Two minimum taxes: US eyes robust rate, while small countries seek carve-outs

By Doug Connolly, MNE Tax

The US should raise the minimum tax on corporate foreign earnings to 21% while the OECD works towards a 15% floor on tax competition, according to a September 7 article from two US Treasury officials. Similar calls were made by a group of Democratic Senators on September 3 and a further 41 congressional Democrats on September 7.

At the same time, the Finance Minister of Estonia – a holdout from the global minimum tax agreement – held discussions with the US Commerce Secretary and OECD Secretary-General on September 7, seeking changes to the global deal to accommodate their current tax system, according to a report in The Baltic Times.

Estonia’s Finance Minister said the global deal is “too vague” and “could prove harmful to a small open economy” – adding, “we expect the OECD to make a few accommodations.”

Ireland has likewise so far declined to endorse the global minimum tax agreement, arguing for some yet-to-be-defined exception for small countries. Following reports that the Irish government was contemplating abandoning its 12.5% corporate tax rate under international pressure, the country opened a public consultation in July on the impacts of the OECD deal on the Irish economy.

In a September 8 response to Ireland’s consultation, the US-based Tax Foundation makes the “small, open economy” argument for the country. The response contends the global revenue gains from the OECD deal will not be evenly distributed and will more likely be revenue losses for small exporting countries like Ireland. Moreover, it argues that an agreement would lessen the importance of “investment hubs” like Ireland and complicate its tax policy.

US minimum tax of 21% amidst global 15% rate

The Treasury article – authored by Itai Grinberg, Deputy Assistant Secretary for Multilateral Tax, and Rebecca Kysar, Counselor to the Assistant Secretary for Tax Policy – contends that the current 10.5% US minimum tax on foreign earnings under the global intangible low-taxed income (GILTI) provision is too low. They argue that the relatively low rate encourages multinationals to move operations abroad and gives them a lower effective tax rate than smaller, local businesses operating in the US.

The article’s authors state that the 21% minimum rate proposed by Biden would reduce this “tax distortion.” They further argue that by coupling this 21% rate with the proposed global minimum tax of “at least 15%” under OECD negotiations, US corporations would be “more competitive than they ever were before,” because foreign corporations would for the first time face minimum taxes around most the world.

Congressman Lloyd Doggett (D-Tex.) and 40 other members of Congress signed a letter further contending that the US should adopt “the U.S. tax system that is best for Americans, not simply defer to a least common denominator OECD outcome.” They suggest GILTI should be no lower than 21% – even “if the domestic corporate rate is raised to only 25%,” rather than the 28% rate initially sought by Biden.

The letter adds that “enacting a tough minimum tax could help Secretary Yellen negotiate a global minimum tax rate above 15%, as desired by several important trading partners.”

The same sentiment was expressed by Senator Sheldon Whitehouse (D–R.I.) and four other senators in a letter stating that, “short of fully equalizing the domestic and foreign rates, the GILTI rate should be no lower than the 21% President Biden has proposed.”