US tax bill stumbles as OECD rolls out global minimum tax rules

By Doug Connolly, MNE Tax

The path toward US implementation of the internationally agreed global minimum tax hit a roadblock on December 19, as a key US Senator announced he will not support the President’s budget bill that would adopt the tax changes.

The news came just one day before the OECD’s release this morning of the much-anticipated model rules for implementation of the global minimum tax under Pillar 2 of the October 8 pact, which 137 countries – including the US – have agreed to implement.

While the OECD model rules will enable the EU and other jurisdictions to move ahead with legislation to adopt the landmark tax agreement, failure of the US to adopt corresponding amendments could imperil implementation of the agreement globally.

US adoption stalls

The US is unique compared to other countries in the OECD pact in that it already has in place a type of global minimum tax through the global intangible low-taxed income (GILTI) provisions adopted in the 2017 tax reform.

The effort in the US Congress – concurrent with the development of the OECD model rules – has been to adopt amendments to the GILTI regime to align with the OECD agreement. In general, this would mean increasing the GILTI rate to 15% and moving its calculation from a global to country-by-country basis.

The provisions to enact the GILTI changes were included in the Build Back Better bill that the House approved last month after extended negotiations within the Democratic party. Last week, the Senate was developing its version of the bill, as the President was working to secure the vote of the hesitant Senator Joe Manchin of West Virginia, whose vote is essential to passage.

Over the weekend, Manchin told Fox News that he “cannot vote to continue with this piece of legislation.”

The Senator’s public stance against the bill seemed to surprise and irk the President, with White House Press Secretary Jen Psaki issuing a statement on December 19 that Manchin’s comments “are at odds with his discussions this week with the President, with White House staff, and with his own public utterances.”

Nonetheless, Congressional leaders expressed their commitment to keep pushing ahead with the bill.

Senate Majority Leader Chuck Schumer (D-N.Y.) said in a letter to his Senate colleagues, “We are going to vote on a revised version of the House-passed Build Back Better Act – and we will keep voting on it until we get something done.”

Likewise, Senate Finance Committee Chairman Ron Wyden (D-Ore.) said in a statement that it is “extremely disappointing to have to drop any major priorities because of … the constraints of legislating in a fifty-fifty Senate, however … Failure is not an option here.”

A statement issued by Manchin following his announcement highlighted some concerns about the overall cost of the bill and potential impacts on the deficit and inflation (while the Administration contends effects on both are minimal to nil). As far as specific provisions to which he objects, he only expressly highlighted climate measures.

Democrats will no doubt regroup, attempt to figure out what went wrong with the bill that they had been negotiating on for months, and likely seek a new compromise.

The bill’s social provisions may be more contentious than the corporate and international tax provisions at this point, but what tax provisions might be enacted and when has become significantly less clear in the last couple of days.

OECD model rules

The OECD model global anti-base erosion (GloBE) rules, which would implement the 15% global minimum tax under Pillar 2 of the agreement, clarify the scope and operation of the new regime.

The OECD’s Inclusive Framework, which consists of the 137 jurisdictions that agreed to the new rules plus a few countries that have not, approved the model rules on December 14.

The model rules define the mechanism for calculating a multinational entity’s effective tax rate on a jurisdictional basis, specify how to determine the amount of “top-up tax” payable, and provide for the imposition of the top-up tax on a member of a multinational group.

The rules also address issues related to the treatment of acquisitions and disposals of group members, certain holding structures and tax neutrality regimes, and information reporting requirements, as well as transition rules that apply to multinational entities that become subject to the rules.

The model rules include some important modifications and new details relative to the October 8 statement and Pillar 2 OECD blueprint released last year.