Is the U.S. Hand at the OECD Weakening?

I’ll admit, when the details of the Organization for Economic Cooperation and Development’s Pillar Two 15% global minimum tax were being rolled out a few years ago, I had a habit of glossing over parts that seemed too complicated.

I know I shouldn’t do this, but international tax is a vast, vast architecture of highly detailed policies, and to stay sane you sometimes get in the habit of triaging. Transition rules? I’m just going to focus on the final policy for now. Timing differences? I’m going to put that one off for a while.

(That last one was a joke, but a joke with some truth.)

And the under-taxed profits rule–then then under-taxed payment rule–seemed like something I didn’t need to spend too much time wrapping my head around, at first. The mechanics of how it worked were complicated, but to me the overall point was relatively simple.

“Why spend time on the details of the UTPR?” I told myself. “The only important thing about it is that it turns off once you’re in compliance.”

Well, it didn’t quite work out that way.

As it happened, the U.S. never enacted language to implement Pillar Two, or to even get close to it, and “grandfathering” into the system became impossible. So the design of the UTPR–the enforcement rule that countries can enact to impose taxes on companies with income taxed below 15% anywhere they operate–turned out to be hugely important to U.S. multinationals. And we’ve been fine-tuning the details of it ever since, with extensive guidance that carves out special treatment for certain credits that can be crucial to U.S. businesses.

During an all-day tax conference in Washington, D.C. last week, Deputy Assistant Treasury Secretary Michael Plowgian noted that U.S. companies are, generally speaking, alone in facing these potential UTPR costs.

"We at Treasury recognize that U.S. multinationals are in somewhat of a unique situation and face compliance difficulties that a lot of other countries' multinationals don't face, because the U.S. has not implemented Pillar Two rules," Plowgian said. “And that's something that we're aware of. We are pushing to address those difficulties as best we can in the multilateral negotiations.”

But, he noted, the U.S. may face an uphill battle keeping the OECD focused on fine-tuning the UTPR design.

“The fact of us not implementing makes it difficult for us to shape the agenda,” Plowgian said. “Other countries just don't feel the urgency to address some of these issues, the way that we do. That is, I think, an important thing for us to acknowledge.”

These comments were a bit striking because, so far, the U.S. has actually managed to keep these issues front and center on the OECD agenda, and it has managed to obtain important changes to the OECD guidance.

The organization agreed to special treatment for investment vehicles used for low-income housing tax credits, as well as the green energy tax credits enacted by the Inflation Reduction Act. It also agreed to a temporary harbor for the UTPR, for countries with headline rates above 20%. (Just low enough to include the U.S. at its 21% rate.)

Could it be that we’ve just about tapped the generosity other countries are willing to extend in molding the Pillar Two rules?

Plowgian also noted that the U.S.’s involvement in the peer review process–how implementation of the Pillar Two rules will be monitored–could also be hampered by its refusal to enact the rules. This will be a crucial phase of the plan, because it will determine how much leeway countries have to carve out their own little variations in the Pillar Two laws. And the U.S. could find itself on the outside looking in.

The U.S. is used to getting an outsized amount of attention in these negotiations because as the world’s leading economy, it’s almost always better to have us inside the proverbial tent. The U.S. doesn’t always get its way, and sometimes all that attention can do as much harm as good. But we’re not used to the conversation leaving us behind, which could increasingly become the dynamic if Plowgian’s comments are any indication.

There still are many issues to be worked out. Or rather, issues that the U.S. would like the OECD to work on further. Most significantly, there's the treatment of R&D credits, which so far the body has seemed reluctant to tweak.

Once countries are focused on implementing and enforcing their own Pillar Two rules, they may be less willing to work with the U.S. for further carveouts. Many of the Pillar Two countries are parliamentary democracies, where adjusting national tax laws on a yearly basis to fit various circumstances is a matter of routine. The U.S. political system, which produces decades-long stalemates and unpredictable legislative changes, creates a lot of bafflement out there.

On the other hand, countries are aware that many U.S. policymakers are unhappy with the Pillar Two results, and support retaliatory measures as a response. The prospect of an Atlantic trade war over the Pillar Two rules does hang over the proceedings, especially if a Republican wins the presidency in 2024.

The U.S. may not always be in the driver's seat, but it's hard to kick them out of the car while staying on the road.

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

• In the tax world, the potentially momentous Moore v. United States Supreme Court case appears to be the big dog that didn’t hunt. The overwhelming consensus in news coverage of the case is that the justices seem very unlikely to upend the U.S. tax code with a new, restrictive definition of “income,” based on their skeptical questioning of the plaintiffs. Tea leaf reading in taxes is always risky, but you could almost feel a collective sigh or relief among tax pros here in DC on Tuesday, after the case was argued. Moore involved a couple challenging the Tax Cuts and Jobs Act’s repatriation tax on the grounds that because they never had access to the income in question–they were only minority shareholders and the company never distributed it as dividends–the tax was not an income tax but an impermissible direct tax. (The constitution only allows direct taxes that are income taxes–unless they’re apportioned by state population.) A broad ruling could have not only invalidated the TCJA tax but wealth tax proposals as well as bedrock international provisions like Subpart F–although the plaintiffs’ attorney argued that Subpart F wouldn’t be implicated because it targets specific types of income that could be considered realized in the U.S., but for the corporate form. This was one of many distinctions the plaintiffs tried to draw that left the justices scratching their heads. The Subpart F/TCJA distinction was interesting to me because it seemed to involve a purpose test–the argument was that Subpart F was clearly targeted at profit-shifting while the TCJA deemed repatriation tax was just a blatant income grab. But Subpart F doesn’t technically hinge on whether there’s an intent to avoid, and the TCJA’s deemed repatriation tax was arguably trying to grab income that had been stockpiled offshore as a result of tax planning. Given how much the current tax rules are tilting towards formulaic proxies of avoidance over facts-and-circumstances evaluations, this distinction could be a huge deal–but it’s apparently a moot point.
• The big accounting firms prefer to stay out of the headlines for their tax-planning role, but that’s becoming increasingly difficult in this age of high-profile tax avoidance scandals. Take Sen. Elizabeth Warren, D-Mass., who is now targeting KPMG LLP in her investigation of the Microsoft Corp.’s planning strategy which has recently reignited. Along with Sen. Sheldon Whitehouse, D-RI., and Sen. Bernie Sanders, I-Vt., Warren sent KPMG a letter demanding that it provide answers about the tax-planning advice provided to Microsoft. This all concerns a cost-sharing arrangement for intellectual property with the company’s Puerto Rico subsidiary, for the 2004-2013 tax years. I’m sure Microsoft is ready to move on from this case, which seems like it’s been endlessly litigated and concerns a tax structure that hasn’t been in place for a decade now, but looks like the spotlight isn’t going anywhere.
• Confirming an earlier report, the OECD’s Revenue Statistics showed that as energy prices rose last year, tax revenue actually fell due to cuts in energy excise taxes. The report mainly blamed the Ukraine war for this trend, and presumably it will reverse this year as oil prices stabilized. (Even as the war rages on.) We’ll see if that carries out. This yet again shows how politically sensitive prices on carbon can be, and the political will necessary to carry out large-scale carbon reduction plans.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

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

Cave Girl, first appearing in Thun'da #2 in 1952. After her parents were brutally killed, an eagle dropped Carol London in the exotic Dawn Lands where she was raised by wolves, and eventually became the pack leader. With the ability to talk to animals as well as her skill with basic fighting weapons like knives and spears, she fights off a nearby tribe of Neanderthals and eventually falls in love with the explorer Luke Hardin. Co-created by avid pulp fan Gardner Fox, the comics legend who created The Flash and the Justice League, as well as the multiverse concept.

Contact the author at amparkerdc@gmail.com.