WASHINGTON — In June, months after reluctantly signing a global tax deal brokered by the United States, Ireland’s finance minister met privately with Treasury Secretary Janet L. Yellen, seeking assurances that the Biden administration would live up to its end of the bargain. .
Ms. Yellen assured Secretary Paschal Donohoe that the administration would be able to secure enough votes in Congress to ensure that the United States abides by the pact, which aims to crack down on companies that evade taxes by shifting jobs and profits around the world.
It turns out that Ms. Yellen was overly optimistic. Late last week, Sen. Joe Manchin III, D-West Virginia, effectively scuttled the Biden administration’s tax agenda in Congress — at least for now — by saying he could not immediately support a climate, energy and tax package that passed months in negotiations with Democratic leadership. He expressed deep concerns about the international tax deal, which he previously indicated he might support, saying it would put American companies at a disadvantage.
“I said we’re not going to go down that road overseas right now because other countries aren’t going to follow it and we’re going to put all our international companies at risk, which hurts the American economy,” Mr. Manchin told a West Virginia radio station in Friday. “So we took that off the table.”
Mr. Manchin’s address, couched in language used by Republican opponents of the deal, was a blow to Ms. Yellen, who spent months wooing more than 130 countries. It’s also a defeat for President Biden and Senate Democratic leaders, who have pushed hard to raise tax rates for many multinational corporations in hopes of leading the world in an effort to stop companies from shifting jobs and income to minimize their tax bills. .
The agreement would have ushered in the most sweeping changes to global taxation in decades, including raising taxes on very large corporations and changing the way technology companies are taxed. A two-pronged approach would see countries introduce a 15 percent minimum tax so that companies pay a rate of at least that much on their global profits regardless of where they set up shop. It would also allow governments to tax the world’s largest and most profitable companies based on where their goods and services were sold, not where their headquarters were.
Failure to reach an agreement at home creates a mess for both the Biden administration and multinational corporations. Many other countries are likely to push to ratify the deal, but some may now be encouraged to hold out, fracturing the coalition and potentially opening the door for some countries to continue touting themselves as corporate tax havens.
For now, the situation will allow the continued aggressive use of global tax avoidance strategies by companies such as pharmaceutical giant AbbVie. A report by the Senate Finance Committee this month found that the company made three-quarters of its sales to American customers in 2020 but reported only 1 percent of its revenue in the United States for tax purposes, a move that allowed it to reduce its effective tax rate to about half the 21 percent U.S. corporate income tax rate.
Keeping international tax laws unchanged could also create new uncertainty for big tech companies like Google and Amazon and other businesses that make money from consumers in countries where they don’t have many employees or physical offices. Part of the global agreement was intended to give these companies more certainty about which countries could tax them and how much they would have to pay.
America’s refusal to participate would be a significant setback for Ms. Yellen, whose role in brokering the deal is seen as her diplomatic achievement. For months last year, she lobbied nations around the world, from Ireland to India, on the merits of the tax deal, only to see her own political party refuse to heed her calls to join.
After Mr. Manchin’s comments, the Treasury Department said it was not abandoning the deal.
“The United States remains committed to finalizing a global minimum tax,” Treasury Department spokesman Michael Kikukawa said in a statement. “It is too important to our economic strength and competitiveness not to finalize this agreement, and we will continue to look for all possible ways to achieve it.”
Jared Bernstein, a member of Mr. Biden’s Council of Economic Advisers, told reporters at the White House on Monday that Mr. Biden “remains fully committed” to participating in a global tax deal.
Find out what happened to Biden’s domestic agenda
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“Build Better.” Before being elected president in 2020, Joseph R. Biden Jr. framed his ambitious vision for his administration under the motto “Build Better,” pledging to invest in clean energy and ensure that procurement spending goes to American-made products.
A two-part agenda. March and April 2021: President Biden unveiled two plans that together form the core of his domestic agenda: the American Jobs Plan, which focuses on infrastructure, and the American Plan for Families, which includes various social policy initiatives.
Law on investment in infrastructure and employment. November 15, 2021: President Biden signs a $1 trillion infrastructure bill, the result of months of negotiations. The president hailed the package, a stripped-down version of what was outlined in the American Jobs Plan, as proof that American lawmakers can still work across party lines.
“Any rumors of his death are extremely premature,” Mr. Bernstein said.
The US path to approving the global pact has faced challenges from the start, given Republican opposition to parts of the plan and Democrats’ tenuous control of the Senate.
To implement the agreement, the United States would have to raise the tax rate companies pay on their foreign profits to 15 percent from 10.5 percent. Congress would also have to change the way the tax is applied, imposing it on a state-by-state basis, so that companies can’t lower their tax bills simply by seeking tax havens and “mixing” their tax rates.
The Biden administration had hoped to enact those changes through its stalled “Building Better” legislation, or a smaller spending bill that Democrats hoped would push through a budget process that would not require Republican support.
“Secretary Yellen and her team have always maintained that they would be able to deliver the changes they needed,” Mr. Donohoe said in an interview in June. “Secretary Yellen made the case again for all the work they are undertaking to try to secure the votes they need to make this change in the House and Senate.”
Congress would also have to revise tax treaties to give other nations the power to tax large American multinationals based on where their products were sold. This legislation will require the support of Republicans who have shown no desire to vote for it.
US tech giants such as Google and Amazon have largely backed the proposed tax changes as a way to end a complex of European taxes on digital services introduced in recent years. If the agreement fails, they will face a new wave of uncertainty.
The entire project has been on shaky ground in recent months amid continued opposition in the European Union, delays over technical fine print and concerns over whether the United States will actually join. However, it remains possible that the European Union and other countries will still move forward with the agreement, leaving the United States as an awkward departure from a deal it revived last year.
“With or without the U.S., there really seems to be a very significant chance that this architecture will take hold,” said Manal Corwin, a Treasury official in the Obama administration who now heads the national tax practice in Washington at KPMG. “Once you get a few countries making those first moves, whether it’s the EU or some other critical mass, I think you’ll see others follow pretty quickly.”
That poses risks for U.S. companies, including the chance that their tax bills will rise, given an enforcement mechanism that the Treasury Department helped create to push reluctant parties into the deal. If the United States does not adopt a 15 percent minimum tax, U.S. companies with subsidiaries in participating countries may find themselves in a position to pay punitive taxes to these foreign governments.
“If Congress doesn’t pass, that doesn’t stop the European Union, Japan and others from moving forward in this area, at which point I think Congress will see that it’s in the U.S. interest to pass, because otherwise our companies will will also be affected by this principle of enforcement,” Kimberly Klausing, who recently left her job as deputy assistant secretary of the Treasury for tax analysis, said at a Tax Policy Center event last month.
Barbara Angus, head of global tax policy at Ernst & Young, said failure by the United States to comply with the deal would have “significant consequences” for American companies.
“For this framework to work as intended, there really needs to be consistency and coordination,” said Ms. Angus, who is also a former chief tax counsel on the House Ways and Means Committee.
The Treasury Department could not provide an estimate of how much additional taxes American companies would have to pay to foreign governments if the United States were to remain outside the global accord. If passed in full, the agreement is expected to raise about $200 billion in tax revenue for the United States over a decade.
Pascal Saint-Amands, director of the Center for Tax Policy and Administration at the Organization for Economic Co-operation and Development, said he thinks the European Union will find a way to move beyond…
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