The Build Back Better Act (BBBA) contained a number of changes to the US international tax regime, including applying global intangible low-taxed income (GILTI) on a country-by-country basis and increasing the GILTI effective tax rate from 10.5%/13.125% to 15.01%/15.80%. Such changes were thought to bring the GILTI regime in conformity with OECD Pillar Two and its 15% global minimum tax. Although the BBBA passed on 19 November 2021 in the House of Representatives (220-213), in the words of Senator Joe Manchin (D-OH), it is “dead” in the Senate. However, most observers believe that many pieces of the legislation, including much of the international tax provisions, may be resurrected in other bills. As a result, there has been, in the tax community, almost a resignation that the GILTI regime will be modified, so that it applies on a country-by-country basis and the effective tax rate will be brought in line with the OECD Pillar Two’s 15% global minimum tax rate.
On 20 December 2022, the OECD released Pillar Two Model Rules for implementation of the 15% global minimum tax.1 Since that time, and particularly over the last month, commentators and companies have expressed a number of concerns in believing that the proposed changes to GILTI will bring it into conformity with OECD Pillar Two and create a level playing field for US companies. This is in contrast with the apparent view of the Biden Administration that US companies will back the OECD global deal as well as the proposed international tax changes in the BBBA to bring the United States in conformity with that deal.
Commentators and companies have noted what appears to be a serious flaw for the United States in the OECD Pillar Two Model Rules.2 Congress has enacted a number of tax credits associated with various activities that it wants to incentivize, such as research and development, low-income housing and renewable (green) energy. Such tax credits reduce a US corporation’s effective tax rate. If a US corporation’s effective tax rate is below the 15% minimum tax rate under OECD Pillar Two, foreign affiliates of the US corporation may be required to make up the difference by making top-up tax payments under the OECD Pillar Two UTPR (previously referred to as the Under-Taxed Payment Rule in the October 2020 Pillar Two Blueprint) to their home (foreign) jurisdictions.3 As noted by ACT, “As a result, investments in domestic activities or projects that Congress seeks to encourage will be curtailed because the tax benefit intended by Congress to encourage these investments would be captured by foreign governments [through the OECD Pillar Two UTPR], rather than the US company making the US investment.”
On 16 February 2022, the 14 Republican members of the Senate Finance Committee (SFC) sent a letter to Treasury Secretary Janet Yellen concerned about “a number of alarming developments that raise additional concerns regarding the effect of the OECD agreement on US competitiveness and tax revenue.” The 14 Republican SFC members noted what was reported in the Wall Street Journal and addressed by ACT – “ . . . under the Model Rules, a US company with operations abroad could face additional tax liability – referred to as a top-up tax – in those foreign jurisdictions if it was determined the US company did not pay adequate tax on its US profits because of the Rules’ treatment of US tax credits and deductions. Ultimately, under the Treasury-negotiated agreement, foreign countries could effectively capture the benefit of congressionally-provided tax credits and deductions targeted at domestic innovation, investment, and job creation.”
The 14 Republican SFC senators pointed to the United Kingdom (UK) as an example of a country/jurisdiction that is defending its companies and tax regime in light of the OECD Pillar Two Model Rules. In January 2022, the UK released a consultation document on the Model Rules.4 The UK noted that, under the OECD Pillar Two Model Rules, tax credits are placed into one of two categories: refundable tax credits (tax credits which are refundable within four years of the year in which the taxpayer became entitled to the credit) and nonrefundable tax credits. Refundable tax credits are treated as income in computing the effective tax rate (increase the denominator in the calculation). Non-refundable tax credits are subtracted from (covered) taxes in computing the effective tax rate (decrease the numerator in the calculation).
The UK determined that, “[t]hese [Model] rules will ensure the UK’s Research and Development Expenditure Credit (RDEC) will be treated as an addition to income rather than a reduction in tax in the ETR [effective tax rate] calculation, which will ensure RDEC continues to be an effective instrument for promoting R&D activity in the UK.” The 14 Republican SFC senators wrote, “. . . in stark contrast, the US R & D credit would not receive the same preferential treatment [as the UK R & D tax credit], nor would the low-income housing tax credit, new markets tax credit, or foreign derived intangible income.”
The 14 Republican SFC senators are concerned that Treasury is negotiating a deal at the OECD that will harm US businesses and jobs. They have requested a meeting (either publicly or privately) with Treasury’s lead negotiators to address the issues of the US international tax system and the OECD Pillar Two Model Rules.
