American competitiveness is at stake as Congress considers whether to support a global tax accord that imposes minimum levies and stricter regulations on corporations, according to a top U.S. Treasury official.
The accord, backed by 137 countries, would remake an international tax system that’s for years seen countries undercut each other’s corporate rates. The average rate in major economies has tumbled to 23% from 40% four decades ago.
“This race to the bottom means that not only are corporate tax rates driven down, but so are government resources, which could be used to build infrastructure, educate and train our citizens, incentivize R&D, and combat climate change,” Lily Batchelder, the assistant Treasury secretary for tax policy, said in prepared remarks to a New York State Bar Association event that were obtained by Bloomberg.
Batchelder added, “To make matters worse, to the extent that this shortfall in revenues is picked up by others, it is picked up by workers and small businesses.”
Last year’s agreement, which Treasury Secretary Janet Yellen helped broker, would impose a 15% minimum tax and strengthen rules that corporations have used to avoid paying taxes anywhere in the globe.
‘Tangible’ benefits
Implementing the plan requires each country to update its own laws and revise tax treaties — an involved process.
“This agreement will provide real and tangible benefits to working and middle-class people in the United States and around the world, because it will allow us to invest in essential public goods,” Batchelder said, in what is her first major speech since she was confirmed by the Senate last September. “Our corporations will no longer be based in the only country on earth that requires them to pay a minimum tax on their foreign earnings. This level playing field will enhance their competitiveness.”
The U.S. is at risk of failing to implement its own plan, because the relevant tax measures are included in President Joe Biden’s long-term economic package — which is now stalled in the Senate.
Little progress has been made on the bill since West Virginia Democrat Joe Manchin said a month ago he couldn’t support proceeding with it. It’s unclear when or how talks could be restarted.
Congress challenge
The legislation contained measures to implement the new 15% minimum corporate rate, as well as several new provisions to stop countries from shifting profits outside the U.S. to avoid paying the Internal Revenue Service.
The bill is only likely to pass while Democrats control the House, Senate and White House, because Republicans have said they don’t agree with the details of the international plan. And Democrats could have less than a year controlling the levers of power in Washington, with Republicans projected to retake the House in the November 2022 midterm elections.
Democrats also face some headwinds in implementing another part of the deal, which overhauls the international taxing-rights system and rewrites the rules for which countries can tax which profits.
Treasury officials are determining whether that requires changing tax treaties, which in turn would require support from Senate Republicans. Batchelder said the process for implementing the new taxing rights system is still being created and that the Treasury is consulting with both Democrats and Republicans to get their input.
“Once it’s clear what the multilateral instrument is and it more fully takes shape, we will be consulting with Congress and the State Department to determine the appropriate approach for implementing it,” Batchelder, a former Senate aide, said.
Batchelder said the Biden administration is still optimistic that large portions of the president’s long-term Build Back Better plan, including the global minimum tax, will ultimately become law.
“We all know that the administration’s Build Back Better package has faced many twists and turns on its road to enactment, despite extraordinarily strong public support for the provisions it includes,” she said. “Having worked in Congress, I can say this is true of every major (and minor) piece of legislation.
— With assistance from Michael Rapoport and Isabel Gottlieb
