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Debating the Global Minimum Tax: Transcript

Posted on Oct. 13, 2023

Pillar 2 of the OECD’s project to curb base erosion and profit shifting would set a global, 15 percent minimum tax on large multinational enterprises’ business income. The plan is intended to minimize worldwide tax competition, but how it will affect the United States and businesses based here remains to be seen.

In an October 4 Taxing Issues webinar, Tax Analysts President and CEO Cara Griffith moderated a vigorous debate on the topic. The panel comprised Peter Barnes of Caplin & Drysdale; Kimberly Clausing of UCLA School of Law; Mindy Herzfeld of the University of Florida Levin College of Law and the Potomac Law Group; and David Schizer of Columbia Law School.

0:00:09.6 Cara Griffith: Welcome everyone. I'm Cara Griffith, president and CEO of Tax Analysts. I apologize for our slightly late start, we had an internet streaming issue. But I am delighted that you joined us today for what we believe will be a timely and interesting debate on the global minimum tax. As you know, the global minimum tax continues to attract support around the world, but its reception in the United States has been lukewarm at best. Our panel will delve into the pros and cons of this controversial tax issue.

0:00:37.9 Cara Griffith: Today's event is another in Tax Analysts’ series of public discussions that we call Taxing Issues. We launched this series as another way for Tax Analysts to encourage debate on tax issues. We've been bringing together the tax community with leading policy makers and experts for bipartisan discussions on the future of tax policy and administration. As always, we welcome your feedback on how we can make our webinars more useful, as well as your suggestions on future webinar topics. You can send your feedback and suggestions for Taxing Issues to

0:01:10.1 Cara Griffith: We also welcome your questions for today's event. Please use the chat feature to submit questions during the webinar. For our panel discussion, I'll begin by asking a few questions, and then we'll turn to questions from you. And I promise to get to as many as time permits. For those of you that would like CPE credit today, please be sure you participate in the program for at least 50 minutes and answer at least three of the poll questions that will appear throughout the webinar. They will appear on the right side of the viewing window above the comment section.

0:01:39.6 Cara Griffith: To receive credit for your answers, you need to register with Pigeonhole, our interactive Q&A system, by providing your name and email. Also, please remain in the default viewing window because you will not be able to see the questions if you expand the program to full screen. The course materials which were sent out in advance are also available for downloading under the viewing window.

0:02:01.1 Cara Griffith: Now, let's turn to the day's topic. As you all undoubtedly know, under the OECD’s inclusive framework on base erosion and profit shifting, or BEPS, more than 140 countries have now agreed to an active two-pillar solution to address some of the challenges of taxing the digital economy. Although pillar 1 is stalled, nations around the world have begun to enact legislation to implement the second pillar, which introduces a global minimum effective tax rate. The goal of pillar 2 is to discourage multinationals from shifting profits to low tax jurisdictions.

0:02:36.1 Cara Griffith: The United States has participated in the BEPS project, and the Treasury Department officials offered their support for pillar 2. Treasury Secretary Janet Yellen suggested that a global minimum tax would end what she called "the 30-year race to the bottom on corporate tax rates." Unlike other finance ministers in other countries, U.S. Treasury officials have no unilateral authority to enact tax legislation, which is necessary to amend the Internal Revenue Code. In our country, as we know all too well, tax legislation must pass both houses of Congress, and be signed by the president. Although the Biden administration proposed changes to the global and tangible low tax income, or GILTI, rules that would have brought them more into compliance with pillar 2,. . .

0:03:23.4 Cara Griffith:. . . those provisions were left out of the final version of last year's Inflation Reduction Act. The IRA does include a new 15 percent minimum tax on the financial statement income of certain large corporations. That tax is unlikely to be rolled to qualified domestic minimum top-up tax, or QDMTT, for purposes of pillar 2. The chance that significant legislation on international taxation will make its way through Congress over the next year is pretty slim. House Republicans don't appear to have an appetite for international tax reform, and we're approaching an election year, with all the heightened politics that that's going to bring.

0:04:02.1 Cara Griffith: Still, the international community will put pressure on the United States to adopt pillar 2. And as a nation, there will be consequences if we remain on the sideline. Seems to me at the end of the day, the Biden Treasury Department got ahead of itself and negotiating the two pillars. Unlike situations in which Treasury can make tax changes through regulation, pillar 2 requires legislation. Without congressional support, Treasury was essentially making deals it couldn't necessarily implement.

0:04:33.6 Cara Griffith: Now, what should we do, and what will federal policy makers do? Will Congress eventually adopt pillar 2 and establish a global minimum tax? If Congress does not act, how will U.S. multinationals react? And in the future, should and can Congress participate more in these types of global negotiations? There are so many questions, and at least some of them have just two answers. But thankfully, we have an outstanding panel of experts today to provide their insights and their thoughts. So, I'm going to introduce them in no particular order because we're going to have a terrific discussion today.

0:05:07.8 Cara Griffith: First we have Kim Clausing. She is the Eric M. Zolt Chair in Tax Law and Policy at the UCLA School of Law. And we have Mindy Herzfeld, a professor at the University of Florida Levin College of Law, and counsel at the Potomac Law Group. We have Peter Barnes, of Counsel at Caplin & Drysdale, and a senior fellow at the Duke Center for International Development at Duke University. And last but certainly not least, we have David Schizer, Harvey R. Miller Professor of Law and Economics, and dean emeritus at Columbia Law School. I am delighted to have the four of you join us today, and I thank you for taking the time to do so.

0:05:49.3 Cara Griffith: So, I'm going to kick it off, we're going to do this in a bit more of a panel discussion today, because I think you're going to get the best... Going to get the best discussion, and you're going to get a lot of different opinions. But Peter, I'm going to kick it to you to start us off. In your opinion, is it a good or a bad idea to limit tax competition?

0:06:09.8 Peter Barnes: My own view is it's a good thing to limit tax competition, and in many ways, pillar 2 does that. Simply by having a 15 percent minimum tax, you reduce the rate differential between the highest tax countries and the lowest tax countries. And I think, take tax down as a lesser factor than it is today. But I do want to point out that if you're a big fan of tax competition, and again, I'm not, you should be in favor of pillar 2. And the reason for that is because the countries that have tax rates above 15 percent are now going to be spotlighted and isolated, and the GILTI rules today is everyone on the webinar knows, we use a blended global rate to determine whether there's an additional tax on the U.S. taxpayers.

0:07:00.1 Peter Barnes: So, if you have high taxes from Japan and low taxes from somewhere else, you can blend those taxes. Under a pillar 2 world where foreign tax credits and calculations are done on a country-by-country basis, any country that has high taxes is going to have that burden pushed directly to the taxpayers, and I think that's going to create pressure on high tax jurisdictions to lower their rates unilaterally. So, I favor less tax competition, but I think pillar 2 has in it the feature of some tax competition for higher tax jurisdictions.

0:07:37.4 Cara Griffith: I'd open it up to the others to respond, maybe in particular Mindy or David who might have a contrasting view.

0:07:47.3 David Schizer: I'm happy to kick us off. I will say this, I am generally concerned about pillar 2, not because it targets tax competition, but because I think it will be ineffective and problematic in ways that it does. So, that's a different concern, I generally have some sympathy with the idea for targeting tax competition. But because it's important that we air the issues, I do think it's not a simple question, and one way to say it is there are jurisdictions that might decide that it's better to have carbon tax, and a lower corporate tax. And in fact, a number of the jurisdictions that cut their corporate taxes over the years did so by adding a carbon tax, and if you ask me, is that a good mix of fiscal policy? I'd say actually, it is. That's not a bad idea at all.

0:08:38.9 David Schizer: And to generalize the point, there are different ways to tax businesses. I've said in the past that I think corporate taxes are a particularly inefficient way to tax businesses and that taxing shareholders is a more promising way. Simply because if you're a corporation and you want to move income, it's easier than if you're an individual and you want to move yourself; that involves uprooting your life and so on.

0:09:03.1 David Schizer: Now, one of the challenges with shareholder taxation is that a very significant percentage of people who own U.S. equities are either non-profits or foreigners, but we could do things about that. One of the proposals I made in the past, this is not for discussion today, is to think about lowering corporate tax and at the same time introducing an excise tax on otherwise tax-exempt shareholders. I'm not describing this as something we should do, but just to say that part of what tax competition gets you is the ability to mix and match and for different jurisdictions to experiment. And when you go with something that's meant to be one-size-fits all, you lose some of that.

0:09:47.8 Mindy Herzfeld: I'll chime in also there, Cara. I think it's a very difficult question to answer in the abstract, is tax competition good or bad; like most complicated things, there are elements of — positive elements, and negative elements if it's completely unregulated. So, if we look at it in the context of recent decades, tax competition, the ability to compete on efficient and stable tax regimes, has done really tremendous things for some countries in the world. And has allowed countries that start off with fewer, say, natural resources or are less developed, to attract business and investment and done really... Had really positive effects. . .

0:10:45.4 Mindy Herzfeld:. . .on their labor force and their economies. Where it's proved really problematic, and I think that pillar 2, and BEPS in general, as an outgrowth of it, is within the EU where there's been tax competition allowed at the same time that many other aspects of the economy are merging. And so, tax competition has proved really difficult to address specifically in the context of the EU and that's why I think pillar 2 is in many respects, trying to solve a European problem.

0:11:22.5 Kimberly Clausing: So, let me add to this as well. I think pillar 2 is a really important step forward in addressing tax competition. And I fundamentally see it as a global collective action problem, much like climate change. We couldn't tackle climate change by ourselves because we all share a global atmosphere, and it's also very difficult for one country to address profit shifting of multinational companies, or the extreme competitiveness pressures placed on the world economy when we have some jurisdictions with zero tax rates siphoning off tax space. So, I think the fact that 140 countries were willing to join this agreement reflects a profound dissatisfaction with the status quo, where we have the world's most profitable corporations often paying single-digit tax rates.

0:12:09.0 Kimberly Clausing: So, I think it's really important to protect the tax base, not just of countries like the United States, but also some of the poorest countries in the world that are even more dependent on the corporate tax than we are. And just to get to this other question about why the corporate tax base itself is worth protecting, I personally think it's a very efficient tax, if you look at the concentration of who the corporate taxpayers are, and the corporate tax base itself is in U.S. data. You can see that one-third of 1 percent of corporations account for nearly 90 percent of the tax base. These are some of the most high-profit, excess-profit market power companies that we have, and to have a fair playing field between small, vital companies that might compete in the same economy is these big multinationals, you need to be able to tax the income of the multinationals too.

0:13:00.8 Kimberly Clausing: And most of the other tax bases have their own inefficiencies as well, falling on labor. And probably it's a progressive tax, and I think that's important in our period of income inequality to be able to tax not just labor income and not just consumption, but to be able to tax capital income. And you as the prior speaker points out, we can't really get to capital income if we can't revise preferences that affect retirement accounts and pensions and non-profits. And I think it's unrealistic to say that we're going to reach this at the individual level; we can't even end step-up in basis. So, that's very difficult. So fundamentally, I think this is key to solving that a global collective action problem.

0:13:44.5 David Schizer: So, just another word about the collective action problem, because I certainly take the point, and at the same time within the 50 states, we do have tax competition. Seems like a fairly stable equilibrium and actually, there are lots of reasons to think it's a good idea to say, New York and California have one model. I live in New York, pay a pretty significant tax. There are services that I get, and at the same time, if I moved to Texas, it would be a different package. So, we are eliminating that possibility, and particularly since you mentioned countries that are less competitive in terms of their economies, I have a feeling that they're not necessarily the ones who are clamoring for this because they're kind of thinking, the thing that we can do is to offer a lower tax rate to get investments. And it's harder for us to compete on other grounds. So, I'm not sure I do.

0:14:38.3 Kimberly Clausing: Yeah, I would just point out that among the states, they use formulary apportionment to allocate corporate income. So, it partly gets around this problem because the corporate tax base would be highly mobile among the states too. The reason they can do labor taxes that are different is because people are less mobile than that.

0:14:54.9 David Schizer: Which was my point, by the way. Taxing people, taxing business is much harder.

0:15:02.1 Kimberly Clausing: Yeah, but we can't do that. Try telling Congress that they're going to revise the way that we tax pension accounts and 529s, and what, are we going to tax foreigners now when they own U.S. stock? This is our only chance that over 70 percent of the U.S. equity income base, and the other...

[overlapping conversation]

0:15:20.7 Kimberly Clausing: And step up in basis of debt.

0:15:23.8 David Schizer: Yeah, I wouldn't give up on it so easily.

0:15:26.4 Cara Griffith: I think it's a good point to be made too, that the states certainly haven't figured it out. It's not like it's running smoothly at the state level, it's been a real challenge and formulary apportionment is, it's not simple, it's not easy, and if it's not necessarily clean. And so, I can only imagine when you take that times, pick your number, when we're going international, this is going to be huge. So, which sort of brings me to... Let's go for a second, I'm sorry, Mindy, go ahead.

0:15:56.3 Mindy Herzfeld: I just wanted to address [0:15:57.0] ____ tax rate in a the single digits for U.S. multinationals and I think there... I hear that number thrown out a lot. And there are questions that I think that number comes from a Joint Committee analysis that's based on country-by-country reports that are really problematic in terms of providing insight into effective tax rates. I'm looking at an NYU report about tax rates, effective tax rates, cash rates by sector, and there are very few industry sectors that have rates in single digits, or in single digits at all. And most of those are industries where we've enacted specific provisions to encourage these industries such as green energy.

0:16:51.3 Kimberly Clausing: Regardless of which data series you use, it's unquestionable that multinationals have lower tax burdens than domestic companies. And that's part of the point, these are our largest, biggest, most multinational companies. We're asking little guys to compete with these big companies that often have market power, and we're giving those big companies a big tax advantage. And for some, it might be single digits, for some it’s double digits, but it's still lower than what the domestics pay.

0:17:20.0 Cara Griffith: So, we've sort of talked about the idea of tax competition; does pillar 2 solve the problem? Is pillar 2 the right solution? Which I think maybe David is... You know, Kim I think you'd say, yes, David, you might say no. I'd be interested in all of your thoughts on that.

0:17:35.0 Peter Barnes: I think “solve” is too big a question to ask. Does it solve? No, and that's fine. We have lots of provisions in the tax rules that don't solve the whole problem. I think it does address it. It addresses it because it will be very difficult to have a zero rate or even a single digit rate. And as I said before, I think it will spotlight the countries that have 25 percent, 30 percent rates, and put pressure on them to move towards a middle ground. And I do think international competition will be benefited if the range of tax rates on country-to-country and industry-to-industry is narrower. And I think pillar 2 moves in that direction and should be viewed as a positive, even though “solve” is a little bit of a goal too far.

0:18:21.8 David Schizer: So, I'm certainly more sober in my prediction. And I guess what I'd say is I've been a tax lawyer for more than 25 years now, and it is not uncommon for there to be an idea or provision that is supposed to address an issue, and then it turns out there is a very significant way to get around it. And to me, pillar 2 very much has that quality because even if we're able to limit tax competition, the door is wide open to fiscal competition. And what I mean is, this does nothing to address grants the governments might decide to give.

0:19:00.0 David Schizer: It actually does only some things to address even subsidies provided in the tax code through qualified refundable tax credits. So if a country was otherwise inclined to have a very low tax rate, and we say, you know what, you have to have a 15 percent rate, they can say, okay, we'll have a 15 percent rate. But now the market is open in our country for all these new subsidies that we haven't created before, but we have them now and net-net we're going to be in a similar place. Now I think that's bad for a couple of reasons. One is I tend to think that tax rates are a little bit cleaner.

0:19:40.7 David Schizer: There's a way in which grants tend to be particularly fertile ground for lobbying. Governments don't typically do a great job at picking industry winners, and we might be sort of pushing our way down a pretty unfortunate road.

0:19:55.9 David Schizer: But second and more fundamentally, I do think this is less customary for the U.S. than it is for other countries. And so if that's the new playing field, the U.S. is going to be maybe at more of a disadvantage than we otherwise would've been. There's a way in which the OECD is likely to be especially attentive to the considerations in Europe. And we've seen that with the way qualified refundable tax credits are defined, because it tends to be a better fit for the subsidies that already exist in European systems and don't exist in U.S. systems. And you can say it's there because of accounting. And, I suppose that's right, but it isn't lost on me that it also tracks the preferences of other countries better than it tracks the U.S. And I have to say, if you're, if you're worried about governments giving away the store, the idea that a refundable credit is better than a non-refundable credit does seem backwards to me. But, at the end of the day, I think we're going to find the U.S. having to defer more than we expect to the staff at the OECD. And I know some of them, they're very capable people, but they weren't, you know, they weren't elected and they're not there to be accountable to U.S. voters.

0:21:14.7 Kimberly Clausing: So I guess I agree with Peter in that it strikes me that this addresses, in an important and substantive way, the tax competition pressure by focusing on the excess profits of multinational companies, not the normal return. And that's the most tax-sensitive part of the tax base. And by making it just simply much harder, right? It's a lot easier to open a tax loophole that's relatively non-transparent and to give, with a wink and a nod, a much lower tax rate to some companies than others, the more mobile ones, through the tax system. If you're literally cutting checks to these companies, there's much more constraint on that. There's transparency, there's political backlash, there's fiscal constraints that I think are very real and binding. And particularly in this high-rate, high-interest-rate environment that we're seeing in front of us, I don't think countries are going to be eager to take tax dollars and transparently hand them over to their companies. So it certainly changes the rules and, you know, every journey begins with a single step. But I think that single step is making it much more difficult for countries to compete with taxes than it was. It's still possible. It's just much more difficult than it was.

0:22:31.4 Mindy Herzfeld: So, I think this question, like the tax competition question, has one answer in the abstract and another answer when you're faced with reality. And so in the abstract, sure, an agreement on a minimum tax that all countries will abide to, will constrain aggressive competition by countries. But the reality of this really complex set of rules is very challenging to implement. And there's two aspects of that. One is that no one really understands what these rules mean. We essentially have an entirely new system, that's based not on any countries’ tax principles, but on accounting rules that, really, taxpayers are struggling with. But the second is, and I give credit to Dani Rodrik, an economist from Harvard who articulates these principles much better than I could. . .

0:23:26.8 Mindy Herzfeld:. . .I'm just rephrasing him in his book, a global trilemma, that it's much different from, from agreeing on, from having an international agreement, a multilateral agreement on a broad principle such as a global minimum tax, and handing over to an unelected, international bureaucracy the ability to write the details of, very specific rules that every country is required to follow. And that gives, so much discretion and authority to unelected officials. I think it's very concerning. As Rodrik points out, you can't have globalization and also democracy and sovereignty, and I think this puts pressure on those, on both democracy and country sovereignty.

0:24:15.5 Cara Griffith: So I want to turn to the revenue effects and we'll kind of start talking about a little bit more of the nuts and bolts. Kim, I'm going to turn to you first for this. What do you think, and from what you've read, from what you know, from your experience, what will the revenue effects of pillar 2 be, I guess broadly and then specifically for the U.S.?

0:24:38.3 Kimberly Clausing: Yeah, so I think, every bit of evidence that I've seen, suggests that this is going to be an important step forward to reducing the tax responsiveness in the tax base in a way that will ultimately help almost every country in the world raise revenue. I think the exception would be a handful of jurisdictions, 10 or 15 of them that succeeded in siphoning off a lot of the tax base of the rest of the world. Those countries will not win from this, but their combined populations are less than that of Spain, so if we focus on the rest of the world, they will see a tax base that's much less responsive. And it's really important in the economics literature to note that the elasticities or the tax responsiveness are non-linear here, the lower the tax rate is. Once you get into those single digits or down towards zero, you get very extreme tax responsiveness, and as that tax rates gets higher, the tax base gets less sensitive.

0:25:39.8 Kimberly Clausing: So that means there are really large benefits associated with moving that bottom from zero up to 15 percent. And it gives countries more flexibility to go higher than 15 percent, right? If you want to be at 20 when the bottom is at 15, that's much less of a differential than being at 35 when the bottom is at zero. And, so I think that's a really important step forward. The OECD has done work that they're continuing to update and they find that it's in the ballpark of $200 billion a year of net revenue gains from pillar 2. Again, causing in countries throughout the world, almost every group except for those very low rock bottom tax rate jurisdictions, a gain in revenue as a share of their corporate tax base that's roughly similar. There's been a recent JCT analysis; that analysis indicates that if the U.S. were to join, at this moment in time with this set of countries that have already adopted, holding that constant, we'd pick up about $230 billion.

0:26:39.9 Kimberly Clausing: And that's, if we join in the bare minimum, parameters that involve just adopting the typical OECD rules at 15 percent. It hasn't typically been in the interest of the United States to match the lowest common denominator country. So we could imagine a scenario where once the lowest common denominator country is a 15 percent, that we would go somewhat higher than that. And this enables us then to raise even more revenue than that. And if you look at sort of revenue projections from the administration and others of what a 21 percent country-by-country tax would raise – or 18, pick your number –it's going to add several hundred billion dollars to the numbers that the JCT reported. But the JCT analysis also indicates that the tax base is going to become less elastic. They aren't able to look at foreign multinationals. They focus only on U.S. multinationals. So they sort of limit, on the... Their analysis is somewhat limited in that respect, and they don't incorporate these nonlinear elasticities, despite the fact that some of their economists were, I think, particularly, pioneers in seeing that pattern in the data. But they also predict, you know, higher U.S. revenues from adoption.

0:27:53.0 David Schizer: So maybe I'll weigh in and, and Kim, feel free to respond to some of the things I'm about to say. Let's focus on the U.S., and I guess my message is let's not spend this money yet. Because it seems to me that there are three competing effects here, and there's a lot of uncertainty about exactly how they net out, but I think it's probably worth being clear about this. So the first is a clear revenue loss for the U.S., and that has to do with losing some of our tax base to countries that up until now haven't had a very high tax. So I'm thinking about GILTI, I'm thinking about CFC rules, and basically when countries start taxing income that we're already taxing through a minimum tax and we give a foreign tax credit for that, we're going to lose revenue.

0:28:44.5 David Schizer: And I know the Tax Foundation talks about $64 billion as the projected loss on that component. What it is, we could debate it, but I think that part is pretty clear. There's a second element that I don't think, Kim, you've mentioned today, and I'm not sure I've seen it at least in your recent writing, although I know you know about it and you can weigh in on it. And that is, we don't care only about the corporate tax. We also care about shareholder-level taxes on dividends and on capital gains. And to the extent that companies become less profitable because non-U.S. countries are taxing them, well, that's a transfer from, you might say some of the workers to a degree. But if you think it's the owners, then, U.S. shareholders to these countries, which means less tax revenue for the U.S. because the profits to these shareholders go down.

0:29:40.7 David Schizer: And that brings us to the third effect, which is the one that you're really emphasizing and it's important. And that is we're hoping that as tax rates equalize, there'll be less profit shifting away from the U.S. and that would be the way that we could make up these losses, maybe even net positive or possibly net very negative. But it's very uncertain, which is why the Joint Committee said, well, it could be a loss of a $175 billion or a profit of $224.5 million. And we don't really know. And to my mind, the risk of the shifting not changing that much is meaningful for two reasons. One is, I take your point about elasticities as being non-linear, but our rate is still 21, the minimum is 15. The administration would like the rate to be 28, not 21. Maybe that happens. There's still a pretty significant shifting incentive there.

0:30:37.6 David Schizer: And then the other reason why I'm skeptical takes us back to the point I was making before. If these countries that have been charging a very low rate lift their rates up, triggering a foreign tax credit, and then give that revenue back in the form of subsidies or other qualifying tax credits, but particularly subsidies, then what happens is we have the revenue loss, our GILTI revenues go down, our CFC revenues go down and it really isn't shifting back to the U.S. because it's still favorable on net fiscally to be in these other countries. So to me, there's a lot of uncertainty here, but reasons to be more skeptical than perhaps you are.

0:31:18.5 Kimberly Clausing: Yeah. So let me just address the first part of that, or at least a couple of them. And then Peter, I need to defer to you. Sorry, I think I cut you off there. But the JCT analysis accounts for that first effect that you talked about, which is the fact that when other countries raise their taxes, it's going to cut into our GILTI and FTC. And I think it's a little bit of a fantasy to sort of imagine that we're going to keep GILTI and the rest of the world is just going to be like, “No, no, you, go ahead and tax U.S. multinationals regardless of where they operate. We're fine with collecting no revenue.” And that's kind of implicit in that critique is saying that like, we can keep GILTI and then we'll be the only ones taxing U.S. multinationals. And I think a world without this agreement actually looks like other countries going to a series of very ad hoc measures that traditionally U.S. companies have resisted such as joint... Sorry, digital sales taxes, but you can imagine more comprehensive versions as well that would do the same thing.

0:32:22.0 Kimberly Clausing: I mean I think the horse is out of the barn. Countries throughout the world are really interested in taxing multinationals, so I don't think you're going to get your effects one and two back if you could keep the U.S. out of this agreement, or even if you could take apart the agreement and pretend it never happened. I think those two are still coming. In terms of the third one I think it's just unquestionable that if you take the bottom from zero to 15, right, that gives more room to be above that with less tax-based responsiveness, because it's really about the differential. And if you're looking at 21 GILTI versus 15 lowest common denominator, that's very different than the world we're in right now, where zero is the lowest, or post-Tax Cuts and Jobs Act, where zero is the lowest common denominator, right? Because it's making that competitiveness difference smaller, and in a way that's the whole point of this agreement. Companies have been saying over and over again, like, you can't tax us because, it's to our disadvantage when we have to compete with these zero-tax rate jurisdictions. What this agreement does is says there are no zero tax rate jurisdictions, it's just 15. And I think that's going to be a big reduction in the elasticity of the tax base. But Peter, I interrupted you. I'm sorry. Yeah.

0:33:39.7 Peter Barnes: No, no. Kim, you didn't interrupt me. You said in technical terms, what I will say in layman's terms here. I think, David, you've got a one, two, three, but there's a four. The U.S. company today that has a high-tech, high-wage, high-profit operation in Singapore is taxed under the GILTI rules at at least 10.5 percent. The Singapore-owned Singapore company pays zero. The Dutch-owned Singapore company pays zero. The U.S. company is still competitive and does very, very well, but it has its hands tied behind its back because its competitors are paying a significantly lower tax. Under the pillar 2 rules, all three, the U.S. company, the Singapore company, and the Dutch-owned Singapore company will be paying a level tax. I think U.S. companies do well when the playing field is level. I have enormous confidence in the U.S. companies’ ability to compete. And I think under this world, whether they shift stuff back to the U.S. or not, they're going to be more competitive in that playing field in Singapore. So to me, in layman's terms, this is going to make it easier for U.S. companies to succeed in their operations outside the U.S. and that's a good thing.

0:34:58.9 Cara Griffith: Go ahead, Mindy.

0:35:02.3 Mindy Herzfeld: Thanks. So just to correct some mischaracterized... Characterizations again, so, both the JCT analysis and a separate analysis from the Tax Foundation that differs from the JCT in some respects, both of them show a revenue loss from U.S. adoption of pillar 2 and a baseline, the baseline. And I think that Tax Foundation analysis is interesting because it shows that adoption of country-by-country GILTI is not likely to lead to any significant revenue. And the analysis is complicated. And the second is just to restate the point that David led with, which is that if other countries raise their taxes and U.S. multinationals pay more taxes overseas, the U.S. necessarily loses revenue because we grant the foreign tax credit. Now you can then posit or imagine from there all these, you can use the word fantasy, scenarios of what might hypothetically happen if U.S. companies bring revenue back to the U.S. or if Congress raises its rates, raises corporate tax rates significantly. But it's a very simple proposition that if other countries raise their taxes on U.S. companies, U.S. automatically loses revenue.

0:36:25.8 Kimberly Clausing: Just to clarify, I think the JCT study is quite clear that U.S. adoption, regardless of what scenario of what other countries do, if none of them adopt, if all of them adopt, if half of them adopt, U.S. adoption picks up revenue. So that's just what the report says.

0:36:45.5 David Schizer: U.S. adoption reduces the loss of revenue from 120 to 56, again, subject to the baseline, which is...

0:36:53.8 Kimberly Clausing: The scenario when every country in the world adopts. I think more plausibly, if this were estimated tomorrow, it would be based on the countries that have adopted so far, which are even less than the ones who have stated their intention. If it's estimated in 2025, it'll probably look like the 236.

0:37:11.8 David Schizer: So I did want to, I realize we have other issues to discuss, but this is so much fun. I'll just mention one other thing. So, Kim, when you first shared thoughts in response to what I said, you said it's a fantasy that we could continue to collect revenue on our multinational earnings, some low tax jurisdictions and others were going to interfere. And, but I think you kind of implied that they wouldn't now. And you mentioned the DST.

0:37:40.0 David Schizer: But, like, how is pillar 1 doing? Isn't there a real possibility that we're going to have digital services taxes and some trading partner jurisdictions taking what otherwise would be U.S. multinational income, taxing it? And we also have pillar 2, and I sort of thought this was framed at least at one point as a way to head that off, but I'm not sure that it has. Maybe I'm wrong about that.

0:38:06.0 Kimberly Clausing: Yeah, I mean, I think this raises a kind of an interesting question that I know Peter has thoughts on too, which is, what are the interests of the business community in terms of the future of international tax, right? And I would make the argument that pillar 2 gives them a more certain tax regime than many alternatives, and I think the same is true for pillar 1, which is obviously much more technically difficult and stalled at present, and we probably don't have quite time in this webinar, to go into all of the details. But I think if we're imagining two worlds, one is a sort of a global solution to a collective action problem where we agree on some baseline guidelines, and another is the sort of Wild West where there's a strong intention to collect revenue on these companies, but it's not done in a coordinated fashion, I think if I were a multinational company, I'd much rather have this certain environment of an agreed upon coordinated approach, than every country just levying their own favorite backstop provision.

0:39:09.3 Cara Griffith: So I'm curious though, that in the... the somewhat... I'm going to say likely in the short term, likely scenario that the U.S. sits on the sidelines and does not adopt pillar 2. What does the business community think of that? So what happens to U.S. multinationals, if in some perfect world, 140 countries adopt and implement and the U.S. does not?

0:39:33.1 Peter Barnes: The last thing I want to do is pretend I can speak for the U.S. business community. I don't. But I certainly am trying very hard to be tuned to the U.S. business community. And it absolutely baffles me that the U.S. business community is sitting on the sidelines here, because the world, as Kim said earlier, it is not a question of no pillar 2 anywhere or full pillar 2 everywhere. The real world is that 100 countries are going to adopt pillar 2, and the question then is whether the U.S. joins them or doesn't join them. As the Joint Committee said, that would raise revenue from the U.S.'s perspective if the U.S. joins that group. It also would substantially reduce compliance burdens on U.S. companies, if they are in pillar 2 rather than we continue with our GILTI rules, our corporate AMT rules, and pillar 2 applies everywhere else in the world. So my own view, and I've talked to a lot of people, my own view is that the business community just doesn't see an upside to jumping into the fight yet. They never want to say that they're open to higher taxes, that's just anathema to any corporate tax professional.

0:40:49.5 Peter Barnes: And I think there's a little bit of, to use Kim's word, fantasy, that somehow the world's going to say our GILTI rules are sufficient. But my own view is that the companies need to get involved, need to get involved right now. Need to go to the Democrats or Republicans, the House, the Senate, and say the real world, the real world is that there are going to be 100 countries out there adopting pillar 2, that will raise some revenue if the U.S. joins them, we would like to take that revenue and use that for other corporate priorities, and let's get on it. Companies are really very good at thinking realistically about the world. And in their offices, quietly, they realistically know that's what's going to happen. So it's time, in my view, for the companies to get off the sidelines and start talking to Democrats and Republicans, the House and the Senate, they don't have to say pillar 2 is the greatest thing since sliced bread. They just need to say, it's coming. And so we, the U.S., need to be responsive.

0:41:51.7 David Schizer: So I do think, Peter, you've made some really fine points, but I would also say that for one thing, it's not necessarily a choice or shouldn't be a choice between pillar 2 as it is and nothing. Another possibility, which would be so nice, fantasy, I don't know, would be a different version of pillar 2, and it seems to me that the business community has been very active in trying to point out problems with this current approach. And you could imagine in theory and I'm not saying I predict it, but you could imagine in theory a different negotiating process, even going forward, certainly I wish it had been this way going back, where the U.S. uses the negotiating power that it has in different ways. We are the largest economy in the world, in a world where U.S. military power seems to be pretty important, and the countries we're negotiating with are maybe even more aware of that than they were before. It is a little bit puzzling to me that we as the country with the first global minimum tax are finding ourselves potentially branded as a tax haven, sort of in that status. We have a 21 percent rate, we have a minimum tax.

0:43:09.6 David Schizer: There was this kernel of an idea in delaying the UTPRs that there's a certain kind of country that won't be subject to them yet, but you could have imagined a different approach in which a certain kind of country with a tax system that really collects revenue in a rate above a certain level and its own safeguards could have been respected and adequate instead of having to kind of comply with a one-size-fits-all approach, which as I've said before, seems to tilt very much in favor of European systems in the way it defines the base.

0:43:44.0 David Schizer: So it just strikes me that this is an imperfect system and that there's room still to try to make it better, and I think that's been the focus of the lobbying that I'm aware of.

0:43:55.7 Peter Barnes: David, very thoughtful. There's no question, U.S. taxpayers have submitted lots of detailed, thoughtful comments to the OECD on drafting and on technical issues. They've done it individually by companies, they've done it through trade groups, and that's all absolutely terrific, and useful and important. The question is, going forward, and everybody on this webinar has been in negotiations a thousand times, at home, at work. The question is whether you say, “Well, OECD and the rest of the world, if you fix this, if you fix that, if you fix this, if you fix that, then maybe our Congress will approve.”

0:44:37.7 Peter Barnes: I think that we say it is an imperfect item, we're in, we understand the benefits, and we think these items need to be fixed, and there are many of them. I also would point out, though, we talk about one-size-fits-all, the truth is countries are going to adopt this in different ways. There's a template of broad terms that needs to be followed, but this isn't a situation of where those bureaucrats over in Paris write our legislation and send it in for us to adopt it. There's a lot more flexibility than that. And my own view is that our negotiating position is strengthened, it's not weakened, if we go to Congress and we say, “Hey, we think this is going to happen, and therefore we need to be a player at the table.”

0:45:32.0 Kimberly Clausing: And I would point out in terms of global collective action, that there are also other forums that we can use to address the subsidy issue. So for instance, we've got the WTO, they have clear subsidy rules. It's high time we reform those rules, I have a separate piece with Chad Bown and Peterson talking about ways to reform the WTO for the present moment, but those rules give governments a way to countervail excessive subsidies in other countries, and that's something that we could certainly look to should tax competitions start taking that form. But ultimately, I do think that this agreement also enables us to give Congress more choices about what tax rates they can choose, not less. Congress retains full authority, the House almost did – The House actually passed a pillar 2 compliant reform in the end of 2021, so we got close, but they retain full authority to do this the way they choose, right? And they’ll have more choices than they used to now that the bottom isn't zero because there'll be less of this competitiveness pressure.

0:46:34.7 Mindy Herzfeld: So to respond to Peter's points about, that this is something that U.S. business community should be doing, going to Congress and asking Congress to enact pillar 2, I'm reminded of watching the 2017 reform process play out, and it seemed to me then that many businesses had their heads in the sand – that there was a train moving, that international tax reform was desperately needed, that it was going to happen, it was just a question of what form it would take, and there was a real lack of engagement on the form of it, and it caught many people by surprise as a result. I don't have the same sense at all in watching this pillar 2 story play out. I watch pillar 2 and I think about U.S. Congress and what the U.S. gets out of it, and I just don't see what the prompt is for U.S. businesses to go to Congress and say, “Please enact a set of rules that takes our U.S. tax system, makes it enormously more complex, but by requiring us to conform to a financial accounting base that's different from anything we have and also provide....” We haven't talked about the UTPR and refundable credits or non-refundable credits at all, we haven't talked about the substance-based carve-out and what that would mean if the U.S. fully adopted pillar 2. And so I just don't see the situation that prompts the U.S. companies to say we need... “Congress, you need to conform our tax rules to the rest of the world.”

0:48:28.9 Peter Barnes: I get, and Mindy, I always value your insights on this, you live in Washington and you watch it. I think the point is that companies are going to be subject to pillar 2, period. We don't have a choice. So it's different if we're subject to it because the U.S. has conformed than if we are subject to it because 100 other companies... 100 other countries have adopted it, but it's there, and you put your finger on a hugely important issue, which is the use of financial accounting. People think that financial accounting is common across the world, and of course it's not. GAAP is different from IFRS. IFRS in the UK is different from IFRS in Germany is different from IFRS in Japan. So these are huge, huge issues, but the choice, I keep coming back, the choice is not a world in which there's pillar 2 and a world in which there's not pillar 2. There is going to be pillar 2, and our companies are going to be subject to all of this, so the question is, are they going to be subject to all of this, plus the whole U.S. GILTI regime on its own, and my own view is, companies would benefit from having a singular system, complex, with its flaws, than having a system for pillar 2 and a system for all the U.S. rules.

0:49:49.4 Mindy Herzfeld: I mean, we've always had a system where other countries had different tax regimes than ours, I'm not sure why this would be so different.

0:49:56.8 Kimberly Clausing: We've created a lot of our own complexity with the corporate alternative minimum tax, which is also accounting-based, we've got this plethora of other things GILTI be... So I think there's actually a room for compromise here, where some of this hodgepodge gets consolidated into something that's conforming and provides more certainty. And one can also address other issues like the move towards R&D amortization that was baked into Tax Cuts and Jobs Act. There's a lot of business desiderata out there that can be met with this moment. So I think there is room for bipartisan, even compromise here.

0:50:34.0 Cara Griffith: I sort of wonder though, how are we going to get Congress involved? And, yeah, that was what I mentioned in the opening that Congress was not involved enough it seems in the negotiation of pillar 2, and we ended up in a place where it will be difficult to get legislation through in the next year. How do we get a better process for a better negotiation where we can end up in a place that the U.S. has a fighting chance of implementing?

0:51:04.4 David Schizer: Yeah. So...

0:51:04.4 Peter Barnes: David, go ahead. Go ahead, David.

0:51:07.4 David Schizer: Maybe I'll just pick up on that and express even more dissatisfaction because at least for me, this is a real concern. Peter, you did present this as something that's inevitable. It's going to happen. A few minutes ago, Kim said, “Well, this gives Congress more choices.” I don't know that it does. I think it might give Congress more choices on rates, but at the expense of significant constraints on the base, but having said that, it is a choice that Congress is supposed to make. The Constitution is really clear. Revenue bills initiate in the House, the president doesn't make tax policy, and yet we find ourselves in a position where Congress is being asked very late in the game to approve something that is almost being presented as a fait accompli. And I just think as a constitutional matter, as a systemic matter, as a process matter, it's a really bad precedent.

0:51:55.3 David Schizer: And I'll just put it this way, I believed for a long time that the 35 percent rate was too high, very much wanted something to be done about it, but Congress had to do that, and if President Trump had said, “You know what, going forward, I'm only going to enforce the 21 percent packs because Congress refuses to act...,”

0:52:21.4 David Schizer:. . .that would clearly be an unconstitutional arrogation of power to the executive. And yet here what we have is we have a situation where the administration, I think they got out ahead of where Congress was, but they've created a situation where Congress isn't making an easy choice, and this is a precedent that people may not like going forward, because the next thing that the next president does might be very different. And so, for example, there are many energy credits in the IRA, they have been put in place by Congress. The next president might say, “Please repeal those,” and Congress might say, “Thank you, no, we like them.” So do we really want the president to then have the ability to go to the OECD and say, “Would you please change that favorable guidance you gave the last administration and now make these credits not viable anymore because they're not recognized by pillar 2?” Now, I'm not predicting that this will happen, I just present this as a way to understand, there's a reason why we want Congress to make these decisions. I know that this week is not the easiest week to defend Congress's track record, but having said that, it's the system we have, and I think we need to be faithful to that.

0:53:40.2 Kimberly Clausing: And just to be clear, I don't think this particular Congress, in this particular moment, seems inclined to do anything that would be helpful in this regard. I'm more hopeful about 2025. I do think there's some hope there. But I would also point out that Congress was consulted. I was on many bipartisan, bicameral meetings. This was not done solely by Treasury. This was done in coordination with the taxwriting committees, and Congress retains their authority. There's nothing that this does that takes constitutional power away from Congress, and I think some of the parallels that David just drew aren't really parallels. Like, I don't think this is like Treasury announcing that they're not going to enforce an existing tax law. I think that would be very, very different from Congress... Sorry, from the administration doing what administrations often do, which is interact with other countries around collective action problems. We don't tend to send Congress to do that, we tend to have the State Department and Treasury work with other countries on those international collective action problems, because they're more placed to have those kinds of international conversations than Congress is.

0:54:54.4 Mindy Herzfeld: David and Peter and I were both at, that all testified at a Ways and Means Committee hearing where the question of whether the administration had consulted with Congress on this issue came up, and they were very pointed questions asked to that Treasury official who was testifying, and I think the members who asked the questions asked for responses. I don't know if there were responses given that haven't been made public, I haven't seen them. But subsequent to that hearing, some of the members of the Ways and Means Committee went to Europe and expressed their concerns with the results of pillar 2, and I think, Cara, to answer your question about what's the way forward, I think greater engagement by members of Congress with the OECD is a path forward and asserting their – Making clear their jurisdiction in this area is important, and their meetings in Europe perhaps set a new path forward to greater engagement of Congress having negotiations in the future.

0:56:06.9 David Schizer: Two more quick points. Also, there is a process for negotiating with foreign countries and then putting it into law. We have a treaty process, we actually have lots of bilateral treaties, and I don't want to get into the technical weeds, but there are certainly arguments that aspects of pillar 2, the UTPR in particular, are not consistent with treaties. Putting that aside though, I do think since Peter mentioned we've all been in negotiations before, good cop, bad cop is a really fine way to negotiate, and you really do have an authentic disagreement between the two branches. It seems to me this is an opportunity to say some candid things to the OECD about what needs to happen in order to get the U.S. on board, and it may be a bit different than what the administration had said before.

0:56:56.7 Cara Griffith: I think that's a great point. Well, given that we started a bit late, we ran five minutes over, but I do want to be respectful of everyone's time, and I know that we have at least two panelists who are in a bit of a time crunch, so David, I apologize to your students in advance, but we thank you for joining today. Thank you for sharing your opinions. This was a very interesting conversation and one that we'll continue having for probably the next few years. Thanks everyone, have a great day.

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