Many leading Republicans are drawing the fault lines over US support for the OECD’s two-pillar reform. By framing the deal as a ‘tax surrender’, the Republicans can appeal to the patriotism of many American voters who fear the country has gone to the dogs.
West Virginia Representative Carol Miller even wrote an op-ed for Fox News on Thursday, July 20, lambasting the OECD reforms as a “global socialist agenda”.
This is very funny for anyone aware of the OECD’s history and its left-wing critics, who accuse the organisation of only representing rich countries. What’s less amusing for tax stakeholders is the possibility of international reform being derailed by US opposition.
Meanwhile, the Democrats have not made a strong case for a global deal on tax reform, preferring to keep the focus on domestic social issues instead. This may mean the Republican Party will win on blocking tax reform even if they lose the next election.
Leaving America behind
The Joint Committee on Taxation (JCT), a non-partisan congressional body, has estimated that the US stands to lose $122 billion in tax revenue because of pillar two alone. However, the JCT analysis finds it likely that the US may not enact pillar two in 2025, while most of the rest of the world goes ahead.
If this happens, the US would be the biggest international outlier in a very small club of nations – including Kenya, Nigeria, Pakistan and Sri Lanka – and the only major developed economy to reject the reforms.
Many Republicans appear more concerned about a short-term political victory by stopping reform, but it wasn’t long ago that the Republicans were not so opposed to the OECD plans to solve digital taxation.
The Trump administration worked with the OECD, just as the Biden administration has done, because reform was a way of ending the wave of unilateral tax measures levied on US businesses.
US tax reform was partly the model for the global minimum corporate tax rate, even though the two-pillar solution goes further. The Tax Cuts and Jobs Act introduced minimum tax rates on inbound and outbound investments. OECD officials saw an opportunity in building on this.
It’s less clear what the Republicans will do on this front in 2024 if they win back the White House. They might just scrap the deal and refuse any further agreement, but the risk of this would be countries levying digital taxes on US companies.
Trade wars are one alternative to international tax reform. Some Republican politicians may be quietly thinking they can win fights with the EU over digital taxes without an OECD deal, but this would mean more unilateralism, not less.
All it takes is one major country to refuse to back down on digital tax and we are back to square one. This could take many more years to resolve and end up with similar solutions in the end.
Trouble in DC
Right-wing institutions in the US are also trying to build opposition to the OECD’s two-pillar solution. The Cato Institute, a libertarian think tank based in Washington DC, has become increasingly critical of the plans.
Adam Michel, director of tax policy at the institute, told the Ways & Means Committee last week that the OECD “no longer serves the interests of the United States”. He even argued that the US should withdraw from the OECD over the reforms.
This is shocking because the OECD was set up to administer the US Marshall Plan to rebuild Western Europe after the Second World War. As an institution, the OECD is a part of the core of European-US relations.
Nevertheless, Pennsylvania Representative Mike Kelly, who chairs the Ways & Means Sub-committee on Tax, criticised the OECD-brokered two-pillar solution for its cost to the US.
“It’s $120 billion in US tax revenues to foreign countries. This makes absolutely no sense,” said Kelly.
The Republican congressman went on to claim that the OECD tax work is effectively controlled by Europe.
“Europe controls one third of the seats on the Steering Committee, and the broader Inclusive Framework includes over 30 tiny former European colonies,” said Kelly.
“The bottom line is the deck is stacked against America at the OECD,” he argued. “That is why it has never made sense for Treasury to negotiate behind closed doors with a group of 140 nations on a ‘one-country, one-vote’ basis.”
At the same hearing, Georgia Representative Drew Ferguson said: “We are not about levelling the playing field with the rest of the world. We’re about being number one day in and day out.
“We’re either going to be number one in the world or we’re not,” he added.
The timing of all of this couldn’t be worse for the OECD. This is a critical juncture for the work on pillar one; the Paris-based organisation hopes to finalise an international agreement by the end of the year.
Losing US support for the deal at this point wouldn’t necessarily kill off the two-pillar solution, but it would create the need to continue working on it until the US eventually supported it. Otherwise, it’s a matter of the world leaving the US behind.
