Congress must reject the tax offer the OECD says we ‘can’t refuse’
Shrouded by complexity, the scheme — dreamed up by progressive international bureaucrats who would make Plato’s utopian philosopher-kings jealous — would create a global tax code and transfer revenue from America to foreign governments. OECD and the Department of Treasury are bulldozing objections by smaller countries and boldly predicting they can force congressional Republicans to go along.
While mockingly disavowing interference in America’s “democratic processes or politics,” OECD Secretary General Mathias Cormann told the World Economic Forum last Tuesday that “rational thinking and the pursuit of self-interest will prevail,” and that even a Republican Congress would adopt the pillars to avoid leaving “money on the table for other countries to collect.” He argued that U.S. acceptance of the pillars is the only way to stop digital services taxes targeting American companies.
Acquiescence is in America’s “self-interest,” implied Cormann, making the plan a Godfather-like offer we can’t refuse.
Pillar one would allow countries where consumers are located to tax certain profits, instead of the countries where business activities take place. Although nominally neutral, the provision targets American companies, who would pay most of the taxes, and replicates the digital services taxes it supposedly eliminates.
Pillar two would effectively require every country to impose a 15 percent minimum book tax on certain large companies, again with carve-outs, benefitting China and the European Union at America’s expense. Non-compliant countries would be punished because affiliates of companies headquartered in non-compliant countries with a book tax rate under 15 percent in any country would be taxed by others to make up the difference. Pillar Two would destroy America’s sovereignty by allowing foreign countries to tax American companies’ profits from American customers earned purely in America on the grounds that American taxes are too “low.”
OECD and Treasury are conveniently “forgetting” the pillars violate existing tax treaties, which shield America’s sovereignty and revenue. Other countries avoid violating treaties with the U.S. because they fear retaliation and driving away investment.
Instead of insisting the pillars proceed only if permitted by new ratified treaties, Treasury and OECD are encouraging countries to steamroll ahead and violate existing treaties to force opponents to capitulate. Treasury is responding to Congress’ refusal to increase taxes on Americans, by encouraging foreign countries to do so instead through the pillars. Apparently, the progressive agenda overrides the rule of law, domestic and international.
Congress’s lodestar should be sovereignty. Our Constitution allows Congress, not foreign powers, to tax Americans, requiring revenue measures to originate in the House, up for election every two years.
Capitulating to foreign threats to tax Americans in violation of existing treaties would encourage, not end, foreign tax assaults, whatever the promises we get in return, notwithstanding Cormann’s offer we can’t refuse. Why wouldn’t countries just violate the new deal after we have shown that the route to further American concessions, such as with new digital services taxes?
As if to highlight the worthlessness of Cormann’s promises, Denmark imposed a 6 percent “cultural contribution” on streaming services last month. In the future, the 15 percent rate could creep much higher, and much smaller companies may get drawn in. And why not minimum taxes on individuals? Progressives are already demanding such measures.
Making major international commitments without building the wide consensus required by the Constitution’s treaty clause is bound to blow up, as demonstrated by President Obama’s Joint Comprehensive Plan of Action (JCPOA) for Iran’s nuclear program. Congress should make clear now that foreign imposition of these abusive taxes absent congressional treaty ratification will be met with harsh retaliation. Countries taxing Americans in violation of treaties should not expect the U.S. to respect their treaty rights.
Even Democratic Senate Finance Committee Chairman Ron Wyden (Ore.) suggested using section 891 of the tax code against digital services taxes, allowing a president to unilaterally double taxes against companies from countries that discriminatorily tax Americans. Tariffs against countries imposing digital services taxes were imposed but suspended by the prior administration and canceled by this administration.
Pillar two taxes are much more dangerous and any Congress or White House defending America’s Constitution and sovereignty will consider those measures and much more. Such measures are not ideal, but the U.S. cannot just let others violate our treaties. Refusing to take a stand now would only make things much worse down the road. Giving in to threats instead of enforcing existing rules would only bring chaos, not OECD’s promised stability.
Instead of negotiating the terms of our surrender in a futile effort to get a better deal, the United States should fight back with every available economic and diplomatic tool, which would also empower smaller countries bullied by OECD.
“It’s unstoppable,” OECD tax chief Pascal Saint-Amans triumphantly declared of the pillars. “Whatever happens in Congress whatever happens in Europe, I think we’ve turned the page.”
Like John Paul Jones, Congress should respond we “have just begun to fight.”
Aharon Friedman is a former senior advisor for tax policy at the U.S. Treasury and former senior tax counsel at the Committee on Ways & Means.