July 19, 2023
What to expect in Washington (July 19)
Senate Finance Committee Ranking Member Mike Crapo (R-ID) and House Ways and Means Committee Chairman Jason Smith (R-MI) were not satisfied with the OECD's July 17 administrative guidance on Pillar Two of the OECD BEPS 2.0 project that, among other things, provides a safe harbor rule that will temporarily prevent countries that adopt the Undertaxed Profits Rule (UTPR) from applying the UTPR top-up tax to Ultimate Parent Entities (UPEs) if the nominal or statutory tax rate in the UPE jurisdiction is above 20%. The Administrative Guidance also provides favorable treatment for transferable tax credits under the Inflation Reduction Act and detailed guidance on the QDMTT safe harbor, as well as guidance on substance-based income exclusion and currency conversion rules.
Under the guidance, the UTPR Top-up Tax Amount calculated for the UPE Jurisdiction shall be deemed to be zero for each Fiscal Year during the Transition Period if the UPE Jurisdiction has a corporate income tax that applies at a rate of at least 20%, with the Transition Period spanning Fiscal Years that run no longer than 12 months that begin on or before December 31, 2025, and end before December 31, 2026. The rule would eliminate the threat of the application of the UTPR to the domestic earnings of US-headquartered companies for the transitional period. OECD said, "The short transition period is designed to ensure that the safe harbor does not serve as a disincentive for jurisdictions to adopt the GloBE Rules or as an incentive for MNE Groups to invert into a jurisdiction that has not yet adopted a QDMTT or to shift profits into UPE jurisdictions that have lower effective tax rates. Accordingly, the transition period cannot be extended."
A Bloomberg Daily Tax Report analysis by EY's Barbara Angus and Jason Yen said, "The guidance contains a transitional safe harbor, which deems any ultimate parent entity's UTPR liability to be zero for fiscal years beginning before 2026 if the entity's jurisdiction has a statutory corporate tax rate of at least 20%. This effectively serves to delay application of the UTPR on the US profits of a US multinational enterprise until 2026 at the earliest." Further, the analysis stated, "The new rules on tax credits relate specifically to transferable tax credits — a priority for the current US administration … The guidance effectively treats these credits, whether transferred or retained, like qualified refundable tax credits — regardless of the company's financial accounting treatment. It also provides additional favorable guidance for entities that participate in tax equity investments, including tax equity investments that generate transferable credits."
An EY Tax Alert is available here.
Tax Notes reported some as suggesting "the 2026 deadline for the transitional safe harbor could indicate that the OECD expects the United States to pass legislation on pillar 2 in 2025 after elections are held."
Senator Crapo and Chairman Smith said in a joint statement: "Once again, the Biden Administration neglected to consult Congress before cheerleading the OECD's latest global tax code rewrite. 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."
The developments come as the Ways & Means Tax Subcommittee holds a hearing today (Wednesday, July 19) at 2 p.m., "Biden's Global Tax Surrender Harms American Workers and Our Economy." Witnesses:
A Joint Committee on Taxation (JCT) staff report for the hearing, "Background and Analysis of the Taxation of Income Earned by Multinational Enterprises," said on ordering: "The primary right to tax income (including Globe income) arising in a jurisdiction is with the jurisdiction (the source country) itself … The mechanism for applying that top-up tax (i.e., a top-up tax on domestic income) is the QDMTT … The secondary right to collect a top-up tax with respect to Globe income earned in a source country is with the jurisdiction of the MNE's ultimate parent entity. This top-up tax is known as the IIR … The final mechanism providing for the collection of top-up tax is the UTPR. If a top-up tax is due, but the source country does not impose a QDMTT and no parent entity is in a jurisdiction imposing an IIR, then countries in which other MNE affiliates are located may collect the top-up tax under a UTPR."
Rep. Ron Estes (R-KS), who has been vocal on global tax issues, July 18 introduced a bill to amend the Base-Erosion and Anti-Abuse tax (BEAT) calculation for specified Foreign-Owned Extraterritorial Tax Regime Entities, another reciprocal tax measure for countries that target the US under the OECD-led agreement. Under the bill, the term "tax" includes any increase in tax whether effectuated by an increase in the rate or base of a tax, by a denial of deductions or credits, or otherwise, which is intended to include any UTPR. A release said, "the Unfair Tax Prevention Act [is intended] to discourage foreign countries from attacking U.S. jobs and tax revenues through the Organization for Economic Co-operation and Development's (OECD) Pillar 2 so-called Under Taxed Profit Rule (UTPR) surtax."
Trade — The Senate July 18 passed by Unanimous Consent H.R. 4004, the United States-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act that expresses the approval of Congress for the June 1, 2023, agreement regarding trade between the United States and Taiwan and imposes requirements on the negotiations of certain further trade agreements between the United States and Taiwan. (The June 1, 2023, agreement, which addresses issues such as customs administration and regulatory practices, is the first of several expected agreements under the United States-Taiwan Initiative on 21st-Century Trade.)
A Ways & Means release highlighted that the bill imposes new congressional consultation and transparency requirements on the Administration with respect to the negotiation of any subsequent agreements arising under the initiative, requires such agreements be subject to a Congressional vote of approval to take effect, and reiterates that under the U.S. Constitution, Congress has sole authority over international trade. This is separate from the discussion draft to provide relief from double-taxation for workers and businesses engaged in U.S.-Taiwan cross-border investment released by House Ways & Means Committee Chairman Smith, Ranking Member Richard Neal (D-MA), Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Crapo on July 12.