Global Tax Accord: Economic Diplomacy or Imminent Sanctions?

In October 2021, Janet Yellen championed the Global Tax Accord (“GTA”), aimed at multinational corporations and tax avoidance, calling the occasion a “historic day for economic diplomacy.”[1] In August 2022, Congress passed the Inflation Reduction Act of 2022 (“IRA22”), which included a minimum tax. Though the IRA22’s minimum tax appears like the global minimum tax, the IRA22 minimum tax differs significantly from the GTA’s aspiration.[2] Combined with the United States’ treaty ratification process and midterm elections, the GTA’s demise may come before the GTA even begins.[3]

The GTA aims to end what Yellen calls “[t]he race to the bottom.”[4] Multinational corporations legally use a combination of tax mechanisms and policy (such as corporate inversions, transfer price accounting, or both) to shift taxable income from higher-tax to lower-tax jurisdictions. The impact of these mechanisms reduces the corporate tax burden resulting in corporations paying less taxes and governments worldwide collecting less revenue.[5] U.S. politicians—from both major parties—have expressed contempt for these tax mechanism tactics, suggesting these mechanisms are “disgusting” and “nothing less than a tax scam.”[6] Although global minimum tax critiques range from such policies having “structural deficiencies” to being overly complex, neither critique suggests the answer is nothing.[7] The global minimum tax concept and the GTA, therefore, results from governments recognizing the importance of collecting revenues and minimizing competition with other governments for tax dollars.

The GTA deployed two schemes targeted to meet goals for reducing tax dollar competition in the global market. Pillar One ties a multinational corporation’s tax jurisdiction to where the customer resides and not the company’s domicile. Pillar One responds directly to the European Union’s digital tax threat.[8] Pillar Two—a fifteen percent global minimum tax—shifts to financial statement income as opposed to tax adjusted income.[9] Because tax laws vary significantly by each jurisdiction (as tax laws often reflect policy goals), financial statement income provides more uniformity across jurisdictions for corporations. Although the global accounting standard, International Financial Reporting Standards, is not fully adopted across all countries, financial statements are converged enough that financial statement income creates a more uniform standard for income.[10] The uniform standard of financial statement income means that corporations cannot exploit loopholes or tax breaks, which appear standard across tax jurisdictions. This shift represents the main goal of GTA: closing loopholes such that corporations pay the perceived “fair share” tax burden.

Yet the IRA22 does not meet the Pillar Two standards because IRA22 does not use financial statement income.[11] With midterm elections around the corner, Congress appears unlikely to enact legislation converging towards the GTA standard. Further, as Yellen stated, U.S. corporations stand to lose out as other countries adopt the GTA, meaning that companies in the United States will pay less taxes within the United States, yet U.S. companies abroad will pay more in foreign jurisdictions, creating disproportionate tax burdens.[12] “Diplomatic enmity” may occur as U.S. corporations certainly will bear the brunt of the burden.[13]

Additionally, Pillar One is in trouble as the European Union considers broaching the topic of digital taxes, which Pillar One was designed to curtail.[14] Digital taxes are critical to the GTA because governments formerly relied on the concept physical nexus (relying on tangible products or other in-country presence), which jurisdictions used to tax corporations with domiciles outside of the physical nexus jurisdiction.[15] The nature of tech companies’ products—being intangible rather than tangible—shifts a government’s ability to claim physical nexus. Because Pillar One shifts revenue to where the customer resides, regardless of where the product resides, Pillar One overcomes the concept of physical nexus. The United States views the E.U. digital tax threat as a “specific attack on U.S. tech giants and consequently, an economic attack on the United States.”[16] Because the United States hosts more tech companies as domiciles, the United States stands to lose the most with a digital tax.[17] In previous responses to digital taxes, the United States used tariffs to counter those taxes.[18]

Pillar One faces significant headwinds in Congress because of its shift of revenue to where the customer resides. U.S. tech companies may pay more tax in jurisdictions outside of the United States without the United States receiving a reciprocal return from foreign companies’ customers who reside in the United States (due to the volume of tech companies outside of the United States by comparison). As Pillar Two also appears to remain stalled, a likely outcome, based on history, suggests that the United States and European Union may start a cycle of sanctions in the future to the ultimate detriment of the GTA.



[1] Paul Hannon & Kate Davidson, U.S. Wins International Backing for Global Minimum Tax, Wall St. J. (July 1, 2021, 2:50 PM), https://www.wsj.com/articles/u-s-wins-international-backing-for-global-minimum-tax-11625153698.

[2] Daniel Bunn, How Does Inflation Reduction Act Minimum Tax Compare to Global Minimum Tax, Tax Found. (Aug. 2, 2022), https://taxfoundation.org/inflation-reduction-act-minimum-tax.

[3] Colin Wilhelm, Biden Running Out of Options to Meet Global Tax Pact Promises, Bloomberg Tax (July 26, 2022, 2:46 AM), https://news.bloombergtax.com/daily-tax-report/biden-running-out-of-options-to-meet-global-tax-pact-promises.

[4] See Hannon & Davidson, supra note 1.

[5] Scott DeAngelis, If You Can’t Beat Them, Join Them: The U.S. Solution to the Issue of Corporation Inversions, 48 Vand. J. Transnat’l L. 1353, 1357 (2015).

[6] Inho Andrew Mun, Reinterpreting Corporate Inversions: Non-Tax Competitions and Frictions, 126 Yale L.J. 2152, 2172 (2017).

[7] Daniel Shaviro, What Are Minimum Taxes, and Why Might One Favor or Disfavor Them?, 40 Va. Tax Rev. 395, 451 (2021).

[8] Stephen Gardner, EU to Bring Back Digital Taxes If OECD Deal Flops, Official Says, Bloomberg Tax (June 23, 2022, 1:14 PM), https://news.bloombergtax.com/daily-tax-report-international/eu-to-bring-back-digital-taxes-if-oecd-deal-flops-official-says.

[9] Daniel Bunn & Sean Bray, What’s in the Global Tax Agreement?, Tax Found. (Apr. 7, 2022), https://taxfoundation.org/global-tax-agreement.

[10] Zehra G. Kavame Eroglu, Article: Global Adoptions of IFRS as an Example of International Financial Law Making, 53 Geo. Wash. Int’l L. Rev. 239, 242 (2021).

[11] See Bunn, supra note 2.

[12] Laura Davidson & Isabel Gottlieb, US Risks Losing Billions in Taxes as Congress Spurns Global Deal, Bloomberg Law (July 27, 2022, 3:00 AM), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/daily-tax-report-international/X52K4JHG000000.

[13] Inflation Reduction Act Becomes Law, BakerHostetler (Aug. 8, 2022), https://www.bakerlaw.com/Inflation-Reduction-Act-Becomes-Law.

[14] Stefano Giuliano, Pillars One and Two: How We Got Here and What May Happen Next, BL News (Aug. 5, 2022, 1:00 AM), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/X8FV6EA0000000.

[15] Connor L. Smith, Article: Reflections from the Brink of Tax Warfare: Developing Countries, Digital Services Taxes, and An Opportunity for More Just Global Governance with OECD’s Two-Pillar Solution, 63 B.C. L. Rev. 1797, 1816 (2022).

[16] See Giuliano, supra note 14.

[17] Id.

[18] Todd Buell, EU Parliament Draft Wants Digital Tax If Pillar 1 Stalled Past ’25, Law360 (Aug. 30, 2022, 11:53 AM), https://www.law360.com/tax-authority/articles/1525622/eu-parliament-draft-wants-digital-tax-if-pillar-1-stalled-past-25.