Global Minimum Tax Faces Challenges in Congress

Janet Yellen has argued the U.S. could implement the plan without ratifying it as a treaty, but Republicans are warning her not to act without Senate approval.

After years of negotiations, the Organization for Economic Co-operation and Development (OECD) announced in August that officials from more than 130 countries around the world have agreed to a global minimum tax plan—but a dispute over whether components of it need to be ratified as a treaty could inhibit America’s full involvement in the deal.

The agreement aims to end a decades-long “race to the bottom” among global tax rates for multinational companies. It has two pillars that, if enacted, will change how nearly every country on earth taxes multinational corporations. Pillar One establishes that earnings would be taxed in all of the countries a corporation operates in, not just where it has a physical presence. This change is a reaction to the growing number of Big Tech companies that do most of their business via the internet. Pillar Two would require the countries involved to implement a 15 percent minimum global tax rate for companies with revenues of more than $870 million. 

For a further breakdown of the details, you can read what The Dispatch wrote about it back in June.

Now that countries have struck an agreement that would alter the world economy, leaders are considering how to implement the changes. There are many unanswered questions in the United States—chief among them is whether Congress will go along with the plan, and what the proper legislative mechanisms are for implementing it. 

Alan Cole, former senior economist with the congressional Joint Economic Committee and co-author of the Full Stack Economics newsletter, told The Dispatch that getting all of the countries involved to revise their respective laws will be challenging. “You can get on paper commitments from diplomats who love diplomacy, but whether the actual individual legislative bodies and their business communities are all going to agree to this, I think that’s far less certain,” he said.

This is especially true of the United States. Not only do Democrats and Republicans differ on the policy itself, with Republicans largely opposing it, but there is also disagreement on how to actually implement the changes. 

Republicans acknowledge the changes in Pillar Two can be done through regular legislation. But GOP Senators argue enacting the changes in Pillar One would require making changes to already existing bilateral tax treaties. The U.S. has tax treaties with a large number of countries across the world, and Republicans argue the changes in the OECD agreement means the U.S. will have to reevaluate each of those separate treaties. 

The changes outlined in the agreement would mean the U.S. would have to cede the right of taxable foreign income to whatever country a company operates in, not just where it has a physical presence. So Google, which has offices in 50 countries, won’t just be taxed in those 50 countries but any country it does business. 

The U.S. Constitution requires support from a two-thirds majority in the Senate to ratify a treaty. It’s a high threshold to meet given that the chamber is currently split right down the middle.

The top Republicans on the Senate Finance, Foreign Relations, and Banking committees—Sens. Mike Crapo, Jim Risch, and Pat Toomey, respectively—sent a letter to Treasury Secretary Janet Yellen last week warning that going forward with the tax plan without Senate approval would be detrimental.

“Bypassing this process to override our bilateral tax treaties would irreparably erode the exclusive treaty authority the Constitution provides to the Senate,” they wrote.

Yellen struck a different tone on ABC News last weekend, saying that Congress may not need to ratify it as a treaty at all. Instead, the White House hopes to advance the changes in Democrats’ upcoming reconciliation package. That bill, which is still under negotiation, is expected to include social spending on items like universal pre-kindergarten, as well as climate change provisions. 

“I am confident that what we need to do to come into compliance with the minimum tax will be included in a reconciliation package,” Yellen said. “I hope that it will be passed and we will be able to reassure the world that the United States will do its part.”

The Dispatch caught up with a few Democratic senators this week in the hallways to see if they believe implementing the sweeping new tax plan could be done via budget reconciliation. 

Senate Banking Committee Chair Sen. Sherrod Brown of Ohio told The Dispatch he thinks a lot of the agreement will make it past the Senate parliamentarian. When pressed specifically on what would happen if the parliamentarian does not allow Pillar One into the reconciliation package he said, “We’ll see. I’m not going to do a ‘what if’ because I think she will.”

A spokesperson for Brown also sent The Dispatch a statement when asked about implementing Pillar One: “Until the technical details from the OECD are complete, we won’t know for sure.”

Sen. Jon Tester, a Democrat who also sits on the Banking Committee, said it is up to Senate leaders and the chamber’s parliamentarian to decide. 

The Biden administration argues a minimum tax will help cut down on tax base erosion and profit shifting, which the OECD defines as strategies companies use to exploit “gaps and mismatches in tax rules.” Republicans have raised fears it will make the United States a less attractive economy for business investment.

“It is crazy to me that we are talking about a policy that would increase the global minimum tax,” Sen. Rob Portman, who sits on the Senate Finance Committee, told The Dispatch. “How does that make us competitive?”

The major international holdouts—Hungary, Estonia, and Ireland—ultimately came around to the details earlier this month and signed on to the plan along with all the other OECD and G20 member countries, except for Kenya, Nigeria, Pakistan, and Sri Lanka.