How Joe Manchin left a global tax deal in Limbo

WASHINGTON – In June, a few months later reluctantly signed with a US-brokered global tax deal, the Irish finance minister met privately with Treasury Secretary Janet L. Yellen, seeking assurances that the Biden administration would uphold the deal.

Yellen assured Secretary Paschal Donohoe that the administration will be able to secure enough votes in Congress to ensure that the United States is in compliance with the pact, which aims to prevent companies from evading taxes by shifting jobs and profits. profit. around the world.

It turned out that Miss Yellen was overly optimistic. Last weekend, Senator Joe Manchin III, a Democrat of West Virginia, assessed the effectiveness of the Biden administration’s tax program in Congress – at least for now – by saying he could not immediately support a climate, energy and tax package that he spent months negotiating with Democratic Leaders. He expressed deep doubt about the international tax deal, which he had previously indicated he could support, saying it would put American companies at a disadvantage.

“I said we wouldn’t go down that path abroad right now because the rest of the countries wouldn’t follow and we would put all of our international companies in jeopardy. dangerous, which harms the US economy.” Manchin told a West Virginia radio station on Friday. “So we took that off the table.”

Mr Manchin’s reversal, take a seat in the language used by opponents of the Republican Party of the deal, was a blow to Ms Yellen, who spent months bringing in more than 130 countries. It is also a setback for President Biden and the Democratic leaders in the Senate, who have pushed hard to raise tax rates on many multinational corporations in the hope of leading the world in efforts to prevent companies from switching jobs and income to minimize their tax bills.

The deal will usher in the most sweeping changes to global taxation in decades, including raising taxes on many large corporations and changing the way technology companies are taxed. A two-pronged approach would require states to enact 15 percent minimum tax rate so that companies pay at least that amount on their global profits no matter where they set up shop. It would also allow governments to tax the world’s largest and most profitable companies based on where their goods and services are sold, not where their headquarters are located.

The failure to reach an agreement at home creates a mess for both the Biden administration and multinational corporations. Many other countries are likely to push to ratify the agreement, but some may now be encouraged to abandon, break up the alliance and potentially open the door for some countries to continue to market themselves as other countries. corporate tax haven.

For now, the situation will allow companies like the pharmaceutical giant AbbVie to continue to make strong use of global tax avoidance strategies. A Senate Finance Committee report this month found that the company made three-quarters of its sales to U.S. customers in 2020, but reported only 1% of its earnings in the U.S. for other purposes. tax purposes – a move that allows them to reduce the tax in effect. The tax rate is about half of the 21 percent US corporate tax rate.

Failure to change international tax laws could also introduce new uncertainty for big tech companies, like Google and Amazon, and other businesses that make money from consumers in countries where they don’t. multiple employees or actual offices. Part of the global agreement is to give those companies more certainty about which countries can tax them, and how much they will have to pay.

A US refusal to join would be a significant setback for Yellen, whose role in completing the deal is seen as her signature diplomatic achievement. For months last year, she lobbied countries around the world, from Ireland to India, on the merits of the tax deal, only to find her own political party refused to heed the call. hers.

Following Mr Manchin’s comments, the Treasury said it would not abandon the deal.

“The United States remains committed to meeting the global minimum tax rate,” said Michael Kikukawa, a spokesman for the Treasury Department. “Failure to complete this agreement is too important for our economic strength and competitiveness, and we will continue to consider every possible avenue to complete it.”

The U.S. path to the adoption of the global pact has faced challenges from the start, due to Republican opposition to parts of the plan and Democrats’ thin control over The Senate.

To comply with the agreement, the United States will need to increase the tax rate that companies pay on their foreign income from 10.5% to 15%. Congress will also need to change the way the tax is applied, imposing it on a country-by-country basis, so that companies cannot reduce their tax bills simply by searching for tax havens and “blending” their tax rates. surname.

The Biden administration had hoped to enact those changes through the stalled Building Better Back legislation or a smaller spending bill that Democrats hope will pass a budget process without the need for a bill. any Republican support.

“Secretary Yellen and her team have always made the case that they will be able to secure the changes they need,” Mr. Donohoe said in an interview in June. “Secretary Yellen is again making the case for all the work they’re doing to try to secure the votes they need for this change in the House and Senate.”

Congress would also have to amend tax treaties to give other countries the power to tax large U.S. multinationals based on where their products are sold. That law would require the support of Republicans, who are not inclined to vote for it.

US tech giants like Google and Amazon have largely supported the proposed tax changes as a way to end Europe’s digital service tax complex issued in recent years. If the deal is not cleared up, they will face a new wave of uncertainty.

The entire project has been shaken up in recent months amid continued European Union opposition, delays in fine technical print, and concerns about whether the United States will actually get involved. Still, it’s still possible that the European Union and other countries will stick to the deal, making the United States an awkward outsider compared to the deal it revived last year.

“With or without the United States, there seems to be a very substantial opportunity to see what happens,” said Manal Corwin, a Treasury Department official in the Obama administration who now heads Washington’s national tax division at KPMG. That architecture is standing. “Once you get a few countries making those first moves, whether it’s the EU or some other key bloc, I think you’ll see other countries follow suit pretty quickly.”

That poses risks for U.S. companies, including the chance that their tax bill could increase, given an enforcement mechanism the Treasury Department helped create to spur countries reluctant to join. join agreement. If the United States does not impose a 15 percent minimum tax rate, U.S. companies with subsidiaries in participating countries may end up paying penalty taxes to those foreign governments.

“If Congress doesn’t pass it, that doesn’t stop the European Union and Japan and others moving forward in this area, at which point, I think, Congress would see in the interest of the United States to pass it. past, because otherwise our companies would also be affected by this enforcement principle,” said Kimberly Clausing, who recently left her job as Deputy Assistant Secretary of the Treasury for Tax Analysis. , said at a Tax Policy Center event last month.

Barbara Angus, global tax policy leader at Ernst & Young, said US failure to comply with the agreement would have a “significant impact” on US companies.

“For this framework to work as intended, there really needs to be unity and coordination,” said Angus, who is also a former tax advisor to the House Ways and Means Commission.

The Treasury Department was unable to provide an estimate of how much additional taxes American companies would have to pay to foreign governments if the United States were excluded from the global deal. If fully enacted, the deal is expected to raise about $200 billion in tax revenue for the United States over a decade.

Pascal Saint-Amans, director of the tax policy and management center at the Organization for Economic Co-operation and Development, said he thinks the European Union will find a way to get out of the country’s objections. member and that, once it ratifies that agreement, the United States will be under pressure to join.

Mr. Saint-Amans said in a text message: “Once the EU has moved, the US has the following choice: They move or they leave the taxing power of US multinational businesses to Europeans “. “Even Republicans won’t let this go.”

For now, Republican opposition to the tax deal doesn’t appear to be abating. Lawmakers complained last year about being excluded from international negotiations and attacked Yellen for giving foreign countries new powers to tax American companies.

“The world should know that despite what the Biden administration is pushing, the United States will not surrender economically to our foreign adversaries by raising our global minimum tariffs based on a deal. Agreement is neither enforceable nor complete, nor to our benefit.” Representative Kevin Brady of Texas, the top Republican on the Ways and Means Committee. “Congress will not ratify an OECD agreement that cedes our constitutional power to set tax rules or fails to protect important U.S. tax incentives.”

Mr Brady, who will retire at the end of his term, added: “There is little political support for a deal that makes America less competitive and leaves our tax base to competitors. foreign players”.

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