Global tax deal could drive changes in Democrats’ budget plan

But proposals like tax increase delays may not quell all centrist concerns

Arizona Rep. Tom O’Halleran is among several Democratic moderates who’ve  urged a pause on international tax changes in the reconciliation bill.  (Bill Clark/CQ Roll Call file photo)
Arizona Rep. Tom O’Halleran is among several Democratic moderates who’ve urged a pause on international tax changes in the reconciliation bill. (Bill Clark/CQ Roll Call file photo)
Posted October 15, 2021 at 6:00am

As they work to raise taxes on U.S. companies doing business abroad, Democrats are considering honing some details to align with a landmark deal for other countries to charge similar levies and curb tax avoidance in the process.

House Democrats drafted their international tax plan with an eye on the global talks when they made it part of their budget reconciliation bill, a filibuster-proof package intended to implement much of President Joe Biden’s domestic agenda.

Now with the bill stalled as Democrats debate spending levels, details of the global deal are solidifying and influencing discussions on exactly how the U.S. will boost taxes on multinationals — if they can get the plan past business-friendly centrists.

For starters, Democrats are discussing delaying tax increases to give time for other countries to set up their own minimum taxes on large multinationals’ earnings around the world. Late last week, 136 jurisdictions agreed to a 15 percent global minimum rate, a basic outline for rules and a timeline for implementation that wouldn’t see other countries’ new taxing regimes begin until at least 2023.

“Rather than competing on our ability to offer low corporate rates, America will now compete on the skills of our workers and our capacity to innovate, which is a race we can win,” Treasury Secretary Janet L. Yellen said in a statement following the announcement.

International officials are now working to unveil more detailed rules in November, when world leaders are set to meet to bless the deal. Meanwhile, Democrats in Congress are aiming for movement on the budget package by the end of October. That’s giving space for clarity on how the world will move toward the minimum tax, joining the U.S., the only country that currently has one.

A higher U.S. minimum tax rate than what the Organization for Economic Cooperation and Development-led deal contemplates and some related provisions would take effect next year under the current reconciliation bill. Democrats could push it back another year or more to align with when other nations are expected to begin charging the taxes, with some pieces beginning in 2023 and 2024.

Delaying the effective dates would cost some revenue, which Democrats need to cover spending in the budget bill they’ve pledged will be fully paid for. Still, the price tag is shrinking due to moderates’ demands, and tax increases are expected to be shaved down accordingly.

The House Ways and Means Committee plan has several components that would begin next year.

Currently, companies pay a 10.5 percent base rate on “global intangible low-tax income,” known as GILTI, from mobile assets held overseas such as patents and trademarks. That rate effectively ranges as high as 13.125 percent as companies lose some of the discount they get on taxes paid to foreign countries.

The Ways and Means bill would lift the base GILTI rate to nearly 16.6 percent; the measure would restore some but not all foreign tax credits, raising the effective rate to around 17.5 percent. The measure would also curb GILTI deductions for tangible assets such as facilities and equipment as well as deductions for foreign profits derived from U.S.-held intellectual property. And it would require companies to calculate GILTI in each country individually, rather than allowing overseas profits to be grouped together to offset more of what might be owed in lower-tax countries.

All told, the provisions would raise about $266 billion over a decade, according to the Joint Committee on Taxation, or nearly 10 percent of Ways and Means’ overall offset package.

‘Public and private input’

The Ways and Means panel drafted its proposals with the international negotiations in mind, according to a committee aide who spoke on condition of anonymity, adding that the bill “clearly moves U.S. law towards the current agreement.” But the aide acknowledged that changes were possible.

“On timeline, the Chairman has received public and private input from many Members on the effective date for the new international regime,” the aide said in an email, referring to committee head Richard E. Neal, D-Mass. “Given the importance of these provisions, he will continue to discuss this issue with his colleagues and the Administration as the [reconciliation bill] moves forward in the legislative process.”

Senate Finance Chair Ron Wyden has pressed for his own international tax plan over the House version. Ahead of the global deal announcement, the Oregon Democrat said last week that clarity on the international efforts would be a factor.

“Of course, when you’re working on a final bill, you’re looking at economic circumstances and the challenges,” he said.

Yellen closely coordinated with Wyden and Neal to make sure that international tax proposals in Congress will meet obligations of the global agreement, a senior Treasury official said this week. The official added that both House and Senate proposals include the key pieces to meeting the international deal: raising the GILTI rate and moving to a country-by-country system for calculating taxes.

A delay could quell some concerns within the party. Eleven House Democrats said in an August letter to Neal that they wanted to see coordination between U.S. policy and the deal being brokered through the OECD.

But some Democrats remain wary of changing how the U.S. taxes multinationals at all before other countries fully implement similar taxes. Reps. Tom O’Halleran of Arizona, Lou Correa of California and Henry Cuellar of Texas wrote to House leadership on Oct. 8, saying the GILTI changes as proposed could harm U.S. competitiveness and jobs.

They urged a pause on international tax changes and said waiting would allow Congress to craft policy based on how other G-20 countries write their minimum tax regimes.

“These proposed international tax increases would impact American competitiveness abroad, especially with Chinese competitors,” O’Halleran said in a statement. “Until other countries enact a similar tax structure, implementing these international financing pieces will only hamstring American businesses with red tape and financial burden. House and Committee leadership should reconsider these proposed GILTI taxes in legislation we consider this fall.”

Cuellar signed on to another letter in late September airing concerns about several budget provisions over their impact on the oil and gas industry. Cuellar and fellow moderates representing South Texas districts, Vicente Gonzalez and Filemon Vela, expressed opposition to the bill’s international tax provisions, describing them as anti-competitive. 

O’Halleran is a co-chair of the Blue Dog Coalition of centrist Democrats. He’s a top GOP target next November in a swing district that he won by 3 points last year and that Biden also narrowly won after Democratic presidential candidates lost there in 2016 and 2012.

Arizona’s sprawling 1st District bumps up against Phoenix and Tucson, areas where multinationals opposed to the international tax increases like Raytheon Technologies, Honeywell International, American Express and Bank of America are large employers.

Cuellar, Correa and Gonzalez are also Blue Dogs, and like O’Halleran, Gonzalez has been tapped for party support in a tough race next year. Cuellar, Gonzalez and Vela represent districts that are home to oil and gas companies fighting the overseas tax increases; Correa’s district hosts Disneyland in Anaheim, where Walt Disney Co., another multinational fighting higher taxes on foreign earnings, is the biggest employer.

Reading the tea leaves

Corporate lobbyists generally oppose the tax changes as a whole. But they’re resigned that something’s likely to pass and are quietly staying engaged with lawmakers and staff to ensure the changes at least align with the OECD deal and don’t disadvantage U.S. firms.

Some are discussing a delayed timeline with lawmakers, and the idea of a trigger mechanism that boosts the U.S. tax rate when other countries have done the same has also been floated, according to sources familiar with the talks. But that could lose significant revenue Democrats are banking on.

Rep. Donald S. Beyer Jr., a Ways and Means member, said this week that he expects international tax changes to make it into the final bill. The Virginia Democrat acknowledged the final GILTI rate could be 15 percent and take effect a year or so later to appease moderates.

Beyer isn’t concerned about losing a competitive edge. He said it’s still worth being a U.S. company with a slightly higher rate on foreign earnings, and he doesn’t expect companies to leave for lower-taxed locales if the U.S. moves toward a higher rate one year early.

“It would be untenable to imagine that we could convince, first, the OECD, plus many, many, many more countries to establish this minimum tax and then not be part of it ourselves,” Beyer said Tuesday. “I just don’t see that.”