In June, months after reluctantly signing a global tax deal brokered by the United States, Ireland’s finance minister met privately with Treasury Secretary Janet L. Yellen to seek assurances that the Biden administration would delay the end of the deal.
Ms. Yellen assured Secretary Paschal Donohoe that the administration will be able to secure enough votes in Congress to ensure the United States abides by the pact, which aims to crack down on companies that avoid paying taxes by moving jobs and profits. around the world.
It turns out Ms. Yellen was overly optimistic. Late last week, Sen. Joe Manchin III, Democrat of West Virginia, effectively scuttled the Biden administration’s tax agenda in Congress — at least for now — by saying he could not immediately support the climate, energy and tax package he spent months negotiating with the Democratic leadership. He expressed deep concern about the international tax deal, which he previously indicated he could support, saying it would put American companies at a disadvantage.
“I said we’re not going to go down that road overseas right now because other countries won’t follow suit and we’re going to put all of our multinationals at risk, which hurts the American economy.” Mr. Manchin told a West Virginia radio station on Friday. “So we took that off the table.”
Mr. Manchin’s U-turn the language used by Republican opponents deal, is a blow to Ms. Yellen, who has spent months enlisting more than 130 countries. It’s also a defeat for President Biden and Democratic leaders in the Senate, who have pushed hard to raise tax rates on many multinational corporations in hopes of leading the world in preventing companies from shifting jobs and income to lower their tax bills.
The deal would have brought the biggest changes to global taxation in decades, including tax hikes for many large corporations and changes to how technology companies are taxed. A two-pronged approach would see countries introduce a 15 percent minimum tax so that companies pay at least that much from their global profits, no matter where they set up shop. It would also allow governments to tax the world’s largest and most profitable companies based on where their goods and services were sold, not where they were headquartered.
Failure to come to an agreement at home creates a mess for both the Biden administration and multinational corporations. Many other countries are likely to push to ratify the agreement, but some may now be emboldened to hold out, breaking the coalition and potentially opening the door for some countries to continue promoting themselves as corporate tax havens.
For now, this situation will allow companies like pharmaceutical giant AbbVie to continue to aggressively pursue global tax avoidance strategies. A Senate Finance Committee report this month found that in 2020 the company sold three-quarters of its sales to American customers, but reported only 1 percent of its revenue in the United States for tax purposes, allowing it to reduce its effective tax rate. rate to about half the 21 percent American corporate tax rate.
Leaving international tax laws unchanged could also create new uncertainty for big tech companies like Google and Amazon and others that make money from consumers in countries where they don’t have many employees or physical offices. Part of the global deal was intended to give those companies more certainty about which countries could tax them and how much they would have to pay.
America’s refusal to participate would be a significant setback for Ms. Yellen, whose role in reaching the deal was seen as her diplomatic achievement. For months last year, she lobbied around the world, from Ireland to India, for the benefits of a tax deal, only to see her own political party refuse to heed her calls to join.
After Mr. Manchin’s comments, the Treasury Department said it was not abandoning the deal.
“The United States remains committed to finalizing the universal minimum tax,” Treasury spokesman Michael Kikukawa said in a statement. “It is too important to our economic strength and competitiveness that this deal not be completed, and we will continue to pursue every avenue possible to achieve it.”
Jared Bernstein, a member of Biden’s council of economic advisers, told reporters at the White House on Monday that Biden “remains fully committed” to participating in the global tax accord.
Understand what happened to Biden’s domestic agenda
“Build better.” Before being elected president in 2020, Joseph R. Biden Jr. laid out his ambitious vision for his administration under the slogan “Build Back Better,” pledging to invest in clean energy and ensure that procurement spending goes to American-made products.
“Any rumors of her downfall are very premature,” Mr. Bernstein said.
The U.S. push to ratify the global pact has faced challenges from the start, given Republican opposition to parts of the plan and thin Democratic control of the Senate.
To comply with the agreement, the United States would have to raise the tax rate that companies pay on foreign earnings from 10.5 percent to 15 percent. Congress should also change the way the tax is applied on a country-by-country basis so that companies can’t lower their tax bills simply by seeking tax havens and “blending” their tax rates.
The Biden administration had hoped to enact those changes after passing the stalled Build Back Better legislation, or a smaller spending bill that Democrats had hoped to pass through the budget process, which would require no Republican support.
“Secretary Yellen and her team have always maintained that they would be able to secure the necessary changes,” Mr. Donohoe said in an interview in June. “Secretary Yellen reiterated all the work they are doing to secure the votes they need to make these changes in the House and Senate.”
Ms. Yellen’s spokesperson Mr. Kikukawa described the tax discussion as a conversation about “overcoming any challenges in the respective jurisdictions.”
Congress should also revise tax treaties to allow other countries to tax large US multinationals based on where their products are sold. That legislation would require the support of Republicans, who have shown no interest in voting for it.
American tech giants such as Google and Amazon have largely backed proposed tax changes aimed at scrapping Europe’s complex tangle of digital services taxes introduced in recent years. If the deal fails, they will face a new wave of uncertainty.
The entire project has been shaky in recent months due to continued opposition in the European Union, delays over technical fine print and worries about whether the United States will actually join. Nevertheless, it remains possible that the European Union and other countries will continue with the deal anyway, leaving the US as an awkward bystander in the deal that was revived last year.
“With or without the United States, there seems to be a very good chance that this architecture will be consolidated,” said Manal Corwin, an Obama administration treasury official who now heads the Washington national tax practice at KPMG. “Once you get a few countries taking the first steps, whether it’s the EU or some other critical mass, I think others will follow pretty quickly.”
That poses risks for U.S. companies, including the possibility that their tax bills could rise, given the enforcement mechanism the Treasury Department helped create to push reluctant countries into the deal. If the United States does not adopt the 15 percent minimum tax, American companies with subsidiaries in participating countries could end up paying penalty taxes to those foreign governments.
“If Congress doesn’t pass, it won’t stop the European Union, Japan, and others from moving forward in this area, and then I think Congress will see that it would be good for the U.S. to pass because otherwise our companies will also suffer from this enforcement principle,” Kimberly Clausing, recently after leaving the position of Deputy Secretary of the Treasury for Tax Analysis, at a Tax Policy Center event last month.
Barbara Angus, head of global tax policy at Ernst & Young, said there would be “significant consequences” for American companies if the US does not comply with the deal.
“It really takes consistency and coordination to make this system work as intended,” said Ms. Angus, who is also a former chief tax adviser on the House Ways and Means Committee.
The Treasury Department could not provide an estimate of how much additional taxes American companies would have to pay to foreign governments if the United States were not included in the global agreement. If passed in full, the deal is projected to raise about $200 billion for the United States over a decade.
Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the Organization for Economic Co-operation and Development, said he believed the European Union would find a way to overcome opposition from member states and that the United States would come under pressure to join after ratifying the deal.
“When the EU moves, the US has a choice: either they move, or they leave the right to tax US multinationals to the Europeans,” said Mr. In the message of Saint-Amans. “Even the Republicans wouldn’t allow it.”
So far, Republican opposition to the tax deal is unlikely to budge. Lawmakers have complained over the past year of being shut out of international negotiations and attacked Ms. Yellen for giving foreign countries new powers to tax American companies.
“The world should know that despite what the Biden administration is pushing, the United States is not going to capitulate economically to our foreign competitors by raising our global minimum tax rate based on a deal that is neither enforceable, complete, nor beneficial to us,” he said. Rep. Kevin Brady of Texas, the top Republican on the Ways and Means Committee. “Congress will not ratify an OECD agreement that abrogates our constitutional authority to set tax rules or leaves unsecured key US tax incentives.”
Mr. Brady, who will retire at the end of his term, added: “There is little political support for a deal that reduces US competitiveness and transfers our tax base to foreign competitors.”
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