The Organisation for Economic Co-operation and Development (OECD) has finalized an agreement implementing a "side-by-side system" that exempts U.S.-based multinational corporations from the Pillar 2 global minimum tax reform. This deal, announced recently, amends a 2021 plan that nearly 150 countries had initially agreed upon to establish a 15% global minimum corporate tax rate, aiming to deter large global companies from shifting profits to low-tax jurisdictions.
Agreement Overview
The finalized agreement specifically modifies the 2021 framework by excluding large U.S. multinational corporations from the 15% global minimum tax provision. This outcome followed negotiations conducted between the administration of former President Donald Trump and other member nations of the Group of Seven (G7).
OECD Secretary-General Mathias Cormann described the agreement as a "landmark decision in international tax co-operation" that "enhances tax certainty, reduces complexity, and protects tax bases." U.S. Treasury Secretary Scott Bessent characterized the deal as "a historic victory in preserving U.S. sovereignty and protecting American workers and businesses from extraterritorial overreach."
Background and Evolution
The original 2021 OECD global tax deal, championed by former Treasury Secretary Janet Yellen, aimed to prevent multinational corporations from using accounting and legal methods to transfer earnings to jurisdictions with low or no tax rates, such as Bermuda and the Cayman Islands, where these companies conduct minimal or no business operations. However, this initial plan encountered criticism from congressional Republicans, who expressed concerns that it could reduce the competitiveness of the U.S. in the global economy.
Former President Donald Trump had criticized the 2021 deal, stating it was not applicable in the U.S. His administration indicated it would impose retaliatory taxes against countries that levied taxes on U.S. firms under the 2021 framework.
The Trump administration renegotiated the deal in June, following congressional Republican efforts to reverse a provision from a previous tax and spending bill. This provision would have permitted the federal government to levy taxes on companies with foreign owners and on investors from countries deemed to impose "unfair foreign taxes" on U.S. companies.
Reactions and Criticisms
The amended OECD plan has drawn criticism from several tax transparency and justice organizations.
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Tax Justice Network: Alex Cobham, chief executive of the Tax Justice Network, stated that the agreement signifies a "forfeiture of sovereign rights" by OECD countries, including those in the European Union and the United Kingdom, to tax businesses operating within their borders, characterizing it as a "subjugation of state sovereignty." According to the Tax Justice Network's assessments, countries like France ($14 billion), Germany ($16 billion), and the United Kingdom ($9 billion) are already experiencing significant annual tax losses attributed to U.S. firms. Cobham indicated that the new agreement is projected to result in additional billions in tax losses for these countries and criticized the OECD for not providing quantitative figures on the expected scale of these losses and for a perceived lack of transparency in its decision-making processes. He further asserted that U.S. multinational corporations have increased profit shifting out of foreign countries and into the U.S. since 2016, becoming responsible for nearly a third of all global corporate tax abuse losses.
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FACT Coalition: Zorka Milin, policy director at the FACT Coalition, a tax transparency nonprofit, stated that the deal "risks nearly a decade of global progress on corporate taxation only to allow the largest, most profitable American companies to keep parking profits in tax havens." Tax watchdogs generally argue that a global minimum tax is intended to prevent an international competition among countries to offer lower corporate tax rates.
Conversely, congressional Republicans have expressed approval for the finalized agreement. Senate Finance Committee Chair Mike Crapo (R-Idaho) and House Ways and Means Committee Chair Jason Smith (R-Mo.) jointly stated that the deal marks "another significant milestone in putting America First and unwinding the Biden Administration’s unilateral global tax surrender."
Alternative Approaches
The Tax Justice Network has also highlighted that non-OECD countries initiated tax negotiations at the United Nations (UN) last year, citing perceived delays and watering down of reforms at the OECD. These UN talks reportedly achieved more progress in one year than the OECD did over a decade on international tax reform.
The Tax Justice Network advocates for a transition from the current "pay-where-you-say" global tax system, where multinational corporations are taxed where they declare profits, to a "pay-where-you-play" approach. Under this proposed system, multinationals would be taxed based on where they employ workers and sell goods and services, which advocates contend would render tax havens obsolete and improve global revenue collection. The network estimates that the current system allows companies to exploit tax havens, leading to an estimated $348 billion in underpaid taxes annually. Negotiations at the UN in November debated the 100-year-old cornerstone of the global tax system, with reported significant support for replacing it with a modernized basis.