The agreement last October among almost 140 countries on a new way to tax multinationals was greeted by the OECD – which brokered the whole thing – as a “ground-breaking deal”. It would ensure that multinationals paid their fair share in a two-part agreement which set a minimum corporate tax rate of 15 per cent and agreed a new way of allocating where profits would be taxed.
It was, everyone agreed, the biggest shake-up in the taxation of big business in a generation.
But with tax, to use the old cliché, the devil is always in the detail. And as countries have worked through the necessary detail, politics has intervened, in a big way. The bottom line is that there is now significant doubt over whether – and how – the landmark deal will be implemented at all.
To unpick the complicated dynamic, we need to look at the two big players.
Europe is struggling to get the required consensus agreement to introduce a minimum rate of 15 per cent across the bloc, though as only Poland is now holding out, a deal is tantalisingly close. Meanwhile in the US, the Biden administration, having failed to get the bones of the deal through Congress last year as part of the Build Back Better Bill, is now racing against the clock as mid-term elections loom in November. And events on each side of the Atlantic are playing into the political dynamic on the other.
“ Tax principles are being retrofitted to fit political priorities in an attempt to get this done,” according to Feargal O’Rourke, managing partner of PwC Ireland and long-time observer of the OECD process. Polish objections are couched in technical terms but the rest of Europe sees them as political and possibly related to the release of money to the country from the EU Recovery Fund, set up during the pandemic.
Given that one country rarely holds out on its own, most observers, including senior Irish officials and those close to the OECD process, believe Poland will probably come on board. The EU will then introduce a minimum 15 per cent tax rate, though probably from 2024 rather than the original 2023 target.
Sources point out that ministers are, not surprisingly, distracted by the war in Ukraine. But even if the EU does sign up, two big questions remain. Will the US introduce a similar minimum tax rate? And what happens to the other pillar of the talks – the proposal that big companies in future pay some tax in markets where they have most of their sales.
This is the part which will cost Ireland revenue. Ireland is now represented on the OECD steering group trying to agree how, technically, this will work. But while progress is being made, a July deadline for a multilateral agreement may not be met and there is significant uncertainty about whether the US will sign up to this part of the deal at all.
For Ireland, a key issue is whether the final deal caps likely losses here at the figure of around €2 billion mooted early in the process, or threatens something higher. In the final haggling, US revenues may be protected and Irish revenues could come under a greater threat.
Key question
The key question being asked in Dublin, Brussels and at the OECD headquarters in Paris is whether the Biden administration can get its part of the global minimum tax deal agreed as part of the OECD accord last autumn over the line. The irony is that it was the US which gave impetus to the process after Biden was elected, but it is Washington which is having problems delivering at home.
Biden has promised that his massive spending plans – running to $5.8 trillion – will not see the vast bulk of ordinary Americans paying a single cent more in taxation. However, the super rich as well as corporations would have to dig deep to pay what the White House has insisted is their "fair share".
Biden’s aim is to increase the US corporate tax rate to 28 per cent while the Gilti rate – the crucial rate which is effectively the minimum tax rate that would apply to the international earnings of US companies – would increase to 21 per cent. This is above the OECD 15 per minimum tax rate and would mean US companies located here could potentially face top up payments back in the US. However, most observers see it as a negotiating move unlikely to be implemented.
Biden may have proposed tax measures that would comply with the terms of the OECD deal. However, under the US political system, he does not have the ultimate say.
The former director of the US office of management and budget and later Donald Trump's acting White House chief of staff, Mick Mulvaney, describes a presidential budgetary proposal as a "suggestion" or a message as to how he would govern if he did not have to go to Congress. However, presidents do have to work with Congress. Mulvaney told The Irish Times that never did he remember a president's budget proposal being adopted in full and without changes.
Under the US constitution, it is Congress and not the White House that determines how much will be spent and on what issues. And within Congress, the ways and means committee in the House of Representatives plays a key role on taxation matters.
If Republicans take back control of Congress in the mid-term elections next November, Mulvaney warns, raising the corporate tax rate will be a non-runner unless the measure has not been implemented by then.
“There is no chance that a Republican congress will agree to raising the corporate tax rates,” Mulvaney forecasts.
He says Republicans consider that Trump’s economic plans worked well without generating inflation, including his 2017 tax cut initiative. Republicans argue that if companies make profits, they will make more goods and prices will be lower, he adds.
Biden has tried before to increase taxation on corporations. However, the measure put forward last year got caught up in the Democratic in-fighting over a planned massive spending Bill known as Build Back Better.
That legislation contained well over €1 trillion in spending on everything from healthcare to housing, education and climate initiatives, with the taxation and revenue elements being the engine to drive much of the funding. However, last December the whole edifice fell apart when a key centrist Democratic senator from West Virginia, Joe Manchin, withheld his support. In a Senate that is essentially evenly divided, Manchin’s opposition scuppered Build Back Better.
Even before then, there had been indications that a 28 per cent corporate tax rate may be too high for politicians on Capitol Hill to accept.
Some close observers of the process maintain that, as part of last year’s budget negotiations, the White House wanted to raise the corporate tax rate from 21 per cent to 28 per cent and the Gilti rate from 10.5 per cent to 21 per cent.
However, the House ways and means committee later watered this down and proposed lower levels of 21 per cent for corporate tax and 15 per cent for the Gilti rate.
It was these proposals that were not taken up after the Build Back Better deal fell apart. Now in its budget document for 2023, the White House has essentially sent the original higher tax level proposals back to Congress for a second time.
Popular
Some observers maintain that making the corporations and the super rich pay more are popular with the Democratic base and the White House is simply playing to this gallery in the knowledge that it will have to compromise when the measures are considered on Capitol Hill.
The White House budget document for 2023 argues that corporations received an enormous tax break in 2017 and that, while their profits have soared, their investment in the economy has not.
“Those tax breaks did not trickle down to workers or consumers. Instead of allowing some of the most profitable corporations in the world to avoid paying their fair share, the budget would raise the corporate tax rate to 28 per cent, still well below the 35 per cent rate that prevailed for most of the last several decades ... For decades, American workers and taxpayers have paid the price for a tax system that has rewarded multinational corporations for shipping jobs and profits overseas,” it states.
Mulvaney’s prediction that Republicans will not back corporate tax rises if they take back control of Congress after the mid-term elections is widely accepted. However, the Democrats will have a majority at least until then and many political commentators argue that Biden will have to try get some of the more popular measures contained in Build Back Better – such as reductions in expensive medicine costs for average Americans – adopted in the interim.
The argument is that the Democrats will need to have some achievements on which to fight in the mid-term elections which, at present, seem set to be dominated by soaring inflation. However, for proposals to have sufficient support to secure legislative passage, some of the original Build Back Better package of measures may have to be left behind.
There is a view that, at a time when a number of senior politicians are raising questions about the US deficit, there may be support for a deal to raise more revenue, perhaps in the “lame duck” congressional session after the elections in November but before the next Congress convenes in January next year.
Ironically, tax has so far not featured largely in the commentary – and criticism – surrounding Biden’s budget proposals for 2023. Republican attacks have centred largely on whether the military will get sufficient additional funding. On corporation tax, Republicans may wait and see what developments take place in other countries first.
Public consultation processes in the UK and Canada are scheduled to conclude in the summer. The EU directive on the minimum tax rate is nearly finalised. Talks on the other element of the OECD plan continue.
Another issue that is in play in the US debate is how the rules will work under the OECD deal when companies have to pay a top up tax payment to reach the 15 per cent rate, because earnings overseas have been taxed at a lower level. If the US does not itself introduce a minimum, there are fears that this cash could be paid to overseas exchequers and not to Washington. However, there are still negotiations on how this would work and suggests that the US Treasury may seek to ensure that any such payments are made to the US government.
Hanging
It all leaves the OECD deal hanging in the balance. Having accepted the 15 per cent rate, Ireland would welcome this measure going through at EU level, as it would close off EU debate about an appropriate minimum rate. While Ireland would lose revenue from the other part of the deal – which reallocates taxing rights on some profits – on balance finance minister Paschal Donohoe would probably prefer this to pass, too.
If it does not, many bigger EU countries will introduce their own digital sales tax, which will cost Ireland anyway, but also risks conflict with the US. As the headquarters of the international operations of many of the big US companies, this could leave Ireland stuck in the middle of a nasty row.
