House Republicans introduce bill to deter OECD tax rule

House Republicans on the tax-writing Ways and Means Committee have introduced legislation aimed at curbing an international tax agreement backed by the Biden administration from taking hold.

Rep. Ron Estes, R-Kansas, joined by Ways and Means Committee chairman Jason Smith, R-Missouri, and other colleagues, introduced the Unfair Tax Prevention Act to discourage foreign countries from implementing the Organization for Economic Cooperation and Development's Pillar Two Under Taxed Profits Rule. The OECD's UTPR aims to ensure multinational companies pay a global minimum tax of 15%, allowing a country to raise taxes on a business if it's part of a larger company that pays less than 15% in another jurisdiction. This week, the OECD delayed implementation of it until 2026.

If a country moves forward with a UTPR surtax on American workers and businesses, the Unfair Tax Prevention Act would impose a reciprocal tax measure that would apply as long as the foreign country's surtax remains in place.

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"After repeated objections from policymakers, including myself, and business leaders, the Biden administration has negotiated a deal with the OECD that has a disproportionately negative effect on the United States and our economic competitiveness," said Estes in a statement. "Building on the Defending American Jobs and Investment Act, introduced by Ways and Means Republicans, this legislation protects the U.S. tax base from unfair extraterritorial taxes by foreign countries — and imposes stiff penalties on those countries if they implement them. It's time for the OECD and foreign countries to abandon the UTPR surtax and its fundamental flaws."

The bill would define "foreign-owned exterritorial tax regime entities" (FETR) as foreign-controlled entities connected with entities operating in jurisdictions with extraterritorial taxes aimed at U.S. business operations, including the UTPR surtax. It would strengthen anti-avoidance rules in the U.S. base erosion and anti-abuse tax (BEAT), by eliminating the 3% base erosion percentage floor and the $500 million gross receipts test for FETR entities. In addition, the bill would revoke the ability of FETR entities to disregard certain service payments and payments subject to withholding taxes, and treat 50% of cost of goods sold as a base erosion tax benefit. It would also accelerate the scheduled BEAT rate increase and tax credit changes for FETR entities.

On Wednesday, the House Ways and Means Committee held a hearing on the OECD tax rules.

The OECD released administrative guidance last week on Pillar Two. It agreed to delay implementation of another part of the global tax agreement, this one on digital service taxes, under Pillar One, which would apply to companies like Google parent Alphabet and Facebook parent Meta, until the end of 2024, although Canada has expressed opposition to the delay (see story). The UTPR was delayed until 2026.

The OECD released a report Monday indicating it's nevertheless making progress on ratifying its global tax deal after releasing an outcome statement last week by 138 countries on how its two-pillar plan is addressing the tax challenges of a digital economy.

"The Two-Pillar Solution will provide stability for the international tax system, making it fairer and work better in an increasingly digitalized and globalized world economy," OECD Secretary-General Mathias Cormann said in a statement last week. "We have all been working intensively on the technical details and on the implementation arrangements that are necessary to make the Two-Pillar Solution a reality. The agreement reached yesterday proves that despite the challenges and compromises along the way, multilateral dialogue works and can deliver results to tackle shared challenges requiring shared solutions. This work is critical to governments and our economies — ultimately, to be able to raise the necessary revenue to fund the essential public goods and services for their citizens."

The OECD launched a public consultation Monday on one of the other elements of Pillar One, known as Amount B, related to the pricing of in-country baseline marketing and distribution activities. The OECD is asking for comments through Sept. 1, 2023.

Republicans and Democrats remain at odds over the global tax deal. "Once again, the Biden administration neglected to consult Congress before cheerleading the OECD's latest global tax code rewrite," said Smith and Senate Finance Committee ranking member Mike Crapo, R-Idaho, in a joint statement Monday. "Today's 'administrative guidance' acknowledges what Republicans have warned for more than two years: the UTPR surtax is unworkable and unlawful. By exposing the UTPR's fundamental flaws, congressional Republicans created an opportunity for the OECD to reconsider this illegal extraterritorial tax which violates U.S. sovereignty. Shockingly, the Biden administration failed to follow through, surrendering to foreign country demands to allow the UTPR to hit U.S. workers and businesses starting in 2026.  Moreover, the OECD's nonsensical treatment of investment incentives remains, which will send U.S. R&D jobs and tax revenues overseas.  If other countries move forward to attack U.S. jobs and tax revenues through the UTPR, Congress will be forced to pursue additional remedial measures to protect American interests."

Senate Finance Committee chairman Ron Wyden, D-Oregon, sees the guidance as a positive step. "There are concrete wins for American taxpayers and businesses in this announcement, particularly for companies involved in our clean energy sector that's booming as a result of the Inflation Reduction Act," he said in a statement. "It's a clear sign that the U.S. can shape this process in beneficial ways, and Republicans ought to give up their inflexible opposition to it or else American workers and businesses will lose out in the long run."