Global tax code endangers US sovereignty, businesses

Americans are concerned as much as ever about consumer prices and their ability to afford goods and services with their paychecks. One policy that would certainly not help would be to encourage foreign countries’ governments to place additional taxes on U.S. corporations, including on profits earned in the U.S., which global bureaucrats claim are not taxed heavily enough by Congress at home.

Corporations pass a large share of tax increases along to workers through their compensation and to consumers through higher prices. So workers and consumers would surely feel the hit.

But is anyone seriously proposing that we allow foreign governments to place excess taxes on U.S. corporations that are supposedly “undertaxed” according to a new global tax code that is largely out of U.S. control? Not only is it being seriously proposed, but it’s already happening, and with the active encouragement of the Biden administration.

Until recently, this was a project of the Organization for Economic Co-operation and Development, a multilateral organization of developed countries that receives funding from member countries, including the U.S. But now the United Nations is getting into the game of pushing for a global tax cartel that would discriminate against U.S. companies. The UN’s version is potentially even worse than the OECD’s, because its measures can be decided by a majority, not by consensus agreement.

A simple majority of UN countries could potentially vote to turn global tax agreements upside down, to the detriment of U.S. companies. Such standards would violate various agreements, which protect against many types of extraterritorial and discriminatory taxation. But the agreements are not self-enforcing.

How did we get here? The OECD transformed its mission of publishing data and encouraging economic development into prevention of corporate tax avoidance. And then what began as a project to combat tax shelters turned into a project to create a global tax code to the detriment of the U.S. Treasury and U.S. companies, and by direct extension to their workers and consumers.

Indeed, once other countries in the OECD realized that American companies were among the most profitable in the world, they developed agreements at the OECD that would not only limit shifting of profits to tax havens like the Cayman Islands but also allow countries, especially western European countries that dominate the OECD, to tap into the U.S. corporate tax base.

These policies included a reallocation of taxing rights to be more closely related to the location where a company sells its goods and services (as opposed to where the company’s business operations are located), and a global minimum tax, designed so that companies headquartered in countries that don’t tax their companies “enough” could be taxed by all the other countries in the agreement. The OECD tax regime would also encourage countries to circumvent the rules with various carveouts for politically favored activities, a particularly harmful feature.

Has the U.S. actually agreed to this? The Trump administration was concerned about various unilateral discriminatory taxes other countries were imposing on U.S. companies. It feared just saying “no” to countries violating existing agreements in order to coerce concessions out of the U.S. would result in a trade war. And so it instead engaged in prolonged negotiations, leading to a form of global minimum tax that largely exempted the U.S. as a practical matter. But the Biden administration has since changed the project to try to force Congress to raise taxes on U.S. companies by threatening to have other countries do so if Congress refuses.

While many countries are already raising taxes on American companies under the OECD project, some other aspects of the project have broken down. Seeing that the Biden administration was willing to allow other countries to seize the U.S. tax base, some countries decided to shift the process to the UN, which is even more hostile to U.S. interests.

But from the beginning it was practically inevitable the OECD process would cause the UN to become involved. The OECD in 2016 expanded its reach beyond the traditionally-defined developed countries by creating a so-called "Inclusive Framework" with membership of 150 countries including China. But the non-OECD members naturally wanted their own interests to be more strongly represented, as they are in the UN.

It’s bad enough that China could benefit from OECD rules that give it the power to tax supposedly undertaxed U.S. companies, while effectively exempting many Chinese companies. The UN process, however, would put China much closer to the driver’s seat, actively making decisions on the design and implementation of such policies, in a major blow to U.S. sovereignty.

What is the alternative? Bilateral treaties are superior because they can take into account the needs of each of the two countries in a manner that a multilateral treaty cannot. Yet the Biden administration terminated the U.S.-Hungary Tax Treaty in retaliation for Hungary expressing concerns about the OECD process. Instead, the U.S. should be expanding its network of bilateral treaties (now at just 66) in a manner that promotes American sovereignty.

The U.S. should also insist other countries abide by their tax and trade obligations to us. Increasing tax rates on business activities through multilateral processes and global mandates while incentivizing loopholes encourages inefficiency and corruption, and will harm workers and consumers. More fundamentally, a global tax code robs citizens of each country of the fundamental sovereign right to make their own laws.

The U.S. should vehemently oppose other countries imposing discriminatory and extraterritorial taxes against American companies and workers, including through an OECD or UN global tax code.

Aharon Friedman formerly served as senior adviser and senior tax counsel at the Treasury Department and the Committee on Ways and Means. Joshua Rauh is the Ormond Family professor of finance at Stanford’s Graduate School of Business and a senior fellow at the Hoover Institution.