The OECD in the Spotlight

As I wrote a few weeks ago, international taxes used to be a very niche topic. But not anymore. Everyone, it seems, has opinions about President Biden’s global tax policies, and the 15% global minimum tax agreement reached at the G-20 and the Organization for Economic Cooperation and Development.

A “background deal in Paris” negotiated by “technocrats” that will “result in fewer jobs and less prosperity for millions of American families” is how House Ways and Means Committee Chairman Jason Smith, R-Mo., described it in a scathing letter to the OECD. Rep. Ron Estes, R-Kan., called it “the biggest economic capitulation in American history” in an op-ed in The Hill newspaper.

And the OECD has “evolved into a venue that advocates against the economic interests of United States’ workers and business,” a letter signed by 10 Republican representatives, asking the House Appropriations Committee to cut U.S. contributions to the organization’s funding.

This isn’t the first time the OECD has come under fire, especially from Republicans. But at least in the time that I’ve been covering, it’s an altogether new level of politicization. For years, the organization hovered under the radar, enjoying a status as one of the most powerful entities that no one’s ever heard of. “Technocrats” probably isn’t an unfair way to describe its officials–most of the time they’re concerned with quietly fine-tuning global standards to keep the global economy functioning, through unanimous approval from its 38 member states. Even today, it’s still mostly known as a research body, producing voluminous statistics and studies used by academics and experts around the world.

This harsh new spotlight for the OECD, in part, highlights how successful it’s been in crafting important new rules. But it also could profoundly affect its makeup and work going forward, especially as it tackles new challenges such as climate change. As other, more well-known institutions such as the United Nations slowly encroach upon its role as the world’s tax rule-making body, this politicization could also pose an existential threat to the current makeup of the global tax system. Which, depending on who you ask, could be a good or a bad thing.

From how much Republicans criticize the global minimum tax agreement, it might be surprising to learn that the initiative began in the Trump administration, and hasn’t changed policy-wise all that much since then. It grew out of a 2017 request from the G-20 for the OECD to produce new rules on the taxation of the digital economy, as countries across Europe and the rest of the world enacted new digital services taxes targeting online businesses. The U.S. actually took the lead in advocating a two-part agreement that combined a new customer-based taxing regime, along with rules to target intangible income. The latter was based on the U.S. tax on global intangible low-taxed income, and it became the 15% global minimum tax.

True, the U.S. did abruptly reverse its position in the 11th hour, demanding that the first part, Pillar One, only be enacted as an optional safe harbor. (Even years later, this renege has never been fully explained, other than the general turmoil in Trump-era policymaking.) But the letter announcing this change also reaffirmed the U.S. commitment to the global minimum tax. The main changes the Biden administration added when it took over were to insist on a 15% rate, higher than what was contemplated earlier, and to strongly advocate a country-by-country tax.

One could criticize Republicans for jumping at the chance to exploit the agreement for political gain, once the White House switched parties. But, arguably, this was inevitable when the Biden administration elevated the issue into one of its top agenda items. Once President Biden himself and Secretary of the Treasury Janet Yellen in speeches started touting the agreement as a way to end international tax avoidance as well as the “race to the bottom” in global tax competition, they must have expected some backlash. Maybe that elevation is what got the OECD project across the finish line. But it came at a cost.

And by agreeing to changes that could only be enacted through Congress, the administration added another layer of politics on top. This is also something that the Trump administration initiated–the two-part agreement would have required Congressional action of some kind, perhaps even approval of a multilateral treaty to implement. But Treasury under Biden went further and promised to change the TCJA and GILTI to accommodate the new global minimum tax standards. The plan was to include it in the Build Back Better Act, but one recalcitrant senator from West Virginia nixed that option and now it’s left as a political football.

Again, this was a break from the past. The Obama administration finalized an earlier agreement at the OECD to fine-tune the global tax rules in 2015. The project, called the Action Plan on Base Erosion and Profit Shifting, was at the time the most ambitious effort to stem international tax avoidance in decades, although it’s now dwarfed by the more recent deal. But, crucially, the BEPS plan didn’t require any action from Congress. It included model anti-avoidance legislation, but those were presented as options for countries to consider. The “minimum standards” that were meant to apply to everyone included new language for transfer pricing enforcement and a new global country-by-country reporting system that Treasury implemented through regulation. This was definitely not by accident.

As it happens, the Congress did end up enacting much of that model legislation as part of the Tax Cuts and Jobs Act, even though that was Republican legislation. This was mainly because they were desperate for revenue, but it also speaks to how relatively uncontroversial those models were.

As the Obama administration navigated the BEPS negotiations, it kept it under the radar. It was mostly handled by career professionals at Treasury, some of whom stayed into the Trump administration. Obama himself praised the agreement when it was passed, but otherwise rarely mentioned it. Scrambling to cover it for Bloomberg Tax, I remember that the results were released the same day as the Trans-Pacific Partnership, and you can guess which one got the headlines. And, unlike with the TPP, there was no major effort to reverse the policy in Congress or when the White House switched hands.

We’ll see what this new level of public recognition and political focus means for the OECD. The World Trade Organization was heavily politicized and controversial for years–and now it’s effectively halted. The OECD may share the same fate, or it could continue to grow and evolve in its role facilitating multilateralism and a shared global tax system held together through consensus and soft-law norms.

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

• Somewhat surprisingly, the OECD didn’t ask for comments when it released new Pillar Two administrative guidance this February. But that’s not stopping the National Foreign Trade Council from writing some, anyways. On May 1, it released an open letter to the OECD, raising several issues with the new guidance. It urged the organization to confirm that transferable credits be treated as refundable–read more about that issue here–and went a step further to recommend that refundable credits not create any Pillar Two liability at all. (Under the current rules, refundable credits create new untaxed income for the effective tax rate calculation, but don’t count as a reduction in taxes.)
• Speaking of the NFTC…Australia’s new public country-by-country reporting rules have set off a level of American scrutiny on the Land Down Under not seen since the days of Mad Max. The NFTC sent the Australian Treasury a public comment, expressing concerns about the “overly broad” approach which it said could lead to “selective reading and sensational reporting” of corporate tax information. But the FACT Coalition, a U.S.-based nonprofit advocacy group, praised the “groundbreaking” proposal which could “lead a transformation in global tax policy.” I’ve written before about the gradual move towards global tax transparency and what it could mean. If not for the OECD, these rules would likely be the center of attention right now in the international tax world. Stay tuned.
• Treasury on Tuesday released long-awaited proposed regulations on the repatriation of intangible property, which could make it easier for taxpayers to bring valuable intellectual property and other intangibles home. The rule deals with unintended results from Section 367(d), which was enacted in 1984 to deal with outbound IP transfers that lawmakers felt avoided taxation. While the regs don’t mention the TCJA, they could ease the way for more companies to unwind their international tax structures and keep IP closer to home, which was one of the law’s goals.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Steel Sterling, appearing first in Zip Comics #1 in 1940. After his father was killed by monsters, John Sterling spent years developing a formula to make himself, literally, a man of steel. After coating himself with his special formula and jumping into a vat of molten steel, he became as strong and invulnerable as the metal. It also gave him some interesting side benefits, like being able to magnetize himself and hitch rides on the outside of planes, and to listen to telephone conversations through his teeth.

Contact the author at amparkerdc@gmail.com.