Menu
Tax Notes logo

Hashing Out the Pros and Cons of a Global Minimum Tax: Transcript

Posted on Sep. 30, 2021

A global minimum tax -- such as the one proposed in pillar 2 of the OECD's plan to modernize international taxation -- could dampen large businesses' enthusiasm for profit-shifting but would also pose significant implementation challenges for tax authorities. 

Mike Williams of HM Treasury, Chip Harter of PwC, and University of Florida Levin College of Law professor and Tax Notes contributor Mindy Herzfeld joined Tax Analysts President and CEO Cara Griffith to explore the policy's ramifications in a September 23 "Taxing Issues" webinar

 

Cara Griffith: Welcome everyone, I'm Cara Griffith, the President and CEO of Tax Analysts. I'm so pleased you've joined us for a discussion on international tax reform and the global minimum tax. We will discuss the challenges with the jurisdictional approach to taxing businesses, the added compliance burdens, and, I would expect, a host of other important issues. Today's event is the 12th in Tax Analysts’ series of public discussions we call Taxing Issues. We launched this series last year as part of our 50th anniversary celebration, and through it, we're bringing the tax community together with leading policymakers and experts for bipartisan discussions on the future of tax policy. While I hope that we can hold in-person events in the near future, we will, for now, continue to hold these discussions in a virtual format, and we welcome your feedback on how to make them more interactive. We also welcome your suggestions on future webinar topics. You can send your feedback and suggestions to events@taxanalysts.org. We also welcome your questions for today's event. Thank you to those that emailed your questions in advance. Please use the chat feature to submit questions during today's event. For a panel discussion, I will begin by asking a few questions, and then I will turn to questions from you, our audience, and I promise to get to as many of them as time permits. And now on to the topic at hand.

The United States continues to support efforts to improve the international tax system, and it's making progress with its own plans for international tax reform. Recently at a G7 finance ministers meeting, Treasury Secretary Janet Yellen expressed her support for the ongoing efforts to improve the international tax system and she stressed the importance of quickly implementing a new system, including a global minimum tax. Secretary Yellen explained that we need a new international tax system that's appropriate for an increasingly global economy. That's because governments need to be able to invest in their workers and economies on a level playing field.

Countries in the OECD and G-20 have been working on an inclusive framework, which is based on two-pillar plan. Very generally, pillar 1 addresses where multinationals are subject to tax, and it revisits tax allocation rules. Pillar 2 would ensure that large multinationals pay a minimum level of tax. Pillar 2 lets government's target profits that are taxed under a minimum corporate tax rate of at least 15 percent. Governments would also be able to deny deductions for payments under that rate. Of the 139 countries that have been working on the inclusive framework, about 130 have reached agreement on the two pillars. Among those that are not in agreement are Ireland, Hungary, and Estonia. Ireland and Hungary both have corporate tax rates that are lower than the proposed global minimum of 15 percent, and Estonia only taxes distributed profits. Ireland, Hungary, and Estonia are all members of the OECD. Nonetheless, OECD and G-20 countries are working to finalize details and prepare an implementation plan by mid-October. Whether the outliers will come along and join a global consensus is a very open question.

In the United States, the Biden administration initially supported a 15 percent floor for the global minimum tax, but its original proposals for reforming the [global intangible low-tax income] provisions went even further. Recently, Itai Grinberg, the Treasury's deputy assistant secretary for multilateral tax, and Rebecca Kysar, counselor to the assistant secretary for tax policy, laid out Treasury's argument for doubling the current GILTI rate to 21 percent and ending the exemption for deemed returns under 10 percent of qualified business asset investment. The budget reconciliation package, which congressional Democrats are currently drafting, is widely expected to include a global minimum tax provision that would align with the inclusive framework. As you can see there are a host of issues to address, and we have an outstanding panel to do just that.

First, we have Mike Williams, director business and international tax at HM Treasury, the United Kingdom's treasury department, where he is responsible for a variety of tax types, but his main expertise is in international tax and banking. Among his many other responsibilities, Mike is also the U.K. delegate to the OECD's Committee on Fiscal Affairs.

Next, we have Chip Harter, who is a senior tax advisor with PwC. Chip served in the Treasury Department as deputy assistant secretary of tax policy for international tax affairs, where he was responsible for international tax matters. Chip played essential role during the development of the [Tax Cuts and Jobs Act] and represented the United States in tax negotiations at the OECD.

And last but certainly not least, we have Mindy Herzfeld, of counsel for the taxation and mergers and acquisitions practices of the Washington, D.C., office of Potomac Law. Mindy is also a professor of tax practice at the University of Florida and a regular contributor to Tax Notes International. She is an expert in cross-border taxation and international tax policy.

We are delighted to have such a distinguished panel today. Thank you for taking the time to join us. And let's get right to it. Mike, if I could start with you, could you give us a sort of a brief overview of the OECD project and the two pillars and perhaps lay a stage for what might be yet to come?

Mike Williams: Thank you Cara, and hello to everyone. Yeah, let me try and do that. I mean, I think you can perhaps quite reasonably describe pillars 1 and 2 as unfinished business from the OECD's [base erosion and profit-shifting project], which finished in 2015. And I think some people argue that we are where we are because there was so much unfinished business on, for example, things like taxing the digital economy. Whereas others argue that we are where we are, because some countries, including the U.K., went ahead and introduced digital services taxes. I'm not sure it's totally useful to sort of go too far into precisely why we are where we are. Actually the key is that there was too much dissatisfaction that the status quo couldn't hold — I think that that's the key point. And pillar 1 and 2, is, in a sense, a project to restore more stability to international tax rules, which of course does then mean that to get there, we do need to make sure that there is probably more general satisfaction with the system so that the new rules will hold.

In terms of where countries started out, some countries are more interested in one pillar. The U.K. was more interested in pillar 1 from the start, we certainly needed to solve the digital tax issue. Equally, some countries were more interested in pillar 2. Germany has long favored a minimum tax and was one of the sponsors of what is now pillar 2. Equally, some countries were in it for both. But I think fairly early on, it became clear that the only way we were going get a consensus deal was by having both pillars in the project and having solutions reflected in both pillars.

So let me touch fairly briefly on each pillar. Pillar 1, as agreed on the 1st of July in the inclusive framework statement on the 1st of July, it affects around 1,000 groups, and unlike earlier proposals, it has minimal segmentation by business lines. In general, subject to a few exceptions, you look at the group as a whole. It excludes extractives and regulated financial services, it proposes a 20 to 30 percent above 10 percent profit reallocation to market countries. Certainly, in the U.K.'s view, it does enough to solve what we see as a digital tax issue, and I think it also helps solve some of the issues that you see with transfer pricing, where the group can, of course, set up lead entities and segregate assets, risks, and functions between those entities in a perhaps not very commercial way. That then leads to stresses on the arm's-length principle. I think it solves, helps solve both of those issues. Of course, as part of it, countries like the U.K. with DSTs, will need to abolish those DSTs, which we are fine with that. We said when we introduced the DST, it was an interim and not particularly perfect solution that we would abolish once a long-term multilaterally agreed resolution was in place, and that's pillar 1.

And as you said Cara, at the start, this bit is about where tax is paid, and of course, it does matter where tax is paid because tax funds public expenditure. There are schools in Coventry in the U.K. as well as in California, and they've all got to be paid for. And so just saying, "Oh, tax is being paid somewhere else" doesn't really solve the issue, the problem if on fairness grounds some of the tax ought to be paid in other countries. Pillar 2 affects groups with turnover above €750 million. This, as you say, is the global minimum tax of at least 15 percent. It does have a substance carve-out. Also shipping is out, primarily I think because many countries, again, including the U.K., have a tonnage tax, which doesn't tax shipping in a conventional way.

It does create a global minimum tax. I think quite importantly, certainly for the U.K., but I think for many countries in the project it does so on a country-by-country basis. So, there isn't scope if you've got a load of high tax foreign profits to sort of mix that with profits that bear very little tax. So it removes, or at least diminishes very significantly, the incentive to move profits to a tax haven where you're not paying much tax. Obviously, there's a need for GILTI coexistence, and I think one of the interesting tasks over the next few months as U.S. tax reforms presumably adopt it, is to sort of tease how that coexistence will work. But I think it will be made significantly easier if the GILTI is moved onto a form of country-by-country, rather than looking at the world outside the U.S. as effectively one unit. And of course this bit is on the premise that it matters that tax is paid. So under pillar 2, we're creating a floor, if you like, and certainly Secretary Yellen there talks about a floor that reduces race-to-the-bottom tax competition. Pillar 1 is equally . . . it's saying, “Well, yes, it is important the tax is paid, but it's also . . . it also matters where the tax is paid,” and to get a consensus, which will hopefully make for a new settlement that will be more stable. You've got to have both elements. Let me stop there, Cara.

Griffith: Wonderful, thank you, Mike. I think that's very helpful background for the conversation. Chip, let me turn to you, and I'd like to get your reaction to what you see as the overall project in addition, more specifically, to the concept of a global minimum tax. And perhaps you can give us a sense of how you see the process having been going and whether you have a timeline on an implementation plan?

Chip Harter: Well, Cara, the concept of a global minimum tax is a powerful concept when applied on a country-by-country basis as Mike described. When Germany and France proposed pillar 2, I think they fully intended to change the international tax landscape. The assumption is that low-tax countries would have a powerful incentive to raise their corporate tax rates to at least the minimum rate so they could collect the minimum tax rate themselves, rather than have it paid to some parent jurisdiction. So, the irony is that if this agenda is fully achieved, very little tax would be collected directly under pillar 2, but the incentive to engage in cross-border tax structuring would be reduced by reducing the rate differentials between countries.

The United States fully supported the addition of pillar 2, because we viewed it as potentially leveling the playing field for U.S.-based multinationals, which are already subject to our GILTI regime. As to progress on pillar 2, it does seem like there is the political will, at least at the G7 and EU level to reach agreement, and that significant technical issues remain to be resolved, but the political momentum does seem to be there. And it's also important to remember that unlike pillar 2, pillar . . . I'm sorry, unlike pillar 1, pillar 2 could have a very meaningful impact, even if it's agreed to by only a critical mass of significant headquarters jurisdictions. Minimum tax regimes can be adopted unilaterally as GILTI was. OECD agreement is very important to achieve a degree of consistency and uniformity. But, even if the OECD process were to fail to reach agreement, I would expect a number of significant countries would adopt their own minimum tax regimes, but the concern would be that these might not be well-coordinated, leading to a potential double taxation.

Griffith: You make some really interesting points there that I'm going to want to follow up on, but first, let me turn to Mindy for a second. Now Mindy, [I’ve] read numerous articles that you wrote in Tax Notes International, you've been critical of the OECD's project. There've been some points on both pillars 1 and pillar 2 where you definitely disagreed. Could you talk to us a little bit about what you see as some shortcomings of the project?

Mindy Herzfeld: I was just listening to Mike just now, laying out the rationale for both pillar 1 and pillar 2. I was trying to articulate for myself what the goals of pillar 1 and pillar 2 are, and I came up with three here, maybe there are more. One is global equity, and I think that goes to part of pillar 2, that we haven't really talked about, but also pillar 1, which is some lower income countries getting a larger share of the global multinationals global profit. A second is our goal that high tax countries should be collecting more tax than they currently do. You don't often hear that explicitly enunciated as a goal, but I think that's the result, as Chip noted. And then a third is to reduce incentives for tax planning.

And when I think of those goals, it's not clear to me that pillar 1 and pillar 2, as currently articulated, or as they're laid out now, achieve those goals. And also whether there's full agreement on those goals, it's not clear to me that Mike talking about the need for more revenue to support schools in the U.K.is fully on board with sharing more of those profits with lower income countries. It's not clear to me that all of the lower income countries and the low tax countries and also countries that are smaller and use tax as one measure to want to attract more business to their jurisdictions, whether they're fully on board with this idea that high tax countries should be entitled to a larger share of global profits.

And then on the third point of reduced incentives for tax planning, which Chip also mentioned, I think — and this goes to the point about compliance burdens, Cara — I think complexity always, almost always wins in favor of the taxpayer and especially the well-funded taxpayer, that complexity creates more opportunities for planning. And so, the country-by-country is obviously more complex than on a blended system, and so it's not clear to me that ultimately we will see, once everything settles, that we'll see a whole lot more, that goal being achieved. So, those are some of the reasons why I question both where the project is heading, and also it's the tools that are being used. There are also other larger points, which as you know, Cara, I have raised in some of my articles, which is that extent to which this global agreement takes away countries’ sovereignty and their ability to enact and implement measures that the local politicians see as best suited for their own jurisdictions.

Griffith: So that's interesting, and a lot of the complexity — let's say I grew up as a state and local tax person — and any time you get something that is multijurisdictional, the complexity increases in trying to be compliant and trying to determine allocation. Before we move on to some additional questions, Mike, I just wanted to give you the opportunity to respond to any of Mindy's criticisms and make a few additional points if you would like.

Williams: Thank you Cara. I think on how pillar 2 operates — country-by-country versus blending — I think it links a bit back to Chip's point about pillar 2 leveling the playing field, but what playing field? In the U.S., people tend to see that as the U.S. leveling the playing field with the rest of the world having enacted the GILTI, but, kind of frankly, there's not a lot for the rest of the world in that. That's a U.S. domestic concern, if you like. I think and the advantage of operating country-by-country, is you do, so each country has more protection against other countries' businesses moving profits generated in that country to a tax haven, which I'm afraid you don't necessarily get with blending, and we've seen instances where profits have been removed from the U.K. to take advantage of blending. And equally, if you look at a third country, then there's a sense in which there's a more level playing field between businesses based in other different countries than you would get with a blended system, where maybe they would compete on an equal footing. But it all depends on where else they're operating and what the tax they're paying. So, I think you don't get that.

Then one certain point on sovereignty, there is a sovereignty point, and of course, sovereignty is integral to why the U.K. left the EU. That said, in all countries, or most countries, certainly all countries with tax treaties, to an extent, compromise or share their sovereignty through agreeing tax treaties, but they do it with the high goal that Chip described of eliminating double taxation, so you get more trades, so you get a benefit that way. So, there's a sense in which we've already done that. Equally, I think you can look at pillar 2 and see, in a sense, it's about creating new secondary taxing rights. There's money on the table. If the first country chooses not to pick up that money, then in effect, pillar 2 is saying that to an extent, another country can pick up the money, and again, to avoid some sort of unseemly scramble for the money or double taxation, it allocates a priority ordering to who can do that. And as Chip says, probably the most faced with that, the most likely it seems to me, is that the first country will pick up the money. If you've got money on your table, which if you don't pick up somebody else will, well, most of us pick up the money. So, I think you can see now how pillar 2 has a quite interesting behavioral effect.

Griffith: It really does. And so do you see that with pillar 2, what we're going to have is a new type of tax planning? There seems to me that with pillar 2, there's going to be some gamesmanship that could go on, and I open this up to the entire panel, what are your thoughts on that? Are we going to . . . maybe we're at a higher rate, because we've got a 15 percent floor, but are we just going to see tax planning in a different form?

Harter: Well, this will not be the end of tax planning or tax competition between countries, but if it is effectively implemented — again on a country-by-country basis, as pillar 2 proposes — it would reduce the tax differentials. I mean that the difference between having an item of income taxed at a 15 percent rate rather than a 25 percent rate is a lot smaller than the difference between having a tax of a 0 percent rate and a 25 percent rate.

So, the incentive to shift income would be reduced, and so perhaps one would end up seeing less aggressive transfer pricing or in terms of making decisions where to place functions and earn income. The tax advantages start shrinking in comparison with the business consideration, so that the hope is that it lessens the tax incentives and lets the economic considerations to play a bigger role in deciding where businesses are operated and functions performed. So, it will not be the end of the tax competition, and I do think we'll have to be very careful in monitoring the implementation of pillar 2 and making sure that there aren't special regimes that somehow make the minimum rate illusory in a given country. But, in terms of a theoretical construct, I do think it has promise.

Herzfeld: I think . . .

Harter: Notwithstanding the complexity and costs of implementing it . . . Yes, go ahead, Mindy.

Herzfeld: Yeah. To your point about other kinds of planning, Cara, I'd like to use the U.S. anti-inversion legislation as an example. So, that was a legislation adopted to address a very specific kind of transaction that, that was a paper transaction where people were moving their companies from U.S. headquarters to overseas where there was a lower tax rate, and so very targeted to get at a profit shifting sort of base erosion problem. So, what was the . . . couple of decades and various U.S. regulatory attempts to curtail it further, the result was that people shifted real substance, and instead of shifting paper and just nominal headquarters, people started shifting substance outside. So, I think there is a real risk when policymakers try to write rules to address transactions that are just profit shifting, that they end up incentivizing real behavior, real economic behaviors in ways that were certainly unanticipated in terms of what the goal of the rule was.

Harter: And I do think in the U.S., a big issue is how different, how perhaps more harsh a GILTI regime might end up in comparison with a pillar 2 regime that applies to multinationals based elsewhere in the world. Just, again, competitiveness concerns with respect to U.S.-based multinationals. And there, the Biden administration Green Book proposals were pretty breathtaking in terms of doubling the GILTI rate without alleviating any of its peculiarities that keep it from being a true top-up tax. So yeah, effectively looking at something like a top-up rate up to like 26 percent rate before expense allocations, which would have been dramatically worse or dramatically harsher than anything likely to come out of pillar 2.

And we have seen both the Senate finance proposals and then the Ways and Means text itself that have moved the proposed GILTI changes much closer to the pillar 2 architecture as they have proposed to put it on a country-by-country basis, which is quite controversial among U.S.-based multinationals that they have Ways and Means proposal, for example, would reduce the GILTI tax haircut to 5 percent from 20 percent, and also prevent expenses from being allocated to GILTI basket income. And so, the effect would be essentially topping up to something like a 17.4 percent rate, which is much closer to 15, and that might actually come down a bit if we end up with a 25 percent corporate tax rate rather than 26 and a half.

But, I must say, U.S. multinationals are not enthusiastic about transitioning to a country-by-country regime, but there would be some consolation if the rates were reduced to something quite comparable to pillar 2 rates and our expense allocation issues were addressed so that GILTI could also, wide pillar 2 operate more or less as a true top-up tax over a minimum rate, rather than the current full inclusion regime that is only partial level tax relief through the foreign tax credit.

Williams: I think also taxing by substance appears less odd if, like the U.K. and indeed like most of the countries, you don't tax by citizenship and you don't tax by incorporation. We tax our residents primarily, so if a large number of British citizens were to go and live abroad, in substance they would have gone and we would tax less. Equally with corporations, where we are much more concerned about activity or about consumption, but there’s, in a sense —  Are you not always going to be taxing the substance, where people work, where people make their profits, where people sell their stuff? In a sense, substance is at the heart of all this, certainly in terms of working out where the tax is paid.

Griffith: So Mike, and to follow up with you maybe first, we're talking about country-by-country and tax competition, are there certain countries that are perceived as being the winners here and certain countries that are perceived as being the losers? And then to tack on to that, we had a question from the audience which was: Are there any significant gains for developing countries from either pillars 1 and 2? What are your thoughts on that?

Williams: Well, I think if, given the dissatisfaction with the existing rules, and certainly from the U.K. perspective, given the way that those rules don't cope terribly well with aspects of globalization, don't cope well with tech giants, then if you don't sort that out, if you don’t reach some sort of new consensus, I think all countries lose out by everybody going off and doing their own thing. Maybe you get a trade war, maybe you don't, but you're probably going to get unrelieved double taxation to a significant extent. I think in terms of developing countries, well, I think putting a floor on the tax payable through pillar 2 is a significant development. Equally, some developing countries said yes but you need to let's have a substance carve-out, which we have in pillar 2. And some countries, some developing countries, I think with significant markets will also do well from pillar 1. Realistically, though — if in taxing profits, you're talking about either where activities are or taxing where the markets are — if you've got a country where very little activity takes place relatively and the market is small, then you can't engineer pillar 1 in a way that creates a large impact on that country.

Harter: Yeah, I would heartily second Mike's observation that the primary benefit to all countries in this is preserving an international set of standards for allocating taxing jurisdiction. As Mike earlier observed, the status quo does not seem to be an option, the political consensus has been at risk, and so the nature of this exercise is to reach a new political consensus among sovereign nations to stabilize the situation.

And I'd also observe that in terms of allocating taxing jurisdiction between sovereign countries, I don't think there is a natural law or a technically correct solution. It is inherently a political exercise, and so what has been occurring at the OECD is a highly political exercise where different countries have different interests and a political compromise is necessary to reach an agreement that creates some stability going forward, so we can walk through the different types of countries and different perspectives, but at the end of the day, the common interest is to reach an agreement, so we're all operating under a common, consistent set of rules to avoid double taxation and complexity that would otherwise burden international trade and investment.

Herzfeld: Cara, can I highlight a couple of studies that I think try to answer the question you posed, of which countries are winners and which might be losers, and there's [at] present some IMF work done on this point, and there's also the work done by an economic think tank, a consultant from out of Copenhagen. And those both point to similar conclusions that it's the higher tax, the richer, larger countries that tend to benefit more, what the IMF refers to as investment hubs, so lower tax jurisdictions that is . . . tax preferences to encourage investment, those are losers. And also, the work from the Copenhagen Institute shows that also smaller economies, like the Scandinavian economies, also tend to be losers.

Griffith: What effect, if any, will this have on countries that, we're talking about, again, about tax competition, who've been aggressive on tax incentives? Is the idea of pillar 2 and a global minimum tax, what effect is that going to have on tax incentives going forward?

Williams: I think there's still significant scope for tax incentives in a world where many countries, the U.K., the U.S. tax rates we knew in the mid-20s, and the minimum tax rate is, say, 15 percent as seems likely under pillar 2. Equally there's a substance carveout from pillar 2, just as there is a substance carveout of a sort in the GILTI. So, I don't think it undermines incentives, but I think it makes it much more difficult to exploit tax reliefs by moving profits while leaving activities, say, in a high-tax country. I think that's perhaps the big difference. Yes, there are the studies that Mindy cited, but if I recall there are U.S. Treasury studies as well, that show that most of the activity takes place in high-tax countries, whereas much of the profits kind of magically appear in very low-tax countries which are rather small. So, I think you can look at the studies in different ways.

Harter: It certainly has been an issue within the inclusive framework that imposing a minimum tax, it is said to infringe on the sovereignty of various countries to set their own tax rates and has the effect of reducing their ability to create incentives to attract investment. And so, there's enormous amount of discussion about carveouts of everything from forestry, to building hotels, to whatever, for pillar 2 purposes. And those discussions went on quite a while, and for the most part, they were contained, though the carveouts for tangible investments and mark-up on payroll are pretty significant. But yeah, this has been a contentious issue from the start, I'd say in general, the . . . most of the OECD countries are, once they — at least G7 countries — were trying to limit the scope of any of these carveouts and limit the ability to create incentives that will lower the effective rate below the minimum rate. But it looks like those . . . that that defense was reasonably successful, but we'll see what the final work product is.

Herzfeld: Yeah. Cara, I think your question goes to the heart of why it's hard to design a global minimum tax, and that is you can't really talk about — even though we have been for the past couple of years — it doesn't make a lot of sense to talk about a global minimum tax without anything resembling a uniform tax base. And that ultimately requires someone to make a decision about what kind of tax incentives are okay and should be blessed under this tax base, as okay under this regime, and which ones are not okay.

Harter: Yeah. As I was leaving the negotiations, it was still seemed to be the assumption that the OECD Forum on Harmful Tax Practices could just be disbanded because all we have to do is look at whatever tax practices there are in a country and see if it reduces the effect of rate below the minimum rate, and if it does, one tops up, and that's the end of the inquiry, but that any incentives that had the effect of lowering the effective rate below the minimum rate would result in a top-up.

Williams: I think also, Mindy rightly stresses the need to have some sort of conformance or perhaps uniformity on tax base. But of course, there's a sense in which the United States is the country most keen to devise its own tax base, but a) other countries wouldn't want to adopt the U.S.'s tax base, and b) of course the U.S.'s tax base is tailored to the U.S. anyway, so you can't just export it, so I think that's quite difficult.

But on the other hand, I think pillar 2 is quite innovative in deciding that you will, the only feasible measure that you can use globally to measure is financial accounting profits. Because it's kind of known that you're never going to otherwise get a sufficient agreement on what your measure is. It can't be country A's measure because country B would say, "But our measure is better." Whereas at least there is through the financial accounting system, where there's not clearly complete uniformity, but significant uniformity, there is a means of sort of creating a global measure. And I think that is one of the innovations, but also one of the benefits from pillar 2.

Griffith: It's undoubtedly going to be a challenge in implementation and coming up with uniform definitions and uniform tax — there's a lot that's going to need to be unpackaged. We've had, we've gotten quite a lot of great questions in from the audience. So, I'm going to go and pick off a couple of those and pose them to you. First, what remedy does the U.S. have if it agrees to pillars 1 and 2, but other countries don't repeal their DSTs as promised? Are we looking at a tariff response?

Harter: Well, I had observed, we already have GILTI, which is . . . and the rest of the world, hasn't had a minimum tax, for the last four years. So, we are looking for the rest of the world to move promptly in adopting pillar 2. And we, as the Hill is looking at changes to conform it more closely to pillar 2, there is also a fair amount of discussion on the Hill to defer the effective date of changes to a country-country, country-by-country regime until there is more certainty, that the rest of the world will adopt pillar 2. And so, yeah, this has been a bit of a political issue. If we make GILTI more harsh, how do we know that the rest of the world will actually go through with adopting pillar 2? And this is a topic for a discussion on the Hill as we speak here.

Williams: Actually, it's only fair to say that there are more commentators including many in the U.S., sort questioning whether the U.S. will pass pillars 1 and 2, than there are commentators suggesting that the U.K. won't pass pillars 1 and 2 and at the same time abolish our DST. And there are far more countries like us with parliamentary systems, including ones with governments with majorities, and there are countries like the U.S. which have your much different system. So, I'm not sure it's terribly realistic to say, "Oh, the other countries won't do these things." I feel the evidence, and the evidence from BEPS, is actually that these countries will implement including the U.K.

Harter: No, personally I'm reasonably optimistic they will, but there are some naysayers on the Hill, and I had also observed, we do have the GILTI in existence now and the question is: Should we double down on it before we . . . with effective dates that would kick in well before the rest of the world is adopting pillar 2 even on our current schedule? So, it's both the effective dates and contingencies that are a political issue on the Hill at the moment, and we'll see how it turns out.

Herzfeld: Yeah, and another related . . . more interesting question to me, Cara, is what about countries that nominally enact, say they're adopting these regimes, but then whether through other rules or through other types of incentives or just in enforcement, just don't get there? And how do you . . . I know we're going to have a peer review system that's going to catch everyone who left so it's not fully enforcing it but that also seems very difficult to implement.

Williams: And we do have to go up against that, but on the other hand, Chip knows this in the same way as me, but these will be very difficult and very tough negotiations. If at the end of the day you were going to sign up, sort of with your fingers crossed behind your back and just ignore what you'd signed up to, why would you fight so hard? And I think that tells you in many cases, countries actually are going to implement, and they fought quite hard to avoid implementing things that they really didn't want to implement. So, I think there is reasons to be optimistic, but clearly we do need a peer review process as well to make sure that people do actually live up to their commitments.

Harter: Yeah no, I'm reasonably optimistic, and I think the greater fear is that if the OECD is not able to agree on this, we'll have a fair number of uncoordinated pillar 2 equivalents adopted around the world which could turn out badly.

Griffith: Well, that was another question that was posed by the audience was, if no agreement on pillar 2 is reached, it seems that other countries might enact minimum tax regimes unilaterally, and what would those agreements look like and would they be consistent with treaty obligations? I think the answer is, I don't know, but I pose it to you all, if you have deeper thoughts.

Williams: I think it's possible to enact minimum taxes while staying within your tax treaties. And I think you can see the U.S. as an example of this, but on the other hand I think: “Why haven't countries done it already on their own, rather than go through this great long process of negotiation, if it was straightforward?” And I think it's not straightforward, and if you are much smaller than the U.S. then the competitive aspect probably drives you much more. Equally noted, as Mindy rightly said at the start, the rules are complicated. If we were going to have 20 different versions of these rules, so a large multinational having to track 20 different reporting systems to generate slightly different numbers, I do think that that would be really quite damaging and difficult.

Griffith: On the idea of tracking and auditing, do any of you have a thought on how taxing bodies, including the IRS, are going to monitor and audit the correct allocation of profits across jurisdictions? This seems to me to be a great challenge, and it's certainly one that the U.S. states have struggled with over the years.

Harter: Well, that is a fundamental pillar 1 challenge, and that is why the prior certainty procedures are so important and also why — at least in my view — it was very important and significant to limit the number of enterprises subject to pillar 1 and amount A under pillar 1 to a relatively small number, 80 to 100 or so, because this will not be easy, there are huge technical challenges. I think if we're dealing with 80 or 100 companies that are big, sophisticated companies and we've got a prior certainty regime that will have to be something analogous to a global [advance pricing agreement] trying to apply these new rules, it's just conceivable that it could be made to work. If we were talking 1,000 companies, it would strike me as hopeless.

Herzfeld: Yeah, and you posed a question about the IRS, Cara, but the IRS has way more resources than most countries tax administrations, and so, however challenging it would be for the IRS to apply rules like this, but I think you ultimately end up with the IRS being the tax administrator for the world, because how else are other countries going to?

Harter: Yeah, no, the IRS does feel it would be bearing the burden of this because somewhat over a half of those 80 or 100 companies would be U.S. multinationals, and the IRS would be the lead administrator in terms of the prior certainty procedures, so they would have their hands full, even with 45 of these certainty procedures or functional equivalents of global APAs happening simultaneously.

Griffith: Yeah, undoubtedly.

Williams: I think that's true. I think Chip's right, it's an enormous advantage if you start with only 100 groups, it's then a further advantage that probably 95 percent of those groups are based in less than two handfuls of countries.

Harter: Yup.

Williams: It seems to me, if you wanted to set up a system where you started, it’s not going to be easy, but if you started with the most straightforward bit, a relatively small number of a relatively well-resourced tax administrations dealing with a quite small number of large and resourceful taxpayers, you are maximizing your chances. And equally, if it was just the IRS or HMRC in the U.K. operating a black box where you know at the end of a year there was a sort of printout, each country got dollars X or dollars Y, being of course that would be quite suspicious. But I think Chip's right, it is going to be much more like a global APA. There will be quite large numbers of countries with seats at the table, which I think reduces the grounds for suspicion that the numbers can be manipulated in any way.

Harter: Yeah, and what's vital is that there's a mechanism to force this to a binding resolution once these panels have a chance to consider it, that there is some way to force this to a prompt resolution that's binding on everyone. And I'll be very interested to see exactly how those procedures are ultimately worked out.

Griffith: So, another question from the audience was: What if pillar 2 is implemented earlier than pillar 1? And wouldn't that create more inequities between developed and developing countries?

Herzfeld: I think Mike knows more about that than I do, but they've pretty much already said that pillar 2 was on a different timeframe than pillar 1, they don't even have, they're not planning on issuing a tax or draft tax for a multilateral treaty until spring of next year. Is that right, Mike?

Williams: Yeah. That's right. But on the other hand, we haven't got a complete specified equivalent of pillar 2 yet either, so if you're positing October, November this year versus spring next year, there isn't a big substantial difference in that for something as big as this, especially given that the coverage of pillar 2 will be greater than the coverage of pillar 1 anyway.

Herzfeld: Yeah, I think, pillar 1 is necessarily behind pillar 2 because it involves a treaty ratification process that I think pillar 2 couldn't be done through domestic legislation. But I think that raises, Mike's always tied pillar 1 and pillar 2 together, and so that raises the question of how you're sure that a country will implement pillar 1, and why would you go ahead with pillar 2 if pillar 1 is on a timeline.

Williams: Yeah, but I feel that then also links to DSTs then. We've always been clear enough to agree on pillar 1 and pillar 2. Equally then within pillar 1, if pillar 1 isn't implemented then countries like the U.K. with DSTs will not abolish their DSTs, so there are quite good incentives in both pillars 1 and 2. I think to sort of say, "Oh, you've got to implement them at precisely the same time," just then makes it so much more difficult, and maybe you're almost saying that you'll not implement either, but then you get back to a system that's not very stable.

Griffith: So, to get a little bit more into the weeds, one of the questions was: How will the OECD treatment of loss carryovers address deferred tax assets under separate tax regimes in participating countries? Mindy, you're smiling and Chip, you're smiling. So. . . .

Harter: That one's for Mike because [crosstalk] he's watching the sausages being made on this one while we're . . .

Herzfeld: I wish I knew.

Harter: While we're guessing, so that question’s for Mike.

Herzfeld: Yes Mike. How will the OECD?

Williams: It's an issue that needs to be addressed as part of implementation, and I think the key point is an awful lot of work is being done on that already. And I think there are . . . the important thing is, how much weight do you place on deferred tax accounting? Can you really do that across the piece? And if not, does it make sense in some industries where you get particularly wide swings in profitability to focus more on the deferred tax accounting? You, just the balance between that relying on the loss carryforward, change from industry to industry. I mean, it's not that it needs to be worked through in terms of the details, but that work is underway, and certainly the OECD's working quite actively on it, and obviously, we have to write answers to them.

Herzfeld: Yeah, I'll just state here kudos to the Ways and Means draft, that actually makes an attempt to deal with the question of loss carried forward which neither the administration Green Book or the Senate Finance outline tried to do.

Harter: Though I would observe it's less complete relief with respect to timing differences, than what's in the pillar 2 blueprint, and that it doesn't have essentially an excess capacity carryforward, and so it . . . I would hope some additional work could be done in terms of those rules in Ways and Means and Senate finance in terms of addressing timing differences.

Williams: I think there's a big difference between countries' attitudes to this as well, if you look in their tax regimes. The U.K., many of our reliefs you can carry forward indefinitely. Whereas some countries say that you use them within four years or six years, or they go. Whether they really go or whether you encourage things like loss refreshment arrangements, isn't clear. But again, within the OECD with the 139, 140 countries involved, we've got to find a way that sort of squares those different preferences. And, of course, that's not easy, I know.

Herzfeld: It's going to be done in a couple of weeks, right?

Williams: I don't think we ever claimed that we would choose between loss carryforward and deferred tax in a couple of weeks when . . .

Cara Griffith: Everything can be done super fast, and that will be awesome.

Mindy Herzfeld: But I think Cara, that's one of the hardest issues. In addition to your question about tax incentives. I think the question of losses is one of the hardest ones in a country-by-country regime. GILTI punted on it by allowing for blending, but you can't ignore it when you go to a country-by-country basis.

Griffith: That's right. So, one question I have that is more U.S.-centric, so we've got a proposal on the table right now to increase the U.S. corporate tax rate. Is that going to have any impact on implementation of a global minimum tax on GILTI? What do you see is, if there's any tie-in between all of it?

Harter: Well, I do think a higher U.S. tax rate and a correspondingly higher GILTI rate, will make it abundantly clear that the GILTI is at least as onerous as the pillar 2 regime. And I would hope that that makes it abundantly clear that the GILTI should be treated as a qualified income inclusion regime with respect to pillar 2. And, basically, increasing a corporate tax rate in the U.S. would again, increase the differential between that higher corporate tax rate and whatever the minimum rate decided on in pillar 2 is, and therefore increase the incentives to engage in various tax arbitrages and tax structuring. So, there is a yin and a yang to all of this, but we'll see where we end up.

Herzfeld: If you think of these pillar 2 as trying to prevent profit shifting increasing the differential between the U.S. rate and other countries. That works in the opposite direction.

Griffith: Yeah.

Herzfeld: And, there I’ll give a shout out to a study by Penn . . . University of Pennsylvania Wharton, that showed that, increase in U.S. profits after TCJA was passed, not clear which is the stronger effect there, the enactment of GILTI or the reduction in the U.S. rate. And so, but they both have some kind of effect in how they play off each other, that's for certain.

Griffith: Yeah. Well, with our last, just about two minutes, I'll ask one final question. This came from the audience as well. If China, Singapore and other Asian heavyweights were not to implement global minimum tax with this, would its objectives be seriously undermined? And would this put U.S. firms or European firms for that matter at a competitive disadvantage?

Williams: I think they will implement, Cara, I don't see why they've been sitting at the table bargaining so hard if they've got no real intention to implement. It seems to me that that is a signal that they are intending to implement.

Harter: Yeah. And I would observe that there are highly coercive features, including the under-tax payment rule and that . . . and including things like the U.S. [Stopping Harmful Inversions and Ending Low-Tax Developments] proposals. So that there is an incentive for a country to adopt pillar 2 and adopt an income inclusion regime to avoid having these potentially harsher and blunter instruments apply to their multinationals.

Herzfeld: Right. I think the Western world should not be too glib about China's signing up to something that, it's not clear that we know how to ensure their full compliance with.

Griffith: Well, it is going to be interesting to watch it all play out. And if we had another hour, we have plenty more questions that we could certainly bat around, but I want to thank the three of you for taking the time today and having the discussion. It was very interesting, I learned a lot, and I know that all of our viewers did as well. So I want to thank you. And I hope that everyone enjoyed this, and we will see you next time. Have a great day.

Copy RID