The longtime effort to develop a global minimum tax rate hit a big snag when U.S. legislators recently proposed a “revenge tax” on investors from countries that apply such a tax to U.S. companies.
As we discussed, the U.S. stepped away from negotiations with the Organization for Economic Co-operation and Development (OECD) via executive order earlier this year. The former Secretary of the Treasury, Janet Yellen, took part in efforts to set a global minimum tax rate on multinational enterprises. The reason for the global tax is the continued loss of tax revenue from tech, pharmaceutical and other global industries that take advantage of legal and illegal tax structures to pay lower taxes outside of the region where their profit was earned.
The number of tax dollars lost to the sometimes opaque network of offshore tax havens and foreign bank accounts is significant. The Tax Justice Network estimates that approximately $492 billion flows away from countries where those dollars are earned. Whether tax evasion or tax avoidance, the OECD has a powerful mandate to claw back taxes owed, and the planned mode of doing that has been through a global minimum tax.
A new era: revenge tax
With the new administration, the U.S. withdrew from the OECD measure intended to stem the flow of tax monies into preferential tax structures. As the U.S. moves in a different direction than former allies, Congress took aim at the possibility that participating countries will assess the global minimum tax on U.S. entities as planned.
As the regulatory ground of the U.S. has shifted, companies and industry groups have appealed to the government for protection from these taxes. As a result, President Trump said his administration would not allow the compromise of American businesses “by one-sided, anti-competitive policies and practices of foreign governments.”
In crafting the “Beautiful Bill Act,” the majority inserted a provision in Section 899 of the draft that would assess a “revenge tax” on investors and companies located in countries that charge U.S. interests with a digital tax on their profits in that country. The measure was named to repudiate the framework developed by the OECD. Analysis of the provision led to predictions that the measure would cause significant job and economic loss in the U.S. if it were enacted.
In the end, given concern for the impact of the provision, it was removed from the bill and further negotiation is anticipated. More to come.
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