October 8, 2021
Report on recent US international tax developments – 8 October 2021
The Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on 8 October announced that they had reached agreement on a two-pillar solution to address the tax challenges arising from the digitalization of the economy. The agreed minimum tax rate under Pillar Two is set at 15%. The Organisation for Economic Co-operation and Development (OECD) issued a press release on the announcement, in which it said: “The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.” The press release states that Ireland, Hungary, and Estonia joined the agreement.
The two-pillar solution agreement will be delivered to the G20 Finance Ministers meeting that will take place on 13 October in Washington. It will then be presented to the G20 Leaders’ Summit in Rome at the end of October. An EY Global Tax Alert on this critical development will be issued shortly.
On the United States (US) congressional front, Democrats’ dispute over the size of the Build Back Better budget reconciliation bill continued this week with new discussions on the total cost, what provisions in the US$3.5 trillion1-plus House reconciliation bill should be reduced or cut entirely, or whether the scope should remain broad but with shorter duration and limited benefits. Senator Joe Manchin originally set a $1.5 trillion ceiling on a reconciliation bill last week, and this week reiterated that price tag to the consternation of progressives.
The press is reporting the widely-held view that budget reconciliation talks could spill into December, when Congress will again be confronting the expiration of government funding (3 December) and some tax provisions at year’s end.
The budget reconciliation debate also continues to hold up enactment of the Bipartisan Infrastructure Framework. House Speaker Nancy Pelosi has set another self-imposed deadline for action on the bill by 31 October, the new expiration of the highway authorization.
The Senate on 7 October passed a $480 billion increase in the federal debt limit to allow Treasury to meet the nation’s obligations into at least early December, setting up another must-act date on the issue within the range of the expiration of government funding on 3 December, as noted above. The House will take up the increase in the federal debt limit next week.
Republicans expect Democrats to need the reconciliation process to ultimately address the debt limit on a long-term basis. Senate Democrats have not yet embraced that approach, but if they do it would not impact the proposed budget reconciliation bill currently awaiting a House-Senate agreement over a topline spending number.
Returning to the OECD, the organization recently published two opinions of the Conference of the Parties of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The opinions seek to address questions arising as to the interpretation or implementation of the MLI to ensure its proper interpretation and application.
The first opinion addresses the application of the MLI provisions on the Mutual Agreement Procedure (MAP) where questions were raised on the compatibility of existing treaty rules with those provisions. The second opinion addresses the application of the entry into effect of Part VI (Arbitration) and seeks to clarify when the provisions of Part VI will apply to existing cases in specific situations. See EY Global Tax Alert, OECD: Conference of the Parties of the MLI issues two opinions with respect to MAP implementation and the entry into effect of arbitration rules, dated 7 October 2021 for details.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC