Global Tax Deal Holdouts Face Squeeze Under Biden Plan

The plan, which would require the approval of Congress, aims to leverage the size of the U.S. consumer market to give other countries a choice: impose a minimum tax or watch the U.S. tax your companies and take your revenue. It is an aggressive weapon and one that mirrors how the U.S. changed its tax laws in 2010 to prod foreign banks into identifying Americans’ offshore accounts to the Internal Revenue Service.

The Shield faces some significant potential hurdles in Congress, along with likely resistance from foreign governments and multinational businesses.

“Instead of this being called the Shield it should be called the sword, because that’s the way it’s intended,” said Bob Stack of Deloitte Tax LLP, who was a Treasury Department international tax official during the Obama administration.

While the Shield rule has been part of the Biden administration’s international tax proposals for months, it will get more attention as world leaders try to reach a corporate tax deal and as the administration tries to move its tax agenda through a closely divided Congress. Lawmakers have barely started delving into the details.

Congress is already wrestling with the administration’s broader tax agenda, and some of President Biden’s tax-increase proposals might not survive. Republicans oppose the corporate-tax increases, and leading Democrats haven’t embraced the Shield concept.

The Shield is closely tied to the rest of the Biden agenda. The harder it is for corporate income to escape the U.S., the easier it is for Democrats to raise the corporate tax rate without driving business away.

The Shield would work by taking advantage of foreign-headquartered businesses’ desire to operate in the U.S. Under the rule, companies from countries that don’t impose minimum taxes wouldn’t be able to take deductions on many payments sent back home. Companies would be penalized similarly if they send payments into corporate structures that include low-taxed entities.

Denying such deductions would be the equivalent of taxing that company’s income at the U.S. corporate tax rate—a punitive move designed to pressure countries to change their own tax laws.

In other words, if the global minimum corporate tax is set at 15% and Ireland decides to keep its tax rate at 12.5%, Irish companies operating in the U.S. couldn’t fully benefit from the lower rate back home. The U.S. would essentially tax much of their income at 28% under the Biden administration’s plan. Separately from the Shield rule, the U.S. would raise the minimum tax it imposes on U.S. companies’ Irish profits, and that combination would reduce the benefits of Ireland’s low tax rate and could undercut the country’s tax base.

“When you understand all the details, you would see that it doesn’t require absolute agreement across the board,” Ms. Yellen said after the Group of Seven finance ministers’ meeting this month. “It has a way of bringing holdouts into it.”

The G-7 finance ministers and then the countries’ leaders agreed to back at least a 15% minimum tax, which will be considered by a broader set of countries including India and China. It might prove hard to sell the idea to some of them. Years of work in developing a consensus about minimum taxes and taxing an increasingly digital economy are expected to culminate in the next few months.

The Treasury Department estimates that the Shield rule would raise $390 billion over a decade, more than the administration’s proposed capital-gains tax increase. That figure is based on the assumption that other countries don’t adopt minimum taxes, so the direct revenue from Shield is likely to be less than what would be obtained if the proposal works as intended.

The Shield is even more aggressive than what other developed countries might do as part of their minimum taxes. It would deny full deductions while those other countries would just top companies up to the minimum tax rate. It is designed to be a forceful incentive and is unlikely to be changed, a senior Treasury Department official said.

“That is a very blunt instrument,” said Barbara Angus, former chief tax counsel for the Republicans on the House Ways and Means Committee, now at EY.

Some foreign-headquartered companies could face significant tax increases on their U.S. operations, said Nancy McLernon, president and chief executive of the Global Business Alliance, a coalition of such companies. The Shield could affect their willingness to invest in the U.S., potentially imposing tax rates that would overcome the U.S.’s nontax advantages, she said.

“The U.S. doesn’t have to have the lowest rate in the world,” Ms. McLernon said. “We’ve got a lot of other things that drive U.S. competitiveness. But we can’t be materially out of step.”

Beyond the difficulty of securing enough votes in Congress for the broader Biden tax agenda, leading Democrats aren’t necessarily embracing the Shield.

An international tax plan from three Senate Democrats takes a more modest approach to foreign-headquartered companies. A House Ways and Means Committee aide said lawmakers are aware of the Shield’s goals and are in dialogue with the administration about what is possible.

If passed, the Shield would require the U.S. to collect data on what companies are earning and paying in jurisdictions around the world. The proposal is based on companies’ actual tax rates, not the statutory tax rates in various countries. The proposal includes language to prevent companies from routing payments through high-tax countries to avoid the penalties associated with payments to countries without minimum taxes.

Another potential problem that Treasury Department officials are considering is the idea that countries could adopt minimum taxes that avoid the Shield and then give companies subsidies that would have the same effect as a lower tax rate. That is just starting to draw attention from policy makers and could be difficult for the U.S. to police.

Write to Richard Rubin at [email protected]