background image
U.S. Congressional Research Service Publishes Report on Pillar 2 Global Minimum Tax — Orbitax Tax News & Alerts

The U.S. Congressional Research Services (CRS) has published a report dated 7 July 2022, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy. The report covers the issue of profit shifting, the Pillar 2 proposal, U.S. proposals to conform to Pillar 2, and the impact of the proposals on U.S. revenue and incentives. The report summary is as follows:


The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

In response to concerns about multinational corporations shifting profits to low-tax countries, the Organisation for Economic Co-operation and Development (OECD) and the G20, through an inclusive framework of 141 countries, developed a proposed global minimum tax (GLoBE) of 15%. The United States is considering tax policy changes to conform domestic rules more closely with GLoBE.

The overarching goal of GLoBE is to address profit shifting, where multinational enterprises (MNEs) use techniques such as transfer pricing and location of debt to reduce income in high-tax countries and increase income in low-tax countries. About 69% of the foreign profits of U.S. multinationals are located in eight identified tax haven jurisdictions and in "stateless entities and other countries" generally subject to low or no local taxes.

GLoBE would impose a rate of at least 15% on the earnings of large MNEs in each country they operate in via an additional, or top-up, tax. The minimum tax would be imposed on all constituent entities (parents, subsidiaries, branches, or permanent establishments) in each country with lower taxes, so that the overall effective tax rate on earnings of the MNE in that country is increased to 15%. GLoBE is based on financial income but, to target intangible income in each country of operation, would apply the additional tax to income after a deduction for a share of the book value of tangible assets and for a share of payroll costs. The allowance for these deductions is referred to as the substance carve-out, and would begin at 8% for tangible assets and 10% for payroll before eventually equaling 5% after a 10-year phase-down period

The right to tax income goes first to the source country through a qualified domestic minimum top-up tax (QDMTT). If the source country does not impose a top-up tax on income earned in the country, the home country of the parent company can collect the tax through the income inclusion rule (IIR) by increasing the income of the parent subject to tax. If neither of these taxes apply, then countries where other constituent entities (such as subsidiaries and branches) are located can collect the tax by denying deductions for those constituent entities through the undertaxed payments rule (UTPR).

Tax credits would reduce taxes, but refundable credits (and grants) increase income. Other tax deductions would reduce taxes, but there is a provision to deal with timing differences for items such as accelerated depreciation. GLoBE applies to entities that are consolidated in the MNE accounts and excludes income and losses included under the equity method of accounting

The United States currently has its own minimum tax on foreign-source income—the tax on global intangible low-taxed income (GILTI)—that is similar to the IIR. The Build Back Better Act (H.R. 5376) would increase the GILTI tax rate and impose it on a country-by-country basis, along with other changes, to more closely align the GILTI rules with GLoBE. The Administration's FY2023 budget proposals would repeal the current base erosion and antiabuse tax (BEAT), an alternative tax on a base that includes certain payments to foreign affiliates, and impose a domestic top-up tax and an undertaxed payments rule

GLoBE could increase taxes on multinationals' operations in the United States, even absent U.S. action with respect to the GLoBE proposal. Other countries could impose taxes on U.S. earnings of multinational firms triggered by a low U.S. effective tax rate through the UTPR or IIR. Thus, GLoBE could reduce the benefit of domestic tax incentives such as tax credits. The major tax credits include the research credit, the low-income housing tax credit, and credits for renewable energy.

At the same time, several aspects of the GLoBE proposal would limit its effect on domestic tax policy and incentives to encourage certain types of investment. These include the carve-out for payroll and tangible assets, adjustments for timing differences between financial and tax accounting, and the exclusion for investments accounted for under the equity method. Outside of the research credit, it appears other credits would generally not be affected because they fall under the equity method exclusion. Additional taxes could be triggered by other provisions as well, although some highly aggregated tax-rate calculations suggest the effect would be limited or perhaps concentrated in certain industries. The potential effect on the research credit, or any other affected credit, could be reduced by making it refundable.