US Senate agreement ensures minimum tax rate

While the UK will see tax cuts regardless of who replaces Prime Minister Boris Johnson, the US Senate this week reached a historic agreement to secure a corporate minimum tax rate.

On Wednesday, July 27, Senators Joe Manchin and Chuck Schumer reached an agreement on US minimum taxation, breaking the impasse over long-debated items on President Biden's international tax agenda.


Manchin agreed to the Build Back Better bill's revision under the Inflation Reduction Act of 2022, despite his opposition to it two weeks prior. It includes the streamlined US version of the OECD's international tax regulations known as the corporate alternative minimum tax (CAMT).


Technically, the CAMT is a 15% tax on consolidated corporate profits, but it deviates from the OECD's global framework, which calls for country-by-country taxation. The OECD may or may not accept the CAMT as a component of pillar two, according to advisors, who assert that "the devil is in the details".

In order to better fit with the OECD's global framework, the US minimum tax on foreign earnings, known as the global intangible low-tax income (GILTI) rate, must coexist with the CAMT.


The OECD's income inclusion rule (IIR), which imposes a top-up tax when a foreign company pays less than the minimum rate, should grandfather GILTI, according to tax experts.


According to Daniel Bunn, executive vice president of the Tax Foundation in Washington, DC, "GILTI changes are not part of the reconciliation package yet since Manchin only wants changes after the rest of the world has started implementing, so we are somewhat in the same position as before."


He continues, "If other countries implement the OECD’s model rules, then Biden’s proposal would be a significantly more burdensome policy for businesses than what other countries might adopt."


After GILTI is implemented, the CAMT is assessed, and credits are available to address double taxation problems resulting from the implementation of pillar 2 in other nations. The minimum tax will be charged when the CAMT liability is greater than the corporate income tax liability in the US under standard rules.


Contrary to the OECD's suggested framework, the CAMT permits the blending of profits and taxes across international borders. However, the CAMT would shield US corporate profits from minimum taxes in other nations if it is recognized by the OECD as an IIR under its pillar two model rules.


Regardless of the specifics of the legislation, Manchin's support is noteworthy because he had earlier in July opposed the tax provisions in the BBB bill. The action appeared to end all chances of passing pillar two legislation.


Before reaching Biden's desk, the Manchin-Schumer agreement must still be approved by the House of Representatives, but the legislation has a chance of becoming a law as early as August.


Lower taxes are a campaign promise shared by both Conservative candidates running to be the next UK prime minister, but they differ on timing and specifics.


If he wins the election in September, former chancellor Rishi Sunak has stated that he intends to temporarily abolish the value-added tax (VAT) on household energy bills. The estimated annual cost of this plan to the UK Treasury is £4 billion ($4.8 billion).


While this is going on, his rival, Foreign Secretary Liz Truss, has vowed to roll back the tax increases Sunak oversaw while in office. Sunak has, up until now, argued that tax cuts should come after dealing with inflation, which is the main distinction.


Even if it results in a significant deficit, Truss has consistently argued that tax cuts are the best way to stimulate economic growth. She has promised to abandon the plan to increase corporation tax from 19 percent to 25 percent by 2024 and roll back the 1.25 percent national insurance increase.


Additionally, Truss has vowed to halt the windfall tax that was enacted to recoup "excessive" profits from the oil and gas sector. More than £30 billion a year would be spent by the Treasury on these changes.


Both candidates are attempting to convince party members that their fiscal agenda will yield the greatest benefits as they compete to win the Conservative leadership election.


The resignation of Prime Minister Boris Johnson was announced earlier this month.

By fLEXI tEAM