US Faces Potential $120B Tax Revenue Loss from OECD's Pillar Two Adoption

A nonpartisan congressional committee has cautioned that if the rest of the world adopts the Organization for Economic Cooperation and Development's (OECD) pillar two framework in 2025, the US could face a tax revenue loss exceeding $120 billion by 2033.

The Joint Committee on Taxation (JCT), an independent body, conducted an analysis that presented five different tax revenue scenarios to evaluate the impact of implementing pillar two. According to JCT's projections, the US could lose up to $122 billion by 2033 if it continues to delay the implementation of pillar two while other countries adopt it.

A report from the US Senate Committee on Finance states that this significant tax loss is primarily attributed to other countries enacting domestic minimum taxes that would absorb taxes currently collected under the US global minimum tax.

Even if the US adopts the OECD standard by 2025 and generates additional tax revenue, it could still lose up to $56.5 billion. This is because other countries raising their corporate tax rates would deplete the remaining income pool available for US tax authorities.

The analysis was requested by Mike Crapo, Ranking Member of the Senate Finance Committee, and Jason Smith, Chairman of the House Ways and Means Committee, both representing the Republican party.

While approximately 130 countries have committed to implementing a minimum corporate tax rate of 15% as part of the pillar two rollout, the US has been hesitant to follow suit. Although the Biden Administration's US Inflation Reduction Act included a 15% minimum tax rate on financial statement incomes, it does not encompass global intangible low tax incomes (GILTI), thus keeping the US outside the scope of the OECD standard.

The Biden administration has expressed its intention to implement pillar two, but without substantial modifications, the Republican-controlled House of Representatives is unlikely to support international tax reforms, including changes to GILTI.

In a joint statement, Crapo and Smith voiced their concerns, asserting that the Biden Administration had yielded to the OECD tax cartel by agreeing to a global tax code that could lead to a loss of over $120 billion in US tax revenue over the next decade, unless Congress also relinquishes its authority over US tax policy.

Given the gridlock between the Democrat-controlled Senate and Republican-led House of Representatives, it is probable that the adoption of the OECD's pillar two model by the US will have to wait until the next election cycle in 2024.

By fLEXI tEAM