get on board for Pillar Two to get Pillar One, or vice versa (as in the case of the US).

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, has repeatedly said that he believes agreements on these issues can be reached this year in the G20 meetings to be held in July and October.

The meetings this week that led up to the Treasury’s proposal for a 15% rate took place with the “Steering Group” of the Inclusive Framework on base erosion and profit shifting (BEPS).

The Steering Group is composed of international representatives of 24 countries, half of which are OECD members. It forms a subgroup of the broader Inclusive Framework on BEPS, which brings together more than 100 countries to work on BEPS and related international tax issues.

Ireland, notably, is not represented in the Steering Group.