The EU's tax move to swipe revenue from U.S.

The tax landscape for U.S. multinationals is about to get messier now that the European Union has adopted a 15% minimum tax for big companies while Congress shows no sign of getting on board a global agreement backed by the Biden administration.

EU members passed the measure this week, implementing part of a two-pronged global tax reform agreed to last year by more than 130 governments.

Lawmakers in Washington haven't passed legislation required to bring U.S. tax law in line with the global deal, but multinationals based there won't escape its impact.

Jasper Juinen/Bloomberg

Under the agreed rules, countries adopting the minimum tax can penalize any multinational company operating in their jurisdiction by "topping up" that firm's tax bill if their home country doesn't tax their profits at 15% or more.

That means some large U.S.-based firms may get an extra tax bill from France, Germany or other EU members if their effective tax rate in the U.S. is below the threshold.

Treasury Secretary Janet Yellen, who has long championed the global tax agreement as a way to crack down on corporate tax avoidance, said she welcomed the EU decision and said widespread adoption of the rule would benefit American workers.

The EU's move could put pressure on Congress to adopt the minimum tax, according to Rebecca Kysar, a professor at Fordham University School of Law who served as one of the Treasury Department's lead negotiators on the global agreement.

"Eventually Congress will realize, if U.S. companies are paying elsewhere, why not take the revenue instead," she said.

Uphill battle

A minimum tax provision in line with the global deal was attached to a long-term spending package known as Build Back Better that Democratic Senator Joe Manchin of West Virginia rejected in late 2021. When he reached a compromise with Democratic leadership in July on another bill, Manchin excluded the minimum tax in part because the EU had not yet adopted the measure.

With Republicans about to take control of the House of Representatives, Kysar said she doesn't see a real chance for Congress to pass the measure until at least 2025 when a number of individual tax cuts now in force expire. The debate over renewing them could offer a chance for a wider deal that includes the minimum tax, she said.

In the meantime, digital services taxes also look likely to return in just over one year, wreaking more tax havoc for some U.S. multinationals and applying more pressure on Congress.

DSTs were adopted in many countries to target large tech companies, many based in the U.S., that are able to generate sizable revenues from markets where they have little or no physical presence.

Several countries ultimately agreed to hold off or suspend those levies because the global tax deal included a plan to redistribute some taxes revenues from the countries where multinational firms are based to the countries where they generate revenue.

But technical work on that portion of the agreement has stalled and Congress has shown little appetite for adopting it once it is finalized.

The U.K., France, Italy and Canada, among other countries, are set to either bring back, or implement for the first time, DSTs if that part of the deal isn't implemented by the end of 2023.

"The digital services taxes will come back with a vengeance and likely expand beyond digital," Kysar said.