Introduction
In a recent development concerning the global minimum tax deal, U.S.-based companies have secured some much-needed relief, effectively delaying or reducing the taxes they would otherwise have had to pay to foreign countries. Negotiated by the Treasury Department, the updated agreement introduces significant changes that grant companies an additional year, until 2026, before foreign jurisdictions can impose new taxes on U.S. companies deemed to pay insufficient taxes in the United States. Additionally, the agreement addresses concerns about clean-energy tax credits, providing more favorable treatment than initially feared by some companies. These changes offer a sense of certainty and stability, particularly as the tax-credit trading market emerges.
The Global Minimum Tax Deal: A Landmark Achievement with Challenges
The global minimum tax deal, a significant proposal by the Organization for Economic Cooperation and Development (OECD) and backed by approximately 140 other jurisdictions, mandates a 15% minimum tax on large companies operating in each country where they conduct business. Hailed as a landmark achievement in international cooperation and a powerful deterrent against corporate tax evasion, the implementation of the deal has encountered obstacles and complexities. Calculating the 15% minimum tax consistently across countries and companies requires precise definitions of income and taxes, leading to a series of technical rules and updates, the latest spanning an extensive 91-page document released on Monday by the OECD.
U.S. Resistance and Potential Revenue Loss
While some countries, including Japan, South Korea, and certain European Union members, have proceeded with implementing minimum taxes as per the deal, the United States has not yet followed suit. Despite the deal’s negotiation during the Biden administration, efforts to push the necessary changes through the Democratic-controlled Congress last year proved unsuccessful. Congressional Republicans, who now hold a majority in the House, staunchly oppose the deal, labeling it as a global tax surrender.
Notably, the Joint Committee on Taxation estimates that if other countries proceed with implementing the deal while the U.S. refrains, the country could face a loss of $122 billion in revenue over the next decade compared to more widespread implementation.
Adapting U.S. Tax System to Fit the International Framework
One critical aspect addressed in the updated guidance pertains to the Undertaxed Profits Rule (UTPR), scheduled to come into effect in 2025. The UTPR ensures that companies based in countries outside the deal are still subject to the 15% minimum tax. Under the UTPR, a foreign country can assess a company’s tax rate in each jurisdiction and, if it falls below 15%, impose additional taxes. The guidance from Monday pushes the implementation of this rule to 2026 for countries where the tax rate is at least 20%. Given that the U.S. corporate tax rate currently stands at 21%, this delay allows Congress time to address this concern alongside other expiring tax provisions in 2025.
Treatment of Tax Credits: Balancing Incentives and Compliance
Another crucial decision outlined in the updated guidance focuses on the treatment of tax credits. Under the OECD rules, regular tax credits, such as research tax credits, are considered tax reductions. As a result, companies leveraging such incentives might reduce their effective tax rate below the 15% minimum, thereby nullifying the benefits of these tax credits. In response to concerns raised by U.S. lawmakers who fear that the deal undermines Congress’ ability to offer tax incentives, the guidance acknowledges the significance of addressing the scale and scope of Inflation Reduction Act (IRA) tax credits. These credits, worth hundreds of billions of dollars, can be sold by renewable-energy developers to companies seeking tax breaks, potentially affecting the tax-credit trading market.
Providing Clarity to Boost Confidence in the Market
To instill confidence in companies considering the purchase of tax credits, the update establishes rules for all tradable tax credits, including IRA credits. The treatment of U.S. credits for buyers ensures that only the net benefit—the difference between the tax credit and the purchase price—is considered a tax cut. This measure aims to prevent companies from pushing their tax rates too low and thereby triggering foreign taxes. The Treasury Department has welcomed the guidance, particularly as it treats the IRA’s transferable credits like refundable credits, enabling companies to convert them into cash.
Challenges Persist, but Progress is Made
Despite these updates providing more certainty and clarity, companies engaged in projects generating significant IRA tax credits may still find themselves subject to foreign taxes that offset the benefits, according to Pat Brown of accounting firm PwC. In summary, the latest adjustments to the global minimum tax deal have granted U.S. companies temporary relief, postponing potential tax increases until 2026. While the U.S. has yet to fully adopt the deal, it maintains an ability to influence the rules’ adjustments to suit its specific interests. The treatment of tax credits has been addressed, and more clarity has been offered to companies navigating the tax-credit trading market. As the implementation process continues, the balance between international cooperation and national interests remains an ongoing challenge.