On the first day of Trump’s second term, the U.S. government withdrew from the OECD global tax agreement. This withdrawal signaled a shift toward ‘America First’ policies over globalization. Although less straightforward than his recent tariff policies, this move is equally significant.
The U.S. government didn’t fully withdraw from OECD’s global tax agreement. It “convinced” the other countries that GILTI is just as good as Pillar 2. This article will briefly explain some basic concepts involved and elaborate on why this is a huge win for the U.S.
The OECD member countries drafted a ‘Two-Pillar Solution’ to battle profit-shifting in the era of digital economy.
Pillar 1: Taxing Rights
Pillar 2: Global Minimum Tax
For example, consider Youtube: where is its profit generated — where viewers are located? or where servers are held? or where videos are uploaded? or where they are filmed? or where they are edited?
Many companies, especially in the IT field, transferred substantial intellectual property to their subsidiaries in low-tax jurisdictions. As other subsidiaries paid royalties to the subsidiaries subject to lower tax rates, it lowered their profits in high-tax regions and increased their profits in low-tax regions.
The idea of Pillar 2 (Global Minimum Tax) is, when multinational companies make such profit-shifting, tax authorities will impose “minimum tax” to make sure these companies are subject to the minimum tax rate of 15%.
I’d say the assessment as to whether these royalties are “fair amounts” is in the scope of transfer pricing, which may vary significantly in each industry. The Pillar 2 aims to impose “minimum tax” to make sure multinational companies do not benefit from profit-shifting.
Please forgive my poor illustration. Transfer pricing focuses on allocating income between countries rather than allocating tax rate. I simplified the two concepts to clarify the distinction.
There is an analysis claiming that about 40% of “target income” for Pillar 2 is generated from U.S. companies. If that were true, U.S. companies would pay more tax to foreign countries than what the IRS collects from non-U.S. companies.