Yellen and the global tax drop

Treasury Secretary Janet Yellen addresses lawmakers during a hearing of the House Committee on Financial Services in Washington, DC on December 1.


Amanda Andrade-Rhoades / Associated press

Amid the debate surrounding the Biden administration’s spending plans, it’s easy to forget that the Build Back Better bill comes with hundreds of billions of dollars in tax increases. Democrats promise that at least for corporate taxes, other countries will increase theirs as well. So lawmakers should know what Treasury Secretary Janet Yellen isn’t telling them: These global tax plans could fail again.

It will come as a surprise to anyone who took at face value a flurry of press releases in June and October hailing a major global tax deal. At issue, complex negotiations at the Organization for Economic Cooperation and Development in Paris to settle new tax rules for large companies. Ms. Yellen shattered a long bipartisan consensus in Washington by agreeing to these proposals, which include a minimum global corporate tax rate of 15% and a new method of taxing the world’s 100 largest corporations.

Ms Yellen was quick to praise the deals on these plans from leaders of the world’s largest economies, and 136 countries, including longtime refractories such as China, India, Ireland and Estonia. , have signed. But those deals were just deals to be made, and it is proving more difficult to work out the details.

Take this 15% minimum tax, known as the “second pillar” of the two-pronged approach of the OECD. There seems to be general agreement on the rate and various exemptions and deductions. But negotiators are falling behind on a “commentary” document of several hundred pages to be published at the same time as the model legislation. This is important because every country – all 136 – will have to implement the minimum tax in their national laws. Without this detailed explanation of the OECD Model Law, countries are more likely to deviate (accidentally or intentionally) from the global agreement.

This comment is no longer expected before January or February, making it unlikely that the global minimum tax will come into force by 2023, as the OECD hopes. The 27 members of the European Union are particularly prone to delays. Brussels will soon publish a draft directive telling these 27 governments how to implement the OECD minimum tax, and it faces a difficult task.

For distinctly European reasons, EU leaders would have to agree on a final text before March, otherwise the French presidential election will delay the process until the end of 2022. It would be far too late to reach the end of 2022. OECD deadline. Estonia and Hungary blocked a related EU tax change last week pending the outcome of the OECD process.

These delays are likely to be repeated elsewhere. Governments participating in this exercise should assimilate the OECD model law and the commentary, draft changes to national tax laws, discuss and amend this draft, and then update the revenue collection systems to apply the new tax. Do you still think someone will have a minimum tax in place by 2023?

Meanwhile, the first pillar of the OECD, which redistributes tax rights over a hundred large companies (mainly technology and pharmaceuticals), is falling even further behind. While countries like France and Germany are eager to claim new revenue from these big companies, no one has agreed on which jurisdictions are expected to lose revenue under the deal. Other governments, notably India, remain reluctant to adopt binding dispute resolution that is supposed to provide businesses with greater legal certainty.

No one knows whether a Pillar 2 minimum tax deal will hold if the Pillar 1 technology tax collapses. There are good diplomatic reasons why the two evolved in tandem. It is still possible that this does not happen at all at the end.

This adds up to a great argument for the US Congress to do nothing. Ms Yellen wants lawmakers to approve major changes to the US method of taxing global corporations – which amounts to a substantial tax increase – in the hopes that other countries will follow suit with their own tax increases to reduce competitive harm in the United States. Other governments are not following where Build Back Better wants to lead. The only thing worse than passing a horrible tax law is passing it alone.

Wonder Land (06/16/21): Emmanuel Macron welcomed Joe Biden to the “club”. He was talking about the European welfare state. Image: Kevin Lamarque / Reuters

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