A Look Inside Treasury’s Work with Congress to Align Global and Domestic Tax Reform

New tax frameworks are long overdue to address economic disparities worldwide. Dating back more than a century, many tax laws have not kept pace with the global economy. That’s now changing, as the U.S. Treasury takes a lead role in tax reform on multiple fronts to end the race to the bottom on corporate taxation.

“International tax laws, which have their origins in the early part of the last century, have been creaking under the weight of digitalization and globalization and [need] structural reform,” said Itai Grinberg, a deputy assistant secretary at the Treasury Department, referencing a sentiment expressed by Irish Finance Minister Paschal Donohoe.

This year Grinberg, along with Treasury colleague Rebecca Kysar, provided tax reform insights deemed “invaluable” by Treasury Secretary Janet Yellen.

In a rare moment of public comment, Grinberg and Kysar recently spoke with Bloomberg Tax senior reporter Michael Rapoport. As part of the Bloomberg Tax Leadership Forum, “Navigating the Future of Tax: Latest Developments and 2022 Outlook for Multinational Corporations,” Grinberg and Kysar debriefed on global tax negotiations and similar efforts on the U.S. side, as well as the close partnership now underway between Treasury and Congress to advance tax reform measures.

The current administration’s broad leadership vision informs these efforts, officials say.

“One of the commitments of the administration is to restore U.S. leadership on the international stage, [and] to achieve multilateralism that serves the interests of the middle-class at home,” said Kysar, counselor to the assistant secretary in the Treasury’s Office of Tax Policy.

This year, Treasury helped advance agreement among more than 130 countries and jurisdictions for the Organization for Economic Cooperation and Development/G20 Inclusive Framework’s base erosion and profit-sharing action plan. The result, among nations that comprise roughly 95% of the world’s GDP, is a two-pillar agreement, with a 15% global minimum corporate tax set to begin in 2023.

Here in the U.S., Treasury is working with Congress to advance President Biden’s Build Back Better plan, which calls for a new 15% alternative minimum tax on businesses with at least $1 billion of adjusted financial statement income over a three-year period.

Even as the Biden tax plan, which originally called for the repeal of certain provisions within the 2017 Tax Cuts and Jobs Act, has been scaled back, it stands on par with the OECD framework in significance, officials say. “There’s not much daylight between Congress’s proposals and the OECD minimum tax,” Kysar said.

Within the OECD agreement, Pillar Two establishes the 15% global minimum tax, while Pillar One departs from outdated tax rules that base nexus on physical presence. Also included are tax treaty changes that would reallocate a portion of multinational profits to more countries. However, it is unclear if two-thirds Senate approval can occur.

Kysar is optimistic close collaboration between Treasury and Congress can move the needle.

“The Pillar One multilateral instrument is being drafted now, and Treasury will be working with Congress,” Kysar said. Emphasizing bipartisan interest, Kysar said, “[The OECD deal] ensures the minimum tax on foreign earnings, enacted by Republicans in the Tax Cuts and Jobs Act, is copied throughout the whole world and serves as a model.” Once the instrument solidifies, “we’ll consult with Congress and the State Department to determine the appropriate approach to implement the agreement.”

In parallel, Treasury is working to advance the current administration’s Build Back Better plan, which takes on certain tax provisions within TCJA. The administration had originally proposed more dramatic changes, such as higher tax rates on foreign income of multinational corporations than the agreed upon 15% minimum. Even still, once Pillar Two becomes a “proven concept,” Congress will have the “runway,” Kysar said, “to act more boldly.”

As further measure, “Achieving country-by-country reform of GILTI will dramatically improve the structure of the minimum tax by removing incentives to shift profits,” said Kysar. By contrast, the current iteration of GILTI provides incentives to blend income between high- and low-tax jurisdictions. “That incentivizes companies to locate and earn profits anywhere but the U.S.,” Kysar said.

In parallel, the administration is keeping its eye on the Base Erosion and Anti-Abuse Tax (BEAT), also within TCJA. Earlier the administration’s tax plan had sought to replace BEAT with a new provision, SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments), which would have denied tax deductions for profits from low-tax countries.

Even as the current proposal maintains the BEAT provision, it accelerates the already planned increases in the tax rate – to 18% by 2025. This approach may not fully control erosion of the U.S. tax base, but it’s a start, Grinberg said.

“The BEAT – and its current form – is ineffective, both as a protection against US-based erosion and as a mechanism for policing the global minimum tax,” Grinberg said. As a result, “we would welcome an even stronger BEAT [which would] help level the playing field between the U.S. and foreign companies and strengthen the U.S. ability to individually police the global deal.”

There’s still time to catch the Fall 2021 Bloomberg Tax Leadership Forum on demand and earn CPE/CLE credit.

Watch Day One: Federal Tax

Watch Day Two: International Tax