Major U.S trading partners are initiating the implementation of a 15% global minimum corporate tax, known as Pillar Two, sponsored by the Organization for Economic Cooperation and Development (OECD). However, not all members of the U.S Congress are warm to such a proposal. Approval by the House, where all U.S tax legislation initiates, remains uncertain. The impending enforcement of this tax system poses an increasingly intricate and divergent international tax domain for notable U.S employers.
The Pillar Two design displays a pronounced preference for refundable tax credits over non-refundable tax credits, an arrangement most countries do not take issue with, as they largely disburse their incentives in the form of refundable tax credits. Conversely, the majority of U.S general business credits are non-refundable. This considerable difference in tax credit structures between the U.S and other nations could inadvertently lead to U.S employers having effective tax rates below the OECD’s set 15% minimum rate due to this distinction. To illustrate, refundable tax credits are perceived as equivalent to a government grant in the Pillar Two framework. However, for U.S companies receiving non-refundable tax credits, such notions are not taken into account—impacting the computation of the company’s effective tax rate under Pillar Two and could result in the OECD requesting an additional tax count.
The obstacle lies within the 145 OECD members where a U.S company’s Pillar Two tax bill will be due in up to 144 other countries where it has operations. As Pillar Two does not specify a hierarchy of interaction with other tax agreements and lacks a dispute resolution mechanism, companies will be tasked with computing their effective tax rates for each operational country under independent scrutiny. At present, the rush to implement the new tax system is in full swing globally, except in the U.S.
Both Democrats and Republicans in the U.S Congress eye more favorable treatment of the U.S R&D tax credits (and presumably other non-refundable tax credits) under Pillar Two. Republicans on the Ways and Means Committee are displeased with the Treasury Department’s inadequate communication throughout the Pillar Two negotiation process. This dissatisfaction led to the introduction of two bills aimed at raising taxes on certain U.S companies profoundly affected by the Pillar Two taxes.
Long-term implications indicate that it’s doubtful countries will halt the full implementation of Pillar Two or that Congress will make all tax credits refundable. Further, it’s uncertain that foreign countries would be open to requests to rectify the tax credit issue. In an assessment, author Jonathan Samford states, “If that assessment holds, the unfavorable Pillar Two treatment of R&D credits and the lack of immediate deductibility of common and routine business R&D expenses will create a discouraging environment for long-term U.S R&D investment.”
Samford adds that for Congress and the administration to find mutually beneficial solutions, constructive bipartisan dialog among U.S policymakers and trading partners is crucial. Potential solutions may include altering the accounting treatment of specific non-refundable tax credits or allowing OECD members to accept a stipulation that non-refundable tax credits utilized within a five-year period should be treated as equivalent to a refundable credit.
The complete analysis of Jonathan Samford can be found on the original version of this article available here.