Thorny Tax Developments Await U.S. Companies

Back in October 2021, more than 130 member jurisdictions of the Organisation for Economic Co-Operation and Development negotiated the framework for new international tax rules affecting multinational companies. Rather than using the tax rates of the jurisdictions where companies are located, the rules would source companies’ revenues “to the end market jurisdictions where goods or services are used or consumed.” Moreover, the framework established a minimum global tax rate of 15% to discourage sheltering in low-tax jurisdictions.

Nearly two years later, only 11 countries had introduced or approved actual legislation based on the agreement as of the end of May 2023. In the United States, efforts to adopt the OECD framework have hit a political roadblock.

At the center of the imbroglio on Capitol Hill is Senate lightning rod Joe Manchin. The Democrat from West Virginia flip-flopped on the deal last summer, pulling his pledged support over what he said were concerns “we’ll put all of our international companies in jeopardy, which harms the American economy.” His reversal left Treasury Secretary Janet Yellen, one of the chief architects of the OECD agreement, unable to make good on her promises that the United States would enact the deal.

Since then, House Ways and Means Committee Chairman Jason Smith, a Missouri Republican, has fired back with a bill he claims is intended to “prevent President Biden’s global tax surrender.” Essentially, Smith has said the OECD agreement would put the U.S. at competitive disadvantage to China in international commerce.

The gridlock in Congress, however, has left companies contemplating near term unpleasant tax realities. Next year, South Korea, the European Union, the U.K., and Japan are poised to put the negotiated minimum tax rate of 15% in place. U.S. companies have received short-term breaks from the tax increases, but those will expire at the end of 2025. Meanwhile, if U.S. companies do end up paying higher taxes abroad, it will most likely cut into tax revenues at home. Keep in mind that measures from the GOP tax bill enacted in 2017 are set to take effect in 2026. If that happens, it will bring tax hikes on foreign income earned by U.S. companies, income earned in the U.S. by foreign companies, and exports by U.S. companies.

The failure to enact the OECD tax agreement also comes at an awkward moment for the U.S. in its ongoing standoff with China. Washington is pressuring the Chinese government to reform its accounting rules for public companies. So far, several U.S.-listed Chinese companies have switched to U.S.- and Singapore-based auditors to avoid the possibility of getting booted from U.S. securities exchanges. Welching on the OECD deal calls into question the moral authority of the U.S. to be making such demands of any country.