May 21, 2021
Report on recent US international tax developments – 21 May 2021
The United States (US) Senate Finance Committee on 18 May held a hearing on “Funding and Financing Options to Bolster American Infrastructure.” The hearing served to highlight the major differences between Democrats and Republicans both as to the scope and how to pay for an infrastructure package. Finance Committee Chairman Ron Wyden repeated the Democratic position that the cost should be paid for by corporate tax increases and that corporations should pay their “fair share” for use of the nation’s infrastructure. Ranking Member Mike Crapo – a member of the group of Republican Senators seeking an infrastructure compromise with President Joe Biden – said: “Consideration of offsetting the cost of infrastructure with a corporate tax rate increase or increases in international taxes, especially coming out of the largest negative shock to the economy on record, is counterproductive and a non-starter on my side of the aisle,” and Congress should consider user fees.
Treasury Secretary Janet Yellen this week also re-upped the Administration’s call for corporate tax hikes to pay for infrastructure, saying, “We believe the corporate sector can contribute to this effort by bearing its fair share … At the same time, we want to eliminate incentives that reward corporations for moving their operations overseas and shifting profits to low-tax countries.”
US Treasury officials and members of the Steering Group of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Inclusive Framework met for two days this week in Washington DC, during which the US Government proposed that the global corporate minimum tax rate (Pillar Two) should be at least 15%. According to a Treasury read out of the meetings, Treasury underscored that the 15% rate was a floor and that “discussions should continue to be ambitious and push that rate higher.” Treasury officials were “heartened” by the positive reception they received at the meeting regarding their global minimum tax proposal.
According to Treasury, it is “imperative to work multilaterally to end the pressures of corporate tax competition and corporate tax base erosion.” The “race to the bottom” in regard to corporate tax rates has undermined the ability of the US and other countries to raise the necessary revenue for critical investments, the Treasury statement read. Treasury contends that a global corporate minimum tax would “ensure the global economy thrives based on a more level playing field in the taxation of multinational corporations,” resulting in greater innovation, growth and prosperity.
Speaking at a recent American Bar Association Section of Taxation virtual meeting, an Internal Revenue Service (IRS) official discussed issues with regard to the application of the derivative benefits test post-Brexit. Some US tax treaties include a derivative benefits test in the Limitation on Benefits (LOB) Article, which evaluates, in part, whether the owners of the treaty claimant may be considered an equivalent beneficiary. Following Brexit, as the United Kingdom (UK) is no longer part of the European Union, UK companies may no longer qualify for equivalent beneficiary status. The panel discussed ways to address the issue and the IRS official noted that from Treasury's perspective and [that of] IRS, other concerned countries are encouraged to contact Treasury about modernizing their LOB provisions. “It is probably the more cumbersome of the options, but from our perspective, it's probably the most structurally sound and viable long-term solution,” he said.
The panel also discussed requesting competent authority relief on a case-by-case basis in these circumstances, noting that the approach may be time-consuming and there is no guarantee that the IRS will grant the taxpayer’s request. Another possibility discussed was whether the US could enter into a bilateral competent authority agreement; the panel noted that this approach would test Treasury’s authority to overrule the text of a ratified tax treaty and also could have certain political implications.
The Conference of the Parties to the OECD Multilateral Instrument (MLI) recently approved an opinion that provides guidance on the interpretation and implementation of the MLI. The OECD reports that the MLI now currently covers 95 jurisdictions and has been ratified by 65 jurisdictions. The published opinions of the Conference of the Parties to the MLI are also available.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC