Global Tax Deal Heads Down Perilous Path in Congress

“The world is ready to end the global race to the bottom on corporate taxation, and there’s broad consensus about how to do it,” Treasury Secretary Janet Yellen said.

As detailed negotiations continue, other countries will look to see if U.S. lawmakers implement a minimum corporate tax of at least 15% and embrace new rules for dividing the power to tax the largest companies. Congress will stare back, monitoring how quickly other countries create minimum taxes and remove unilateral taxes on digital companies that have drawn bipartisan U.S. opposition.

“The rest of the world is very aware that the administration cannot bind Congress,” said Chip Harter, the Trump administration’s lead international tax negotiator, who is now at PwC LLP. “They are watching very closely.”

International negotiators split their work into two separate ideas, known as pillars. Pillar One, pushed by European countries including the U.K., would assign more taxing power to countries with large consumer markets and pull power away from low-tax jurisdictions such as Ireland.

Pillar Two, driven by the U.S., would impose at least a 15% tax on companies’ world-wide earnings. Setting that floor makes it easier for the Biden administration to try raising taxes on U.S. companies by up to $2 trillion over a decade, because U.S. rates could rise higher without creating significant opportunities for companies to dodge taxes by shifting profits and addresses.

Both pillars present tricky legislative challenges. They likely will move separately through Congress, but the international consensus rests on pairing them and completing both tasks. Mr. Biden and Ms. Yellen emphasize the minimum tax, but other countries care more about getting the power to expand their corporate taxes. They have imposed digital services taxes on technology companies such as Facebook Inc. and Alphabet Inc. —which they say aren’t paying enough corporate taxes—and will only give those up if they can tax those firms another way.

“The role of Congress will be very important, because if the rest of the world doesn’t think it’s going to get what it bargained for on [profit-allocation rules], then it will lose its appetite” for the rest of the deal, said Deloitte LLP’s Robert Stack, the Obama administration’s international tax negotiator.

The Biden administration will try to turn its drive for a tougher minimum tax into legislation this fall without Republican votes by using the budget reconciliation process that requires a simple Senate majority instead of the 60 votes needed for most bills. The White House would then attempt to change the international rules, perhaps through a treaty requiring Republican support.

The administration’s international tax changes alone would raise about $1 trillion over a decade to help pay for policies such as an expanded child tax credit and renewable-energy tax breaks. That may be enough motivation for many Democrats.

“It’s easier to sell the notion of raising taxes on offshore earnings than it is to raise rates domestically,” said Manal Corwin of KPMG LLP, a former Obama administration Treasury official.

Business groups are urging the U.S. to wait. Their point: The U.S. imposed minimum taxes on U.S. companies in 2017, and other countries didn’t follow.

“Are we really going to do it again and increase our rates while we wait and see if they do something?” said Cathy Schultz, vice president for tax and fiscal policy at Business Roundtable, an association of large-company chief executives.

The 130-country agreement includes an important shift in how the world sees the existing U.S. minimum tax. Under the Trump administration, the U.S. pressed other countries to accept that 2017 tax as complying with any agreement. The Biden administration’s focus on tougher minimum taxes changed the U.S. negotiating position.

The existing U.S. tax is calculated globally, not for a company’s profits in each country, a feature that Treasury officials say lets companies benefit from profits in low-tax countries. However, the new U.S.-backed deal says minimum taxes would be calculated on a country-by-country basis, making it harder for companies to reduce taxes by blending profits in high- and low-tax jurisdictions. Businesses oppose the country-by-country calculation as costly to comply with.

The agreement says “consideration will be given” to how the U.S. tax coexists with international rules instead of automatically making the U.S. minimum tax compliant. The agreement sets a minimum 15% tax rate and includes a mechanism to punish companies from countries without minimum taxes.

Those features are absent in current U.S. law, but they are in the Biden plan. That shift in U.S. posture—from seeking international acceptance of U.S. law to seeking changes in U.S. law—pressures Congress.

If U.S. law isn’t deemed compliant, American companies could face higher taxes abroad. But the agreement gives the U.S. some flexibility as the legislative process unfolds.

Most members of Congress have paid little attention to details of international talks, and Democrats may raise taxes without going as far as Treasury officials want.

At some point, Congress will turn to Pillar One, to give countries more power to tax companies that sell to their residents but don’t have much taxable presence there. That has been driven by European frustration at U.S.-based technology giants, which dominate their markets but funnel tax payments elsewhere.

Observers and congressional aides say Pillar One will require a treaty and thus a two-thirds vote in the evenly divided Senate, requiring Republican support. Crucial details remain unresolved internationally as further talks continue through October. Ms. Yellen said Sunday that it could be ready for congressional consideration by spring 2022 and that officials would determine then what would be needed to implement it.

Senate GOP aides say they are waiting for information from the administration about how the deal affects U.S. companies and revenue. A senior Treasury official said the administration negotiated the deal with bipartisan support in mind, noting Republican backing for removing foreign countries’ digital taxes.

The administration says Pillar One will have little impact on revenue, because the U.S. would cede some taxing authority but gain power over companies selling to Americans.

If Pillar One raises too much money, it looks like a tax increase Republicans would oppose. If it loses too much revenue, it looks like a giveaway of the U.S. tax base. If much of the burden falls on U.S. companies, as early estimates suggest, that also may spur opposition from lawmakers.

Ultimately, a Pillar One agreement might require a nudge from U.S. multinational companies. Corporations may oppose the administration on the minimum tax but back Mr. Biden later, said Ben Koltun, director of research at Beacon Policy Advisors. They could push Republicans to back the subsequent Pillar One deal, contending that it brings certainty and predictability to the international tax order, he said.

“The bet by the administration is the temperature will cool” before treaty consideration, Mr. Koltun said. “There are still plenty of pro-business Republicans.”

—Giovanni Legorano in Venice contributed to this article.

Write to Richard Rubin at [email protected]