Question mark over OECD global tax rate as Biden agenda falters

The failure of the Biden administration in the United States to get the key Build Back Better legislation through the Senate this year – including its commitment to a minimum 15 per cent global tax rate – puts a question mark over the OECD corporate tax agreement.

The Organisation for Economic Co-operation and Development published its detailed plans for how a global minimum corporate rate would be applied on Monday – and it is ostensibly full steam ahead, with the vast bulk of countries supporting the process. But with uncertainty over what US president Joe Biden can get through the Senate, it is not clear now how this will play out.

Ironically, it was the election of Biden that gave the OECD talks a final push to reach a draft agreement last year. The draft deal, as agreed, chimed with Biden’s agenda to increase business taxes to help pay for a massive spending programme.

The Build Back Better Bill proposed a 15 per cent minimum for the so-called US GILTI rate, effectively a minimum charge on the overseas earnings of US companies, the same rate as proposed for the international minimum by the OECD deal.

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Rate

It was a late agreement at the OECD talks that the 15 per cent minimum rate be set at exactly that level, as opposed to an earlier draft of "at least" 15 per cent which led Minister for Finance Paschal Donohoe to sign up Ireland to the draft deal.

The Department of Finance said yesterday that Ireland welcomes the so-called model rules published by the OECD – guides to how the new rules would be translated into national legislation – as the first significant milestone to the new regime being introduced in 2023.

While the OECD document was along expected lines – and will be followed on Wednesday by an EU statement on how it would implement the plan – uncertainty over what the US will do now hangs over the process. With Biden having no Senate majority to get the Bill through, it is unclear whether the legislation can progress in 2022.

The OECD merely said on Monday that the “co-existence” of the new OECD rules with the existing – or amended US GILTI regime would be considered in 2022.

The European Commission’s reaction will be closely watched : will it seek to go ahead with the 15 per cent rate anyway?

The OECD model rules and an EU directive, to be published on Wednesday, are important technical milestones, said IBEC chief economist Gerard Brady. "But if the Build Back Better Bill doesn't find renewed momentum very early in the new year then the 2023 target for the OECD global tax reform programme to come into force is going to look increasingly difficult to achieve."

Vital

What is decided in the US is vital – as it is home to many of the world’s biggest companies. And as America is the key source of Irish FDI, it is particularly important for Ireland. It is in Ireland’s interests for the 15 per cent to apply in the US as well.

At a wider level, Biden’s problems put a question mark against the whole OECD process as it is unclear whether an agreement can survive a failure of Washington to deliver.