Never Surrender?

If I have readers at the U.S. Treasury Department, they would probably prefer I move on from July’s Ways and Means Tax Subcommittee hearing on the 15% global minimum tax. The hearing was titled “Biden’s Global Tax Surrender Harms American Workers and Our Economy,” which gives you a pretty accurate feel for the overall tone of the proceeding.

Regardless, there were a few issues that have stuck in my mind, even months later. Just the title is more revealing than it may seem at first. You might interpret “global tax surrender” as meaning that the agreement, made at the Organization for Economic Cooperation and Development in 2021, was a bad deal, and that the Biden Administration should have fought for a better one.

But there’s a specific complaint there–not on the terms of the pact, but that it was made at all. Throughout the hearing, Republican members returned to the central question–why are we ceding our right to make tax policy to a foreign organization? (Based in Paris, no less?) There were actually two overlapping but distinct complaints: that the Biden Administration thought it could set tax policy despite Congress’ constitutional authority over the tax code, and that it would go further to let foreign countries dictate to us what our tax policy should be.

“Treasury is taking Congress's tax writing authority and giving it to unelected bureaucrats in Paris,” said Rep. Nicole Malliotakis, R-NY. “They are giving it to foreign governments, it really doesn't make any sense and it's not something I think that this committee will not be tolerating.”

Rep. Mike Kelly, R-Pa., chairman of the subcommittee, shook his head ruefully before giving up the gavel.

“I think the main thing that has bothered me since the beginning of this is the constitutionality of what the administration is doing,” he said. “I'm just trying to understand why the administration would go outside that model and decide to do something on its own.”

For those not steeped in tax policy, it probably does seem outrageous. Just who are the OECD, and why do we need their seal of approval for our tax code?

But whether or not it’s right, it’s something the United States has been doing for more than a century. Nations have met to hammer out tax agreements since the days of the ill-fated League of Nations. Without some degree of cooperation in this area, globalization as we know it today probably wouldn’t be possible.

It’s also been evolving since then, as well. It’s fair to ask if it’s crossed some line most recently, or at some point in the near past.

International negotiations are naturally going to put the executive branch in a key role. As recounted by Yale University professor Michael Graetz in his 1991 paper “The ‘Original Intent’ of U.S. International Taxation,” T.A. Adams filled that role in the early days of the international tax system. Also a Yale professor, Adams served as an advisor to Treasury during the presidencies of both Woodrow Wilson and Warren Harding, and became a sort of informal advisor to the Congressional tax-writing committees as well.

He also led negotiations at the International Chamber of Commerce and the League of Nations to design the first model tax treaty, creating a new template for nations to follow. This came as the U.S. created the first step in the international tax system, a then-unprecedented foreign tax credit to fully reimburse U.S. citizens and corporations for taxes they paid overseas. The movement to protect international investors from double taxation had begun.

At the ICC and League, countries advocating for taxation at the source of income or at the residence of taxpayers hashed out their positions. Ironically, Adams was an advocate for source taxation, the opposite of the stance that the U.S. has normally taken since. They ultimately arrived at a compromise that became the arm’s-length standard, the principle that income be allocated based on the market prices for assets.

The constitution dictates that Congress jurisdiction over taxation, although the president’s veto power gives the executive branch a role and can often ultimately put him in the driver’s seat. But with treaties, the president is recognized as a lead actor, with the Senate’s ratification requirement as an essential check. There’s no practical way for Congress to lead bilateral or multilateral negotiations even if they wanted to–and they normally don’t. (This is further complicated by the constitution’s origination clause, which mandates that the House gets first say on all revenue-increasing bills. But the House gets no say on treaties. Rebecca Kysar, who worked at Treasury during the OECD negotiations, wrote about this tension back in 2013.)

I don’t know all of the details about how the OECD became the new forum for model treaties, or how its role grew to include creating model legislation, global tax standards and now whole new tax regimes.

Model legislation isn’t meant to be coercive, though–in theory it’s an option to help nations enact laws to deal with issues like tax arbitrage. It became enmeshed with another role the OECD assumed, to set global standards that countries can use to evaluate each other. In 1998, it created the Forum on Harmful Tax Practices to determine if tax regimes were unfairly inviting profit-shifting from other nations. Much of this became codified during the organization’s 2015 Action Plan for Base Erosion and Profit Shifting, which set out “minimum standards” in areas such as information reporting requirements, transfer pricing and dispute resolution.

The initial BEPS project directly led to the current OECD effort, and here we are.

From the OECD’s perspective, this isn’t a coercive process at all, because they work entirely through consensus and voluntary participation. Even when there is a consequence for noncompliance, it’s usually enforced by another country, not them. But the U.S. is one of the relatively few (though certainly not only) participants without a parliamentary system, which makes this more complicated. Just because the executive branch signed on, that doesn’t mean Congress has, or the nation as a whole. Prior projects like BEPS worked around this, with standards that didn’t require new laws. But the global min tax goes beyond this–critics say, inappropriately–to include implementation legislation.

Critics would probably also say that the OECD’s new role is diametrically opposed to its original purpose of promoting global trade and economic efficiency. But OECD officials see it as intrinsic to that goal. Widespread skepticism and anger at current international tax laws, and the perception that they’re being flouted, threatens the credibility of the whole system. Without credibility the whole thing could collapse, leaving multinational companies with no protection against double taxation and facing monumental new costs for crossborder investment.

Earlier this year I read “Against the World: Anti-Globalism and Mass Politics Between the World Wars,” by Tara Zahra, which documents the nationalist and isolationist backlash to World War I and globalization, which coincided with the League of Nations’ efforts at economic coordination. Globalization has always been rocky like this, with advances met by setbacks as the nation-state remains the primary political identification for most people around the world. Yet, the overall trend towards increased interdependence seems to be unstoppable, at least if the past 100 years are indicative.

It’s worth it, though, to take a step back now and then and reflect on where we are, where we’re going, what is possible, and what there is political buy-in for.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

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LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• A quartet of progressive U.S. senators–Elizabeth Warren, Bernie Sanders, Sheldon Whitehouse and Chris Van Hollen–sent a letter to Treasury and the Internal Revenue Service Monday, urging them to get more aggressive with their executive authority to crack down on alleged tax cheats. They focus mostly on issues in individual taxation such as inheritance, but they also claim that the administration could do more to “ensure that large multinationals pay their fair share on the subsidiaries’ passive earnings.” It’s not totally clear what they’re referring to–they link to a piece from the Institute on Taxation and Economic Policy which notes several areas. The letter hints at the high-tax exception for the global intangible low-taxed income, something created under the Trump administration, but that doesn’t necessarily involve “passive earnings.” I think what they’re getting at is the check-the-box rules, which go back all the way to the Clinton era. There were rumors that Treasury was looking into this earlier this year, but so far nothing has come of it. The big issue with this potential change is whether the juice would be worth the squeeze, which gets into the overall question of whether the Tax Cuts and Jobs Act’s anti-abuse provisions are actually working or not.
• The latest development in the OECD project regards the subject-to-tax rule, another under-discussed topic that could be crucial for developing nations’ participation. It’s an option to put beefed-up anti-abuse rules on related-party payments into treaties, giving source nations some extra leverage to tax entities in their jurisdiction. On Tuesday the organization released language of a multilateral agreement to enact these changes into existing bilateral tax treaties.
• The African Administration Tax Forum has emerged as a key advocate for developing nations, and it could prove to be crucial to determining whether they end up participating in the OECD plan or not. The forum released  a “Suggested Approach” for countries to enact the domestic minimum top-up tax, an optional tool for the countries to pick up taxes that would otherwise be captured by the 15% global minimum tax. The document lays out why countries that otherwise see little benefit from the project may want to implement this part.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Every week, a new character from the Golden Age of Superheroes who's fallen out of use.

The Masked Marvel, first appearing in Gunsmoke #1 in 1949. He may look like a fearsome outlaw, but he's actually a wealthy heir who dons the skull mask to terrify criminals as a gunslinging hero. Aside from being an expert marksman, he's assisted by his fast horse.

Contact the author at amparkerdc@gmail.com.