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Janet Yellen's Poison Pill Tax Gambit May Soon Explode Into a Huge Trade War

Janet Yellen worked out a tax deal with the EU last April hoping to force Congress to approve Build Back Better. Guess what?
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Treasury Secretary Janet Yellen

Poison Pill Set to Backfire     

To understands what's happening we need to go back to the beginning. In April of 2021 Treasury Secretary Janet Yellen worked out a tax deal with the EU.

Both the EU and the US want global minimum taxes and the deal Yellen worked out with the EU would heavily penalize US corporations if Congress did not pass Build Back Better. 

Congress didn't and here were are. 

Biden’s Country-by-Country Tax Canard

Please consider the April 15, 2021 article Biden’s Country-by-Country Tax Canard.

Under the 2017 tax reform, American companies pay U.S. tax on global profits as those profits arise each year. This is done largely via the global intangible low-tax income, or Gilti, regime that imposes an effective tax rate of at least 13.125% on overseas profits arising especially from intellectual property held by offshore subsidiaries. The Biden plan would increase the Gilti tax rate to a statutory 21% (and an effective 26.25% after accounting for quirky tax mechanics).

But wait, there’s more. The Biden plan also would overhaul how companies calculate Gilti liability. Currently companies aggregate overseas earnings, losses and foreign tax credits in various markets into a single global calculation. The Biden plan would go country-by-country, meaning that for each jurisdiction in which a company does business it would have to compute its Gilti taxable profit, work out any local tax credits, and then figure the tax due.

Country-by-country reporting would introduce vast new complexity into the tax code. Even with modern computing power, running Gilti calculations in individual jurisdictions would be complex and expensive. Enforcement would be difficult because the volume of documentation would drown tax bureaucrats.

Country-by-country reporting also threatens to make overseas investment uneconomical. A flaw in the 2017 version of Gilti—which the Biden plan leaves in place—is that it doesn’t allow companies to carry losses forward or back.

Under Gilti, if an American company starts a new subsidiary in high-tax Italy that makes losses its first few years, that company still will owe tax in the subsidiary’s first profitable year. The partial solution in 2017 was to allow companies to calculate Gilti on a global basis, so profits in some places would offset losses in others.

The Biden plan’s country-by-country reporting removes that mitigation. It would tax profits that don’t exist in an economic sense, because Gilti would sometimes apply on “profits” that only recoup earlier losses. And companies would have to pay astronomical sums to their accountants for the pleasure.

Yellen's Global Tax Railroad

Next please consider the WSJ October 21, 2021 article Yellen’s Global Tax Railroad.

Amid media fretting about Democratic disarray in Congress, don’t underestimate the party’s determination to ram something into law. Consider the Biden Administration’s plan to force tax increases through a skeptical Congress by exploiting global tax negotiations.

Treasury Secretary Janet Yellen this summer sidestepped a long bipartisan consensus to sign up the U.S. for a radical overhaul of corporate tax rules. Negotiated at the Organization for Economic Cooperation and Development, the agreement would revamp how tax jurisdiction is set for the world’s largest companies (mainly American tech firms), and also introduce a 15% minimum global tax rate.

Ms. Yellen thinks she’s found a way to railroad Congress. A sticking point in the OECD talks had been whether other countries would treat America’s Gilti as equivalent to the global minimum tax even though the fine print is different. Without this equivalent treatment, U.S. companies could be subject to double taxation.

The latest OECD deal offers to treat Gilti as equivalent, but it specifies in the same paragraph that the OECD’s minimum tax is designed to be applied “on a jurisdictional basis.” Translation: The global minimum tax will be calculated country-by-country, and Congress had better fall into line if it wants America’s Gilti tax to count.

The goal appears to be to put Congress in a bind. If the global OECD pact goes ahead and Congress doesn’t adopt the Administration’s country-by-country rule, it will subject American companies to ruinously high taxation abroad. 

By agreeing to this language at the OECD, Ms. Yellen is helping other governments hold Congress hostage until Ms. Yellen extracts the Gilti changes she wants lawmakers to pass. 

Yellen’s Global-Tax Zombie Lives

Today the WSJ reports Yellen’s Global-Tax Zombie Lives

The Biden Administration’s Build Back Better spending extravaganza may be on life support, but some of its tax-raising gimmicks may survive. 

Last year she [Yellen] broke a long bipartisan consensus to endorse new global tax rules under negotiation at the Organization for Economic Cooperation and Development, including a 15% global minimum tax on large companies.

This was supposed to be a threat from Ms. Yellen to Congress: Implement Democrats’ Gilti changes, or else. Congress has balked at changing Gilti, but now Ms. Yellen’s “or else” is arriving courtesy of the European Union.

EU bureaucrats last month released their draft directive instructing the 27 EU countries on how to implement the OECD minimum tax in domestic laws. The draft specifies that to count as equivalent to the minimum tax, a foreign government’s (read: America’s) global tax regime must be calculated on a country-by-country basis. And if Europe doesn’t treat Gilti as equivalent to its own minimum tax, U.S. companies could get taxed twice, paying both Gilti and the European minimum levy.

Fair Taxation Proposal 

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Last month, the EU bureaucrats did what what Yellen asked. Here is their Fair Taxation Proposal

The directive we are putting forward will ensure that the new 15% minimum effective tax rate for large companies will be applied in a way that is fully compatible with EU law. We will follow up with a second directive next summer to implement the other pillar of the agreement, on the reallocation of taxing rights, once the related multilateral convention has been signed. The European Commission worked hard to facilitate this deal and I am proud that today we are at the vanguard of its global rollout.”

The proposed rules will apply to any large group, both domestic and international, including the financial sector, with combined financial revenues of more than €750 million a year, and with either a parent company or a subsidiary situated in an EU Member State.

Inquiring minds may also wish to look at the Fair Taxation Tax Sheet or the Fair Taxation Q&A

Oops, the EU Went Along, Now What?

Yellen pressured the EU to adopt a poison pill to Yellen's liking and the EU went along. 

Now what?

Now the US hopes the "progress" bogs down in EU bureaucracy. The EU's flawed structure is such that trade deals can go years or decades without approval.

But in this instance a global minimum tax is just what the EU wants. 

And look at that €750 million a year base target.

It was set to specifically include large US corporations, especially US technology companies while avoiding taxes on small EU startups.

Trade wars loom if this goes through as Yellen foolishly requested.

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