Europe Balks at Biden’s Tax Plan


Treasury Secretary Janet Yellen speaks at the White House on May 7.



Photo:

jonathan ernst/Reuters

The Biden Administration hopes a new global minimum corporate tax will dampen the blow of its tax increases on the U.S. economy. But other governments are making it clearer by the day that they won’t play along.

Treasury Secretary

Janet Yellen

has thrown herself enthusiastically into negotiations at the Organization for Economic Cooperation and Development to write such a global tax regime. President Biden wants to impose a form of alternative minimum tax on corporate profits earned overseas, with a statutory rate of 21% and an effective rate that’s higher for many companies. Even the progressives manning the Biden barricades realize this will throttle U.S. competitiveness if other countries don’t impose similar taxes.

Ms. Yellen might have thought long-running OECD negotiations toward a global minimum tax would be an easy way to achieve this goal. Instead, European governments are adopting a version of Napoleon’s maxim: Never interrupt Washington while it’s harming itself.

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One problem is the rate the OECD will propose for its own version of a minimum tax. The talks seem most likely to settle near 12%-13%, close to Ireland’s current corporate tax rate. That’s far below the rate Mr. Biden wants to apply to American companies, and European governments are aware of the competitive benefits of lower rates.

Officials in Ireland, Hungary and the Czech Republic—all of whom will have to agree to an OECD proposal before the European Union can adopt it—have said recently an OECD rate of 21% would be unacceptably high.

Some French and German officials have endorsed a 21% OECD rate, but Ms. Yellen should be wary of taking such statements at face value. Paris and Berlin know that the EU’s unanimity requirement will allow them to talk a good game about higher rates while sheltering their own companies behind the low-tax demands of the EU’s smaller members.

Outside the EU, U.K. Chancellor

Rishi Sunak

has voiced skepticism about a 21% rate, noting it’s “higher than where previous discussions were.” He also insists such a tax would come at the cost of Washington agreeing to a new global regime for taxing American tech companies that the OECD is negotiating in tandem with the minimum tax. Let’s see how the White House’s friends in Silicon Valley like that.

The OECD also is set to nix some of the fine print that makes the Biden plan especially awful for U.S. companies. The Biden plan creates its minimum tax by revamping the current tax on global intangible low-tax income, or Gilti. The Gilti tax in the 2017 tax reform was intended to apply only to “excess” profits attributable to intellectual property that American companies hold offshore. So it included an exemption for the first 10% of profits that firms earn overseas from tangible investments such as factories. The Biden proposal scraps that 10% exemption so its new 21% Gilti applies to all profits U.S. companies earn abroad.

The OECD is moving in the opposite direction, insisting on exemptions that are more generous than current U.S. law. “At the global level, I think it’s not realistic to think that we could move ahead without some form of carve-out, which would recognize the activities, the substance,” chief OECD tax negotiator

Pascal Saint-Amans

said May 5.

He means that any OECD minimum tax would exempt some portion of profits arising from tangible investments. The current OECD blueprint for negotiations also would exempt profits related to payroll expenses so as to avoid ensnaring too many service companies—a benefit Congress left out of the 2017 tax reform.

The Biden Administration is hoping for political and economic cover from the OECD for its tax grab. It now looks like help may not be on the way. Congress should bear that in mind as lawmakers decide if they want to impose a tax increase that will hamstring American companies in the global marketplace.

Main Street: The Democrats’ proposed tax deduction for the rich puts the Vermont socialist and low-tax Republicans in the same foxhole. Images: Getty Images Composite: Mark Kelly

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Appeared in the May 20, 2021, print edition.



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