US president Joe Biden celebrated last week after 130 countries agreed to make significant changes to the international tax system, reaching a consensus after fresh proposals from the US jolted talks that appeared to have hit an impasse.
But the momentum that had gathered pace since Biden took office threatens to be lost in Washington, where any tax agreement must secure support in the Senate, which the Democrats have control of by the tiniest of margins.
It is highly unlikely. Any eventual OECD agreement will probably be addressed by lawmakers on Capitol Hill in two separate parts. The agreement on a global minimum tax of 15 per cent, known as Pillar 2, will require lawmakers to change domestic tax legislation.
Giving countries new rights to tax large companies based on where they generate revenue, the so-called Pillar 1, is likely to be dealt with as a separate bill, because it alters Washington’s agreements with other countries, meaning the US must alter existing treaties or create new ones.
Pillar 2, which changes US domestic legislation, could potentially be passed using the so-called reconciliation process. This can be used by US Congress once a fiscal year and bills passed by this route can clear the Senate with a simple majority. The upper chamber is split 50-50 between Democrats and Republicans, with US vice-president Kamala Harris casting the tiebreaking vote.
However, Pillar 1, which will probably require treaty changes, would need the support of at least two thirds of the Senate.
Exceedingly slim. Republican senators have lined up to criticise the fledgling agreement. John Barrasso, the second most senior Senate Republican, earlier this month slammed the plans as “anti-competitive, anti-US and harmful”. Pat Toomey, the most senior Republican on the powerful Senate banking committee, has called the plans “crazy”.
Mike Crapo, the top Republican on the Senate finance committee, has also criticised the deal, and has written to Treasury secretary Janet Yellen to express concern that the US is ceding the right to tax its own companies to foreign countries.
Possibly, but any attempt to circumvent the Senate is likely to be the subject of technical and legalistic arguments on Capitol Hill.
Manal Corwin, a former senior Treasury official in Barack Obama’s administration who now works at KPMG, said there could be a way to override existing treaties by passing both Pillar 1 and Pillar 2 using the reconciliation process.
Although under US law, domestic legislation and treaties are given equal weight, Corwin said, a provision known as the “last in time” rule allows new US legislation to override existing treaties.
Because the agreement would give the US the right to tax some large multinationals with annual revenue greater than €20bn and pre-tax profit margins of at least 10 per cent, the US tax code would need to be changed, Corwin said, with the secondary effect of overriding some treaties.
“A treaty says ‘we would do this, if they would do that’, and we’re overriding that through a legislative vehicle that changes the Internal Revenue Code, which is eligible for reconciliation,” Corwin said.
But Brian Jenn, another former Treasury official who has worked in both Democratic and Republican administrations, warned that passing legislation through the reconciliation process was subject to strict rules.
Efforts to pass legislation using this method are closely scrutinised by the Senate parliamentarian, who advises on the interpretation of the upper chamber’s rules and precedents. Earlier this year the parliamentarian, Elizabeth MacDonough, ruled that a federal minimum wage increase could not be included in Biden’s $1.9tn stimulus bill.
A bill “clearly overriding a treaty” may not be eligible for reconciliation either, said Jenn, who is now a partner at the law firm McDermott Will & Emery.
Efforts to override treaties using the reconciliation process would “likely offend even Democratic senators” prone to “jealously” guarding the upper chamber’s prerogative, Jenn added.
One European diplomat warned that if the US used “legal chicanery” to pass parts of the deal, it might “open itself [up] to a concerted political challenge” in Washington.
Not much. Treasury officials said on Tuesday that they would need the support of Congress to pass the new deal, and that they expected Pillar 1 would require a treaty. Officials said the details were still being worked out, however, and that a detailed plan on how the US will implement the deal would be agreed in October.
Separately, a person briefed on the tax negotiations said any discussion on how the US administration would pass the deal through Congress was “premature”.
“There is still a lot that needs to be worked out, and that includes how the administration will deal with Congress,” the person said.
This story has been updated to clarify that Pillar 1, which will probably require treaty changes, would need the support of at least two thirds of the Senate.