Next Steps for the U.S. and OECD

Over the course of the Organization for Economic Cooperation and Development’s recent project on international taxation, officials began to shy away from using the term “grandfathering,” due to its history with beginning with the grandfather clause, one of the central legal pillars for Jim Crow segregation in the U.S. South for nearly a century. (It said that if your grandfather could vote, you could vote--which in practice meant that white voters didn't have to take the sham literacy tests which prohibited black voters from participating.)

It’s a rare case where I think the vocabulary switch may have had a real, and possibly detrimental, effect on the negotiations.

Some originally used the term to describe how a new global minimum tax framework might deal with the U.S. tax on global intangible low-taxed income, which was enacted by the 2017 Tax Cuts and Jobs Act. The GILTI tax doesn’t conform to the new OECD standards exactly, but it’s similar from a 10,000-foot view, and it was a central inspiration for the organization’s plan in the first place. Officials involved in the negotiations began to discuss whether it should be “grandfathered” in.

While the grandfather clause was one of the most horribly unfair laws in U.S. history, the common term “grandfathering” usually implies a modicum of fairness. It says, “you were following the rules at the time, we think it’s best to give you a pass on new rules that would be very difficult for you to follow now.” Not perfect, but as best we can do.

“Legacy exemption” was one alternative term for it, although the official 2021 OECD document used the more nebulous term “coexistence.” I’ll confess I often just used “exemption” in my stories, sacrificing precision for brevity. “Exemption” makes it sound like the U.S. would get special treatment, a concept that could provoke bitterness around the globe. But the reality is a bit more nuanced than that. The U.S. actually already moved towards the minimum tax concept, before the OECD did.

Achim Pross, one of the top tax officials at the organization, noted this during a recent conference in Estonia with the Tax Foundation. He didn’t use the “grandfathering” term, although ironically he bristled a bit when the questioner asked if GILTI would be “whitewashed.”

“Let’s occasionally give the U.S. some credit,” Pross said. “The U.S. came up with GILTI, whether you like it or not, as a first mover.”

Following Congress’ refusal to enact any of Biden’s proposed changes to GILTI, many have declared that the hopes of the U.S. participating in the new U.S. system are essentially dead. Pross fought back against this view, insisting that the project always anticipated that some flexibility would need to be used to incorporate GILTI into the OECD’s minimum tax proposal.

“From the beginning, we talked about GILTI coexistence,” he said. “We have not suggested in anything, either under the Trump or Biden administrations, that the U.S. must conform to Pillar Two.”

Whether the U.S. and its companies can avoid the UTPR, the project’s retaliatory enforcement taxes, is the trickier question. But the answer is not yet a solid “no.”

“So the question that we have is not ‘Is it compatible?’ If you mean is it compatible in the sense of is it the same, no it's not. There was no expectation it's the same,” Pross said. “Can it coexist? Of course it can coexist.”

This is a point I’ve also made–the U.S. isn’t as far from the new OECD standards as the public narrative suggests, despite much of the doom and gloom about the project and its prospects. Strangely, some of that pessimism comes from the very people who were involved in this project inside the Biden administration.

The partisan politics may give both sides a reason to disregard the possibility that the project still has life. Republicans remain steadfastly opposed to the entire idea of a multinational tax agreement, and use the Congressional standstill to declare victory. But Democrats are also loath to admit that the Tax Cuts and Jobs Act, President Trump’s signature legislative accomplishment, may have included any good international anti-abuse measures. It’s become Democratic dogma that the TCJA must be tweaked to make any progress on stopping international tax avoidance, which leaves them with few options if Congressional action is off the table.

As Pross also noted, some special treatment for GILTI would have been needed even if Biden had passed the international tax provisions in the Build Back Better Act. (The White House did propose full implementation measures in its annual budget request, but that seemed like a confusing theoretical exercise.) What the BBB would have done is raise the GILTI tax rate to 15%, and given it a country-by-country calculation–two crucial elements of the OECD plan. It would have narrowed the gap, but that doesn’t mean the gap is impassable now.

It will likely take some creativity and aggressive use of Treasury’s existing authority to narrow the gap further, which the department may already be exploring by re-examining the check-the-box rules. Some tinkering with the GILTI high-tax exemption may also be an option. The administration could explore how wide the gap is in a pure revenue sense–it may still be true, as Treasury officials under the Trump administration suggested, that U.S. GILTI is actually harsher on taxpayers than the OECD standards would be. (Due to the lack of loss and foreign tax credit carryforwards, among other details.) That could make grandfathering–excuse me, a legacy exemption–more palatable.

Of course, the Biden administration will also likely have to deal with strong opposition from the GOP, especially if they regain control of the House of Representatives, which at the time of this writing seems likely.

Republicans have spent plenty of time knocking the agreement–that was likely inevitable after Biden elevated it as a major goal of his administration–but so far they’ve released little in the way of concrete proposals to reverse it. The House GOP “Commitment to America” includes a promise to “express a Sense of Congress that a global minimum tax must not make Ameri- cans less competitive or surrender our tax revenues to foreign governments.” That’s not exactly “repeal and replace.”

Still, a Republican-controlled Congress is likely to be very hostile to the OECD project, creating a genuine obstacle for passage. OECD plans can be designed to be implemented without the approval of Congress–that’s actually how it usually worked, until now–but can the U.S. participate against opposition from Congress? We could soon find out.

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.

LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

Following their proposed "Resolution of Inquiry," which was blocked by Democrats on the House Ways & Means Committee, Congressional Republicans are continuing to press Treasury to release more internal information about the effects of Pillar 1, the other side of the OECD tax agreement. Rep. Kevin Brady, ranking Republican member of Ways & Means, and Rep. Kevin Hern (R-Okla.) penned a letter to Treasury Secretary Janet Yellen asking her to submit any economic and revenue analysis the department has performed to the House committee, and to preserve all documents related to the agreement. This is as clear an indication as any that Republicans intend to make this issue a central matter of oversight should they take control of Congress.

The Internal Revenue Service released a new estimate of the "tax gap," or the difference between the estimated "true" tax liability and what is actually paid. The report shows that the estimated gap for 2014-16 grew by $58 billion to almost half a trillion dollars for the three-year period. But the report also stated that many areas are still likely unrepresented in the figure, including noncompliance with reporting offshore activities.

The Biden administration also announced that Doug O'Donnell will be appointed acting IRS commissioner once current Commissioner Chuck Rettig's term is up. O'Donnell, who was previously the commissioner of the IRS Large Business and International Division, is a familiar name to those in the international tax sphere. He is not expected to be a candidate for the role permanently, but he still could make some important decisions as the agency begins implementation of the Inflation Reduction Act.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Captain Wizard, who premiered in Red Band Comics #3 in 1945. A veteran unjustly accused of murder, Joseph Preston was given a magical cloak by a mysterious magician, giving him Superman-like powers. He uses these to fight crime and prove his innocence.