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Yellen Provides Another Reason to Scrap the Whole Build Back Better Plan

Treasury Secretary Janet Yellen is doing an international end run via an OECD agreement to force Congress into damaging tax hikes.
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Janet Yellen is Scheming With the OECD For Damaging Tax Hikes

International End Run

Please consider Yellen’s Global Tax Railroad

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. This prospect is supposed to overcome qualms lawmakers have about whether the Biden plan is good policy on the tax merits.

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. This railroad job is reason enough for Congress to kill the global deal in its entirety.

Biden’s Country-by-Country Tax Canard

To understand what's going on, please consider 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).

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 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.

A surefire sign that this is a terrible idea is that the Organization for Economic Cooperation and Development isn’t proposing anything like it in its global minimum-tax plan. The OECD’s current proposal would include an option for companies to carry losses forward and back to avoid the fatal flaw in the Biden country-by-country Gilti.

This means tax-happy Europeans might prefer to abandon their long-cherished dream of an OECD tax deal rather than adopt anything resembling the Biden plan. Why would Congress do to American companies what European governments won’t do to theirs?

Read that last two paragraph above and reflect on them. They do not at all jive with with the first article. 

The second was written back in April. The lead article came out today. 

RECOMMENDED ARTICLES

Janet Yellen managed to get the OECD to offer the US a deal to treat Gilti as equivalent but only “on a jurisdictional basis.” 

The Journal commented "This railroad job is reason enough for Congress to kill the global deal in its entirety."

The Journal proposes killing the OECD deal.

I mean everything. Progressives are out to ruin the country and I suggest we kill any trade deal and Build Back Better too.

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