Republicans Strike Back at Global Minimum Tax

The global minimum tax, otherwise known as Pillar 2, is the most under-reported on change in global economics in the last few years. While only applying to extremely large corporations for now and at a low minimum level of 15% with some qualifying deductions, it is on schedule to come into effect THIS YEAR in 2025. If successful, it is a crucial first step to establish a model where the race to the bottom can be ended for corporate taxation. The end to the trade-off between tax revenue and capital flight may be here finally.

To cut to the chase, let me address skepticism of the form

“That’s a great idea, but what if everyone doesn’t agree? Wouldn’t this only apply to countries that want to have higher taxes anyway? How could this do anything to deal with the problem of tax competition?”

While this thought is natural, hopefully your second thought should be

“The countries adopting the global minimum tax are not idiots and what was an immediate objection in my head probably was not overlooked by the combined wisdom of policymakers around the world.”

For a full break-down of the theory, mechanics, and history of the global minimum tax, you can read my prior piece The Global Minimum Tax is Awesome. For this piece, I will only focus on the UTPR or Under-Taxed Payment Rule because that is the most critical and novel aspect of the global minimum tax and what is targeted by Republicans as part of the Big Beautiful Bill passed recently in the House of Representatives.

The Under-Taxed Payment Rule is not called the Under-Taxed Payment Tax because it is meant as a penalty and in an ideal world would collect no revenue. For countries adopting the UTPR, an assessment by the international economic body OECD is made of whether the 15% minimum tax has been collected and if it has not, then the remainder is designated for collection. Each country that has adopted the UTPR will levy a tax penalty so that in total the corporation will have paid the minimum tax.

While if an individual country were to adopt a penalty like the UTPR to penalize tax havens across the world, it may result in many corporations avoiding operating in the country at all to avoid it, the UTPR has been adopted very widely in the world so corporations face a much more one-sided choice. Yes, you can avoid the UTPR but only if you choose to not operate in a large share of major economies around the world. By withdrawing from any single country that has adopted the UTPR, the penalty from the remaining countries with the UTPR will increase proportionally and you will see no tax advantage. It is an all or nothing choice of facing the tax or withdrawing from participation in much of the world economy.

The game-theory of the UTPR is that it creates every incentive for countries to collect the corporate tax revenue they are owed. In the past, a country would choose between higher corporate tax revenue and being an attractive destination of investment. With the UTPR, the tax revenue will be collected from corporations operating in your country whether you collect it or not, so suddenly there is every incentive to claw back the revenue that would be collected abroad by the UTPR.

The Republican Party has taken the mask off of objecting to corporate taxes because of the fear of tax competition abroad in their stance against the global minimum tax. Their opposition to corporate taxes is squarely rooted in being on the side that corporations simply should not have to pay taxes. The framing they are giving to this objection is an opposition to extra-territorial taxation.

In their Big Beautiful Bill, they have included provisions to retaliate against countries that have adopted the UTPR. This retaliation includes a plan to raise the taxes on dividends from U.S. corporations to foreign holding companies and income from foreign corporations operating in the United States (effectively connected income) by 5% per year for foreign corporations based in countries that have adopted the UTPR, along with other taxes Republicans dislike like the digital services tax.

If escalation of this type were to be taken far enough, it could chill foreign investment in the United States. However, it is worth noting that it applies incredibly widely to foreign investment in the United States. The Tax Foundation recently estimated that over 80% of all foreign investment in the United States would be impacted by these measures, giving one indication of how much of the world economy is united in adopting the global minimum tax.

What is amusing about the Republican response to the UTPR is, in effect, they are doing exactly what the UTPR is attempting to accomplish. The Under-Taxed Payment Rule is not intended to be a long term tax, but instead to ensure that the tax is collected. Let us play through what will happen based on the Republican proposal.

In Australia, they will collect UTPR from American corporations. America responds by raising taxes on Australian corporations doing business in the United States. Australia will allow their corporations to apply this foreign tax as a tax credit against the tax they owe to the Australian government. In effect, this is a massively indirect way for the United States to claw back the UTPR taxes collected by Australia, which is what the UTPR intends to encourage.

It would be more straight forward to just adopt the global minimum tax framework ourselves and avoid the need for Australia to go to the trouble of collecting the global minimum tax through the UTPR, but the result will be similar. Republicans seem to not understand that the UTPR is not intended to be an extra-territorial tax. It is intended only to remove the incentive of corporations to operate in tax havens by having someone collect the tax revenue, preferably in the country where the corporation is earning its income.

Oh no, to combat the UTPR, Republicans are raising taxes on foreign corporations!!!