OECD Global Minimum Tax (BEPS Pillar 2 tax) has major impact on US companies doing business abroad

On July 17, 2023, the Organization for Economic Cooperation and Development (OECD) issued important new guidance on the 15% Global Minimum Tax (GMT), also known as the BEPS Pillar 2 tax plan.  

This guidance, negotiated with the US Treasury Department in an attempt to overcome opposition by some in Congress and spur the U.S. to action, has significant implications for large U.S. companies doing business abroad.  

A quick refresher on the OECD Global Minimum Tax

OECD Pillar 2 tax – or the Global Minimum Tax, as you prefer – is part of a larger, two-pillar Inclusive Framework the OECD/G20 created called BEPS (short for base erosion and profit shifting).  

The goal of the OECD Pillar 2 tax is to create a global minimum tax, with large, multinational enterprises paying at minimum an effective tax rate of 15% in every jurisdiction in which they do business.  

While the concept sounds simple, it’s been difficult to implement. Many countries and jurisdictions around the world define concepts like income and taxes differently. Many have imposed different starting dates, or like the U.S., haven’t acted on the global minimum tax at all. 

See “In more detail: what is the OECD Pillar 2 tax?” further down in this article for more background about the OECD Pillar 2 tax. 

Details of the recent OECD guidance and how it impacted US GMT concerns. 

Congressional concerns, as discussed in more detail in another section of this article, are myriad. But in general, there are both ideological and fiscal concerns about the OECD tax in general. Ideologically, many in Congress are opposed to the idea of ceding taxation authority to other nations. Fiscally, no one wants to lose the tax revenue that the U.S. is projected to lose if it enacts conforming tax legislation or countries begin assessing the OECD Global Minimum Tax against US companies without any further action by Congress. Within those broad concerns, there are more specific ones, two of which the July 17 OECD Pillar 2 guidance addressed.  

However, it’s safe to say that serious questions remain as to whether OECD-conforming Global Minimum Tax legislation will get through Congress. The two main takeaways from the recent guidance are: 

1. OECD Global Minimum Tax start date extension. 

To provide the U.S and other countries more time to pass conforming legislation, the guidance extends the OECD Pillar 2 starting date by one year – from 2025 to 2026 – where the tax rate is at least 20%. The guidance extends the date from 2025 to 2026 during which foreign countries can begin to impose additional taxes on US-headquartered companies that pay less than 15% income tax in the US. 

2. Guidance on the treatment of sellable renewable-energy tax credits.  

The 2022 Inflation Reduction Act established tax credits that may be sold by renewable-energy developers and others without income tax liability. Prior to the July 17 guidance, there was considerable confusion on how these credits would be viewed under GMT. The guidance gives some welcomed clarity; any gap between these credits and the purchase price likely will be the amount considered as a tax reduction.  

Author’s note: this “good news” does not apply to other popular tax credits, such as the research and development tax credit creating a situation where companies may lose those credits when considered on a global basis. 

The current climate in Washington, D.C.: uncertainty and controversy remain

While the July 17, 2023 guidance provides welcomed clarity on two key issues, many open questions remain, and there is no clear path forward on Pillar 2 adoption.  

The view of many in Congress is that the Administration is going around Congress and encouraging countries around the world to adopt Pillar 2, effectively forcing Congress to act. The Republican majority argues Pillar 2 adoption in the US would result in a significant income tax increase on US corporations, something they are against.  

Regardless of whether or not Congress acts, U.S.-based companies who do business abroad will face a tax increase in the countries and jurisdictions they do business that have adopted Pillar 2, as they would face what’s called a “top-up” tax in those countries. 

For those who may be wondering what a top-up tax is, the top-up tax for OECD BEPS Pillar 2 is a part of the larger Global Minimum Tax plan. This top-up is what ensures that multinational corporations pay a minimum effective tax rate of 15% in jurisdictions in which they operate.  

The rules create a “top-up tax” to be applied on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15% rate. Companies calculate their effective tax rate for each jurisdiction where they operate and pay top-up tax for the difference between their effective tax rate per jurisdiction and the 15% minimum rate.   

In more detail: what is the OECD Pillar 2 tax?   

The Pillar 2 tax started in October of 2021, when 138 countries and jurisdictions around the world, including the U.S., agreed to reform international taxation rules. Theoretically, by ensuring that multinational enterprises pay their fair share of tax wherever they operate and generate profits in today’s digitalized and globalized world economy, tax avoidance by these large, multinational entities would be ended, and businesses of all sizes would have a level playing field. 

The OECD proposed addressing the tax challenges arising from the digitalization of the economy through a two-pillar solution. The second of the two pillars (also referred to as Pillar 2 or Pillar Two) is made up of three components, which together are intended to ensure that large, Multinational Enterprises (MNEs) have a minimum effective tax rate of 15% in every jurisdiction they do business in.  

On July 11, 2023, the OECD provided an update, announcing that all 138 country and jurisdiction members had agreed on an Outcome Statement, providing a consensus and a way forward. While you can read the Outcome Statement’s details and an analysis of its impact in this CCH AnswerConnect article, Countries Agree Way Forward On OECD's Two-Pillar Tax Plan, in short, Outcome Statement summarizes the package of deliverables developed to address the remaining elements of the Two Pillar solution.

Background: How has the US responded to the OECD Global Minimum Tax?

There is significant opposition to the OECD Pillar 2 tax by Congress, ideologically and fiscally. Congressional members on both sides of the aisle argue that adopting and conforming to the OECD GMT cedes authority over the taxation of our companies to the EU and the rest of the world.  

Others in Congress, who have no ideological issues, are concerned about potential lost revenue, citing a recent Joint Committee on Taxation report. Part of the report findings include a warning that US could lose as much $122B in revenue to other countries over ten years if the US doesn’t conform its tax rules to the OECD GMT and other countries begin to implement it. 

In part as a response to the OECD Global Minimum Tax, the U.S. created its own minimum tax in the Inflation Reduction Act, called the Corporate Alternative Minimum Tax (CAMT). The CAMT is on top of an existing 10.5% minimum tax on U.S. companies’ foreign income. Neither the existing tax or the CAMT – which takes effect in 2023 – conform to the OECD Global Minimum Tax. 

The average taxpayer is difficult to get a read on when it comes to the concept of a Global Minimum Tax. Because those most affected are larger multinational corporations, and it particularly impacts companies that use low-tax jurisdiction to minimize their global effective tax rate, it’s easy to assume that most taxpayers would be in favor of a minimum effective tax rate – and for the most part, they are. It’s when the world “global” comes into play that things get sticky; many Americans don’t like the idea of foreign nations taxing U.S. corporations, especially if those taxes ignore tax credits that are vital to our innovative culture, such as the R&D credit.