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OECD Gives U.S. More Time to Implement Global Minimum Tax

S.J. Steinhardt
Published Date:
Jul 18, 2023


U.S.-based companies will have an extra year before foreign countries can start imposing new taxes on them under the global tax reform rules published by the Organization for Economic Cooperation and Development in 2021. The extension stems from an agreement negotiated by the U.S. Department of the Treasury, The Wall Street Journal reported. U.S. companies deemed to pay too little tax in the United States will have until 2026 before foreign countries can start imposing taxes on them.

The OECD detailed the changes in a technical guidance published after negotiations among countries. In May, the OECD issued amendments to the rules that offer companies temporary relief from accounting for deferred taxes under the reform agreement.

The 2021 agreement established the imposition of a 15 percent minimum tax on large companies in each country where they operate. But implementation has been hampered by how that minimum tax must be calculated consistently across countries and companies, which required clear definitions of income and taxes, according to the Journal. That led to a series of technical rules, such as this recent one. 

Some countries, including Japan, South Korea and members of the European Union, are moving ahead with minimum taxes. The United States, which played a large part in achieving the agreement, is not part of it because the proposed legislation codifying this into American law could not pass Congress.

The Journal noted that the United States has a 10.5 percent minimum tax on U.S. companies’ foreign income, which was created in 2017. It also has 15 percent minimum tax on large companies’ global profits, which was enacted last year. Yet neither conforms to the global agreement.

“The U.S. hasn’t done anything to adopt these rules and yet it’s clear that they are still able to exercise some leverage over how these rules are being adjusted to accommodate U.S. considerations,” Daniel Bunn, president of the Tax Foundation, a Washington group that favors lower tax rates and a simpler tax system, told the Journal. 

The United States could lose $122 billion in revenue over a decade in a scenario in which the rest of the world enacts the OECD agreement in 2025 and the United States does not, according to the nonpartisan Joint Committee on Taxation. 

Part of Monday’s guidance addresses a provision scheduled for 2025 called the Undertaxed Profits Rule (UTPR), which is a way to make sure that companies based in countries outside the deal still have to pay 15 percent. The Journal offered as an example a scenario in which France could see that a U.S. tech company is paying a 10 percent rate to the United States and require it to pay more to France. The top Republicans on congressional tax-writing committees said that the UTPR remains unworkable and warned that it creates incentives for companies to shift investment abroad.

“If other countries move forward to attack U.S. jobs and tax revenues through the UTPR, Congress will be forced to pursue additional remedial measures to protect American interests,” Rep. Jason Smith (R-Mo.) and Sen. Mike Crapo (R-Idaho) said in a statement.

The OECD guidance also addressed the treatment of tax credits. As regular tax credits are treated as tax reductions, a company could use the incentive to lower its rate below the 15 percent minimum, effectively losing the benefit of the tax credit because it would pay higher taxes to other countries as a result of having a low U.S. tax rate.

U.S. lawmakers have objected, arguing that the deal undermines Congress’ ability to offer tax incentives, the Journal reported.

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