Debate on US legal issue threatens global tax deal

While the Administration Biden and the world’s governments celebrate another move toward a historic global tax deal, a dark legal issue in USA threatens to tear it apart.

At a Congressional committee hearing last month, Republican Sen. Pat Toomey, who opposes the deal, told the Secretary of the Treasury, Janet Yellen, that a key part of the tax deal would require a formal treaty approved by a supermajority in the Senate.

This statement by Toomey opens what could become a crucial legal debate about what exactly is required of Congress for the US to be aligned with the international agreement.

While the details may seem arcane, the consequences can be enormous. If Toomey is correct and a formal treaty is required, the Administration will need 67 votes in a Senate where Democrats currently have just 50.

Leaders Summit

A global agreement backed by 136 countries is at stake. In the negotiations organized by the OECD, officials took another step Friday to work out key details, and three resisting European countries joined in. World leaders hope to give their seal of approval at the summit of the G20 from October 30 to 31 in Rome.

The pact envisages achieving two main objectives: establishing a global minimum tax rate of 15% to combat the transfer of corporate profits to tax havens with low taxes, and agreeing on a formula to tax the largest multinationals based, in part, on the place where they do business and not where they record profits. This measure arises from the increasingly digital nature of international trade.

Under the agreement, Congress must first enact legislation to modify existing US tax laws in two stages. Yellen said Sunday he is confident Congress will pass the minimum tax portion soon.

But the other party is not expected to appear before Congress until at least next spring. It could be relatively more important to know whether the Senate should ratify the agreement as a treaty.

What can Congress do?

Oona Hathaway, a professor at Yale Law School, said Congress can override an existing treaty either by passing a new formal treaty or by enacting a later law “through the normal legislative process.”

Barbara Angus, a world leader in tax policy at consultancy Ernst & Young, said tax deals have traditionally gone through the Senate treaty process, but that doesn’t make it a requirement. “Certainly, there may be the possibility of following a different path,” he said.

The Department of State’s Office of Legal Counsel must provide a recommendation as to whether an international agreement should enter into force as a treaty or as “an international agreement other than a treaty.” You should consider a specific set of factors detailed in the department’s Foreign Relations Manual and, in certain circumstances, consult with Congress.

If the US fails to participate fully, it could risk the successful implementation of the broader tax deal. It would be difficult for the profit reallocation plan to work without the involvement of the US, home to many of the largest multinationals.

For their part, European governments said that US involvement is necessary for them to accept a global minimum tax and remove the digital levies that the US has demanded be removed.