The OECD’s recent Pillar 2 global minimum tax blueprint anticipates the Pillar 2 global minimum tax would “co-exist” with the US Global Intangible Low Taxed Income (GILTI) minimum tax. US MNEs would be subject to the GILTI while non-US MNEs would be subject to the Pillar 2 minimum tax. The term “GILTI co-existence” brings to mind the term: “guilty conscience”: a bad feeling caused by knowing or thinking that one has done something bad or wrong.
Although the Pillar 2 blueprint and the US GILTI have similarities, there are important differences that have both potentially bad economic and political implications.
The US GILTI is a 10.5% (13.125% after 2025) minimum tax on US corporations’ foreign income. The most important difference between the US GILTI and the OECD Pillar 2 blueprint is the GILTI is calculated on a global-blending basis, while the OECD Pillar 2 blueprint is calculated on a jurisdiction-by-jurisdiction basis. The US GILTI allows MNEs to earn low-tax-rate income from tax havens combined with higher-tax-rate income from other countries to avoid the GILTI minimum tax. Non-US MNEs could not benefit from low-taxed income from tax havens.
A global-blending minimum tax is less strict, given the same minimum tax rate and other features, than a jurisdiction-by-jurisdiction minimum tax. If US MNEs are allowed a less strict minimum tax, it is likely that other countries will want to help their headquartered MNEs with a similarly less strict minimum tax. The Pillar 2 blueprint is not likely to be politically stable with a combination of two different approaches.
The OECD economic impact assessment’s revenue estimate of Pillar 2 applies the blueprint approach to all non-US countries, then adds the US Joint Committee on Taxation’s estimated revenue from the US GILTI. Given OECD’s available data, it would be beneficial if the OECD estimated Pillar 2 applying the blueprint approach to all MNEs, but then showed the loss of revenue from allowing US MNEs to benefit from global blending.
The OECD data and modeling also would be of interest in showing the difference between a global-blending vs. jurisdiction-by-jurisdiction approach for US MNEs, since Presidential-candidate, Joe Biden, has proposed calculating the GILTI on a jurisdiction-by-jurisdiction basis, in addition to increasing both the US general corporate and GILTI tax rates.
Given the potential for other countries to want their MNEs to have the same global-blending treatment as US MNEs, an additional scenario the OECD should present is the revenue estimate for a universal global-blending scenario. A similar amount of revenue could be raised with a higher global-blending minimum tax rate.
Jurisdiction-by-jurisdiction minimum taxes would discourage tax havens from keeping their low tax rates, since MNEs would not benefit from a lower rate on any economic activity or profit shifting to those countries. With global blending, US MNEs would find some profit shifting to tax havens still attractive to the extent it could be offset by higher taxed income. Some tax havens would find it attractive to keep their low tax rates to attract US MNE profit shifting. Thus, global blending defeats much of the purpose of the Pillar 2 global minimum tax as a backstop against continued profit shifting, and thus would have lower expected revenue gains and less improvement in investment allocations from reduced profit shifting.
Although the OECD used aggregated country effective tax rates for their calculation of the Pillar 2 revenue gain, they have public financial statement data for over 27,000 MNE groups. That data could be used to estimate the revenue effects of the Pillar 2 blueprint with global blending for a list of the top 100 MNEs. Additional transparency for the proposal’s effect on the largest MNEs would help policymakers understand the types of MNE groups most affected by the proposal.
Tom Neubig