Experts Divided on US Adoption of OECD's Pillar Two Legislation

Tax experts remain divided on whether the US will implement legislation for the OECD's pillar two framework. The OECD’s BEPS 2.0 reform package, with its two-pillar approach, aims to tackle tax avoidance, ensure coherence in international tax rules, and foster a more transparent tax environment. Pillar two is designed to ensure multinationals with revenues of at least €750 million ($794 million) pay a minimum effective tax rate of 15% globally.

Despite commitments from major jurisdictions like the UK, Canada, Australia, and all EU member states, the US has yet to endorse pillar two. Multinational companies are now subject to this agreement following its implementation on January 1.

Alex Straight, a partner at tax firm Blick Rothenberg in London, is “unsure” whether the US will adopt pillar two. He commented, “[The US] has always marched to [its] own beat. Looking back through recent history, there are many examples such as [the Foreign Account Tax Compliance Act], the transition tax and [the Global Intangible Low-Taxed Income (GILTI) regulation], which showed that they are not afraid to pass domestic legislation which has a global impact on US-owned businesses and companies. Therefore the question is whether they need to sign up if they are already able to pass the tax laws they want.”

Bernie Pistillo, a tax partner at law firm Morrison & Foerster, pointed out the challenging political climate in Washington, making it hard to envision significant tax legislation passing soon. He said, “Some legislators have objected to pillar two…by portraying it as foreign nations dictating the tax policy of the US.” However, Pistillo believes that pillar two legislation will eventually be enacted in the US. “I would expect that countries that have enacted pillar two legislation will enforce the laws they have adopted, including the [undertaxed payments rule]. And when US lawmakers witness that the result of their inaction has been that other nations are collecting tax that otherwise would accrue to the US…and that many of the largest US multinationals are suffering from the imposition of digital services taxes imposed abroad, legislation implementing pillar two will be enacted in the US,” he added.

John Harrington, co-leader of Dentons’ US tax practice, argued that the US has already tacitly agreed to pillar two. He explained, “By agreeing to the various OECD, G20, and Inclusive Framework statements announcing the two-pillar agreement and participating in the development of the GloBE Model Rules and Commentary, the US has agreed to the pillar two rules adopted by the Inclusive Framework.” However, whether the US will enact some version of the pillar two taxes itself remains uncertain. “It is widely acknowledged that the US will not adopt any of the specific taxes set forth in the GloBE Model Rules,” Harrington said.

Harrington also highlighted that any legislative action in the US depends on the political landscape post-November elections. “If President Biden is re-elected and Democrats have substantial majorities in the House [of Representatives] and Senate, then it seems likely that the US will enact changes to GILTI similar to those proposed by President Biden in prior budgets and as passed by the House earlier in his term. In contrast, if Donald Trump is elected and Republicans have substantial majorities in the House and Senate, then the US may seek to undo the current pillar two agreement by enacting punitive tax measures on countries that enforce pillar two rules by imposing an [undertaxed payments rule] on US multinational groups. If control of the government remains split between Democrats and Republicans, it is hard to see them reaching an agreement on what to do about pillar two,” he stated.

Graeme Cooper, a consultant at Herbert Smith Freehills’ Sydney office, indicated that pillar two could proceed without US agreement since it is largely implemented by domestic law. “There is some substance to the argument that the US has already enacted something close to pillar two in the GILTI regime and the corporate alternative minimum tax, so it doesn’t need to do anything more,” he noted. The Inflation Reduction Act, which created the corporate alternative minimum tax, imposes a 15% minimum tax on the adjusted financial statement income of large corporations for taxable years starting after December 31, 2022.

Cooper also mentioned that the next US Congress could potentially sabotage foreign pillar two measures through domestic retaliatory taxes, emphasizing that a degree of “goodwill” from the US is crucial. The possibility of the US retaliating against countries enforcing pillar two rules remains a real concern.

By fLEXI tEAM