In-house tax directors at large multinational companies and their advisors are expecting revisions to certain measures under the TCJA, including increasing the corporate tax rate and global intangible low-taxed income (GILTI) rate, following key appointments to the US Treasury. Faster developments on pillar one and two at the OECD are also expected.
Former IMF director David Lipton will serve as a senior counsel to Yellen on tax policy, according to reports from Reuters. Alongside Lipton’s appointment on February 2, Deputy Assistant Secretaries Kimberly Clausing, Itai Grinberg, and Tom West, as well as Counsel to the Assistant Secretary Rebecca Kysar, were selected by the Biden administration to direct and shape domestic and international tax policy at the Treasury.
“This is a big deal, it’s like Janet Yellen actually means business by building up the tax team more quickly than other areas of the Treasury,” said one vice president of global taxes at a US multinational consumer goods company involved in the OECD discussions. “We should not be surprised with the personnel that are coming in, and yet, it is still impressive.”
Clausing, Grinberg, and Kysar, in particular, bring a significant amount of international tax academic experience, according to Daniel Bunn, vice president of global projects at the Tax Foundation in the US.
Digital tax negotiations between the Treasury and OECD
Grinberg, who is a former Treasury official, will be working on pillar one and two negotiations and other international tax policy items such as beneficial ownership registries with the OECD and its 137 member countries. He has been critical of digital services taxes (DSTs) and the European Commission's state aid investigations involving US companies, and may address these in negotiations too.
“The taxation of the digital economy is currently at the top of the global international tax policymaking agenda,” said Grinberg in an interview at the Centre for Business Taxation at University of Oxford. He argued against pillar one’s approach to reallocating profits to market jurisdictions, and against user participation to justify narrow taxes on digital companies. “The digital economy neither can nor should be ring-fenced, and while there should be no special rules for the digital economy that does not resolve the question of whether the international tax system requires reform.”
Yellen already started calling the UK, German, Italian, and French finance ministers in late January about increasing multilateralism to reach a consensus on fair taxation regarding the global anti-base erosion (GloBE) proposal under pillar two, as well as the more contentious reallocation of profit from digital services to market jurisdictions under pillar one. Yellen and Grinberg will likely seek a deal that politically links the two pillars, and already shared support for pillar two regarding a global minimum tax.
The scope of the rules under pillar one, particularly reallocating residual profits under Amount A to market jurisdictions using a formulaic approach, is a key concern among in-house tax directors at Microsoft and other large businesses. Taxpayers also said they were concerned about the interaction between GILTI and GloBE rules under pillar two without a safe-harbour. The OECD is working on simplifying its multilateral tax solution, which includes political and technical reviews regarding scope, segmentation, nexus, dispute resolution mechanisms, and the allocation of losses.
The next step in negotiations is Yellen attending a call with the G7 finance ministers and central bank governors on February 12. The steps Yellen and her Treasury team will be taking to involve the US in negotiations is welcome news, but other recent picks for the Treasury are drawing attention from business leaders because they are likely to change the tax rules under the TCJA.
Upcoming TCJA changes
While the US Treasury looks ready to continue negotiations on pillar one and two, economic stimulus options under the $1.9 trillion recovery bill are likely to take precedence at the Treasury for the next few weeks, according to John Gimigliano, Washington tax partner at KPMG US.
Clausing and Kysar will play a key role in rewriting the domestic and international tax rules as their department is responsible for analysing the economic and revenue effects of tax policy and negotiating treaty rights with foreign governments. Clausing advocated for a global minimum tax in her academic work to address corporate tax avoidance and bolster revenues, and will likely help in coordinating changes to the GILTI regime to work with the GloBE rules for simpler interactions.
Linda Evans, director of global tax policy at IBM, flagged changes to GILTI as a major concern to the business, and that increasing the rate will also penalise other US businesses with global operations.
“We would look forward to working with the Biden administration to find alternative revenue sources for the programmes they want to do, but I don’t think it’s a good thing to raise taxes on companies as we continue to struggle through the economic downturn of a pandemic,” she said.
The most important changes suggested from the Biden administration on cross-border tax planning are an increase in the corporate tax rate from 21% to 28%, a minimum tax of 15% on businesses with book income in excess of $100 million, a 10% surtax on corporations that move manufacturing or service jobs offshore to sell goods back into the US market, and doubling the GILTI tax rate from 10.5% to 21%.
Gimigliano said these changes are unlikely in the near-term in the recovery bill because Assistant Secretary for Tax Policy Mark Mazur and Yellen’s comments in recent weeks to the Senate Finance Committee focus on economic recovery instead. However, he suggested that the Democratic majority in Congress may propose revisions to the GILTI rate in the next major legislative package after another round of economic relief, since it has been a key revenue raiser for the US Treasury.
Both Kysar and Grinberg have already pointed out flaws with GILTI and other parts of the TCJA’s international rules in their academic work, which may have an impact on negotiations at the OECD and the design of technical details under pillar two.
The Senate is also considering amendments to GILTI rules by repealing the tax-free deemed return on investments under the Removing Incentives for Outsourcing Act, the bill is being discussing in line with President Biden’s plan to keep jobs and businesses in the US. Senators Amy Klobuchar, Chris Van Hollen, and Tammy Duckworth re-introduced the Act to Congress on January 26 after it was first discussed in 2017. It would also determine the net controlled foreign corporation (CFC) tested income on a per-country basis, instead of a blended or “global rate”. The change would mean companies will not be able to deduct 10% of their return on tangible assets before the tax rate on foreign income applies.
“After three years of upheaval in the US international tax system and thousands of pages of regulations later, the system appeared to be approaching some stability, but the new treasury appointments indicate that changes will continue as each will likely have big ideas for how best to reform the 2017 law,” said one head of tax at an asset management firm based in the US.
Almost all the latest appointments to the Treasury are critical of certain measures under the TCJA, and advisors are more certain about increases in the corporate tax rate from 21% to 28% along with doubling the GILTI rate as suggested by President Biden during his campaign in 2020.
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