While the OECD has come to a tentative agreement, adoption of foreign minimum taxes by individual countries is complex, difficult and many years away
The Organization for Economic Co-Operation and Development (OECD) announced plans to establish a global foreign minimum tax in early October, with 136 countries of the Inclusive Framework (IF) signing a framework agreement. Under the OECD proposal, companies headquartered in a country enacting the foreign minimum tax would theoretically be required to pay at least a 15% tax rate on their foreign earnings. The OECD proposal is broadly similar to the foreign minimum tax enacted by the U.S. in 2017 (GILTI).
It would be welcome news for U.S. companies if their foreign competitors were required to pay taxes on their foreign income similar to the taxes U.S. companies pay under GILTI. But the OECD framework agreement does not mean that signatory countries will actually enact foreign minimum taxes. Consequently, U.S. companies will remain at a competitive disadvantage unless, and until, our major competitors enact foreign minimum taxes of their own.
The OECD’s framework says the adoption of a minimum tax is entirely voluntary on the part of each country. Further, the agreement sets no deadline for countries to decide whether or not they will enact a minimum tax. Implementing a worldwide foreign minimum tax will be a years-long process, requiring more than 100 countries to approve the tax through their independent legislative processes.
The absolute earliest that major OECD countries could implement a foreign minimum tax is at least several years from now, assuming they were willing to do so. And there are rumblings from a number of countries that they are not keen to quickly implement the framework. In addition, some countries may agree to implement a foreign minimum tax only if other parts of the OECD Framework agreement take effect — provisions that would allow their countries to tax U.S. companies even if the U.S. company had no physical presence in the country.
Despite the multi-year timeline before a foreign minimum tax is likely to be adopted by foreign countries who are major U.S. competitors — if they do so at all — Congress is now considering Build Back Better legislation that would significantly increase taxes under GILTI by even more than the OECD’s guidelines for a foreign minimum tax. The legislation would put U.S. companies at an even greater competitive disadvantage relative to their foreign-headquartered competitors than they are today, and U.S. companies would remain at a disadvantage even if other countries eventually enact a foreign minimum tax of their own.
If Congress raises GILTI taxes now, amidst this uncertainty and in a harsher manner than even proposed by the OECD, American companies will be put at a very significant disadvantage in global markets.
To learn more about the Alliance for Competitive Taxation, please visit www.actontaxreform.com.