The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

Changes from June 29, 2023 to July 6, 2023

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The Pillar 2 Global Minimum Tax: Implications ~~June 29~~July 6, 2023 , 2023
for U.S. Tax Policy
Jane G. Gravelle
In response to concerns about multinational corporations shifting profits to low-tax countries, the In response to concerns about multinational corporations shifting profits to low-tax countries, the
Senior Specialist in Senior Specialist in
Organisation for Economic Co-operation and Development (OECD) and the G20, through an Organisation for Economic Co-operation and Development (OECD) and the G20, through an
Economic Policy Economic Policy
inclusive framework of 141 countries, developed a proposed global minimum tax (GLoBE) of inclusive framework of 141 countries, developed a proposed global minimum tax (GLoBE) of

15%. The United States had considered tax policy changes to conform domestic rules more 15%. The United States had considered tax policy changes to conform domestic rules more
Mark P. Keightley
closely with GLoBE, but these changes were not adopted. On December 15, 2022, the European closely with GLoBE, but these changes were not adopted. On December 15, 2022, the European
Specialist in Economics Specialist in Economics
Union (composed of 27 countries) adopted the Pillar 2 minimum tax; several other countries are Union (composed of 27 countries) adopted the Pillar 2 minimum tax; several other countries are

also adopting the tax. also adopting the tax.

The overarching goal of GLoBE is to address profit shifting, where multinational enterprises The overarching goal of GLoBE is to address profit shifting, where multinational enterprises
(MNEs) use techniques such as transfer pricing and location of debt to reduce income in high-tax countries and increase (MNEs) use techniques such as transfer pricing and location of debt to reduce income in high-tax countries and increase
income in low-tax countries. About 69% of the foreign profits of U.S. multinationals are located in eight identified tax haven income in low-tax countries. About 69% of the foreign profits of U.S. multinationals are located in eight identified tax haven
jurisdictions and in “stateless entities and other countries” generally subject to low or no local taxes. jurisdictions and in “stateless entities and other countries” generally subject to low or no local taxes.
GLoBE would impose a rate of at least 15% on the earnings of large MNEs in each country they operate in via an additional, GLoBE would impose a rate of at least 15% on the earnings of large MNEs in each country they operate in via an additional,
or top-up, tax. The minimum tax would be imposed on all constituent entities (parents, subsidiaries, branches, or permanent or top-up, tax. The minimum tax would be imposed on all constituent entities (parents, subsidiaries, branches, or permanent
establishments) in each country with lower taxes, so that the overall effective tax rate on earnings of the MNE in that country establishments) in each country with lower taxes, so that the overall effective tax rate on earnings of the MNE in that country
is increased to 15%. GLoBE is based on financial income but, to target intangible income in each country of operation, would is increased to 15%. GLoBE is based on financial income but, to target intangible income in each country of operation, would
apply the additional tax to income after a deduction for a share of the book value of tangible assets and for a share of payroll apply the additional tax to income after a deduction for a share of the book value of tangible assets and for a share of payroll
costs. The allowance for these deductions is referred to as the costs. The allowance for these deductions is referred to as the substance carve-out, and would begin at 8% for tangible assets , and would begin at 8% for tangible assets
and 10% for payroll before eventually equaling 5% after a 10-year phase-down period. and 10% for payroll before eventually equaling 5% after a 10-year phase-down period.
The right to tax income goes first to the source country through a qualified domestic minimum top-up tax (QDMTT). If the The right to tax income goes first to the source country through a qualified domestic minimum top-up tax (QDMTT). If the
source country does not impose a top-up tax on income earned in the country, the home country of the parent company can source country does not impose a top-up tax on income earned in the country, the home country of the parent company can
collect the tax through the income inclusion rule (IIR) by increasing the income of the parent subject to tax. If neither of these collect the tax through the income inclusion rule (IIR) by increasing the income of the parent subject to tax. If neither of these
taxes apply, then countries where other constituent entities (such as subsidiaries and branches) are located can collect the tax taxes apply, then countries where other constituent entities (such as subsidiaries and branches) are located can collect the tax
by denying deductions for those constituent entities through the undertaxed payments rule (UTPR). by denying deductions for those constituent entities through the undertaxed payments rule (UTPR).
Tax credits would reduce taxes, but refundable credits (and grants) increase income. Other tax deductions would reduce Tax credits would reduce taxes, but refundable credits (and grants) increase income. Other tax deductions would reduce
taxes, but a provision addresses timing differences for items such as accelerated depreciation. GLoBE applies to entities that taxes, but a provision addresses timing differences for items such as accelerated depreciation. GLoBE applies to entities that
are consolidated in MNE accounts and excludes income and losses included under the equity method of accounting. are consolidated in MNE accounts and excludes income and losses included under the equity method of accounting.
The United States currently has its own minimum tax on foreign-source income—the tax on global intangible low-taxed The United States currently has its own minimum tax on foreign-source income—the tax on global intangible low-taxed
income (GILTI)—that is similar to the IIR. The Build Back Better Act (H.R. 5376) would have increased the GILTI tax rate income (GILTI)—that is similar to the IIR. The Build Back Better Act (H.R. 5376) would have increased the GILTI tax rate
and imposed it on a country-by-country basis, along with other changes, to more closely align the GILTI rules with GLoBE. and imposed it on a country-by-country basis, along with other changes, to more closely align the GILTI rules with GLoBE.
The Administration’s FY2023 budget proposals would repeal the current base erosion and antiabuse tax (BEAT), an The Administration’s FY2023 budget proposals would repeal the current base erosion and antiabuse tax (BEAT), an
alternative tax on a base that includes certain payments to foreign affiliates, and impose a domestic top-up tax and an alternative tax on a base that includes certain payments to foreign affiliates, and impose a domestic top-up tax and an
undertaxed payments rule. The final version of the bill, the Inflation Reduction Act (P.L. 117-169) did not adopt these undertaxed payments rule. The final version of the bill, the Inflation Reduction Act (P.L. 117-169) did not adopt these
changes, although it adopted an alternative minimum tax on large corporations. changes, although it adopted an alternative minimum tax on large corporations.
GLoBE could increase taxes on multinationals’ operations in the United States, even absent U.S. action with respect to the GLoBE could increase taxes on multinationals’ operations in the United States, even absent U.S. action with respect to the
GLoBE proposal. Other countries could impose taxes on U.S. earnings of multinational firms triggered by a low U.S. GLoBE proposal. Other countries could impose taxes on U.S. earnings of multinational firms triggered by a low U.S.
effective tax rate through the UTPR or IIR. Thus, GLoBE could reduce the benefit of domestic tax incentives such as tax effective tax rate through the UTPR or IIR. Thus, GLoBE could reduce the benefit of domestic tax incentives such as tax
credits. Major tax credits include the research credit, the low-income housing tax credit, and credits for renewable energy. credits. Major tax credits include the research credit, the low-income housing tax credit, and credits for renewable energy.
At the same time, several aspects of the GLoBE proposal would limit its effect on domestic tax policy and incentives to At the same time, several aspects of the GLoBE proposal would limit its effect on domestic tax policy and incentives to
encourage certain types of investment. These include the carve-out for payroll and tangible assets, adjustments for timing encourage certain types of investment. These include the carve-out for payroll and tangible assets, adjustments for timing
differences between financial and tax accounting, and the exclusion for investments accounted for under the equity method. differences between financial and tax accounting, and the exclusion for investments accounted for under the equity method.
Outside of the research credit, it appears other credits would generally not be affected because they fall under the equity Outside of the research credit, it appears other credits would generally not be affected because they fall under the equity
method exclusion. Additional taxes could be triggered by other provisions as well, although some highly aggregated tax-rate method exclusion. Additional taxes could be triggered by other provisions as well, although some highly aggregated tax-rate
calculations suggest the effect would be limited or perhaps concentrated in certain industries. The potential effect on the calculations suggest the effect would be limited or perhaps concentrated in certain industries. The potential effect on the
research credit, or any other affected credit, could be reduced by making it refundable. research credit, or any other affected credit, could be reduced by making it refundable.
Congressional Research Service Congressional Research Service

The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

Introduction
Following the 2007-2009 financial crisis, policymakers were increasingly concerned that the tax Following the 2007-2009 financial crisis, policymakers were increasingly concerned that the tax
planning strategies used by multinational corporations were leading to profits being shifted to planning strategies used by multinational corporations were leading to profits being shifted to
low- or no-tax jurisdictions. While profit shifting has been a long-standing policy concern,1 the low- or no-tax jurisdictions. While profit shifting has been a long-standing policy concern,1 the
more developed economies appeared particularly concerned that the practice was eroding their more developed economies appeared particularly concerned that the practice was eroding their
respective corporate tax bases and resulting in substantial tax revenue losses. Governments respective corporate tax bases and resulting in substantial tax revenue losses. Governments
around the world had incurred large budget deficits to address the severe economic downturn around the world had incurred large budget deficits to address the severe economic downturn
caused by the financial crisis, and they began to look toward curbing profit shifting as a method caused by the financial crisis, and they began to look toward curbing profit shifting as a method
to raise revenue to address fiscal imbalances. Additionally, portions of the public and some to raise revenue to address fiscal imbalances. Additionally, portions of the public and some
policymakers perceived that multinational corporations were not paying their fair share of taxes. policymakers perceived that multinational corporations were not paying their fair share of taxes.
In 2012, the Organisation for Economic Co-operation and Development (OECD), at the request In 2012, the Organisation for Economic Co-operation and Development (OECD), at the request
of the G20, launched its Base Erosion and Profit Shifting (BEPS) project. The project laid out 15 of the G20, launched its Base Erosion and Profit Shifting (BEPS) project. The project laid out 15
steps (or actions) that would be compiled into an overarching Action Plan countries could use to steps (or actions) that would be compiled into an overarching Action Plan countries could use to
coordinate a modernization of the international tax system.2 In October 2015, the OECD coordinate a modernization of the international tax system.2 In October 2015, the OECD
published its final Action Plan, which was endorsed by the finance ministers of all G20 countries, published its final Action Plan, which was endorsed by the finance ministers of all G20 countries,
including the United States.3 The release of the final Action Plan was followed by the creation of including the United States.3 The release of the final Action Plan was followed by the creation of
the OECD/G20 Inclusive Framework on BEPS, with the goal of bringing together OECD/G20 the OECD/G20 Inclusive Framework on BEPS, with the goal of bringing together OECD/G20
member countries and nonmember countries to collaborate on equal footing in implementing the member countries and nonmember countries to collaborate on equal footing in implementing the
proposals contained in the BEPS Action Plan. As of December 2022, 142 countries are members proposals contained in the BEPS Action Plan. As of December 2022, 142 countries are members
of the Inclusive Framework.4 of the Inclusive Framework.4
In October 2021, the Inclusive Framework announced that nearly all of its members, including In October 2021, the Inclusive Framework announced that nearly all of its members, including
the United States, had agreed to a two-pillar solution to Action 1 of the Action Plan, which calls the United States, had agreed to a two-pillar solution to Action 1 of the Action Plan, which calls
for addressing tax challenges of the digital economy.5 Pillar 1 proposes to allocate corporate for addressing tax challenges of the digital economy.5 Pillar 1 proposes to allocate corporate
profits above a threshold (i.e., residual profits) to market jurisdictions (i.e., to countries where profits above a threshold (i.e., residual profits) to market jurisdictions (i.e., to countries where
customers and users are located) in exchange for repealing existing and halting new digital customers and users are located) in exchange for repealing existing and halting new digital
services taxes (DSTs). Thus, Pillar 1 deals primarily with services taxes (DSTs). Thus, Pillar 1 deals primarily with nexus, or determining which countries , or determining which countries
have the right to tax corporate profits. Pillar 2, which is the focus of this report and discussed in have the right to tax corporate profits. Pillar 2, which is the focus of this report and discussed in
more detail below, proposes a coordinated global 15% minimum tax regime under a set of global more detail below, proposes a coordinated global 15% minimum tax regime under a set of global
base erosion (GLoBE) rules. base erosion (GLoBE) rules.
On December 15, 2022, the European Union (composed of 27 countries including major trading On December 15, 2022, the European Union (composed of 27 countries including major trading
partners such as Germany and France, and Ireland where many multinational firms have partners such as Germany and France, and Ireland where many multinational firms have

1 See CRS Report R40623, 1 See CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane G. Gravelle. , by Jane G. Gravelle.
2 Organisation for Economic Co-operation and Development (OECD), 2 Organisation for Economic Co-operation and Development (OECD), BEPS 2015 Final Reports, 2015, , 2015,
https://www.oecd.org/tax/beps-2015-final-reports.htm. Also see CRS Report R44900, https://www.oecd.org/tax/beps-2015-final-reports.htm. Also see CRS Report R44900, Base Erosion and Profit Shifting
(BEPS): OECD/G20 Tax Proposals, by Jane G. Gravelle. , by Jane G. Gravelle.
3 OECD, “G20’s ownership and support to BEPS deliverables,” press release, October 9, 2015, https://www.oecd.org/ 3 OECD, “G20’s ownership and support to BEPS deliverables,” press release, October 9, 2015, https://www.oecd.org/
tax/g20-ownership-and-support-to-beps-deliverables.htm; and G20, “G20 Leaders’ Communiqué, Antalya Summit, 15-tax/g20-ownership-and-support-to-beps-deliverables.htm; and G20, “G20 Leaders’ Communiqué, Antalya Summit, 15-
16 November 2015,” press release, November 16, 2015, http://www.g20.utoronto.ca/2015/151116-communique.pdf. 16 November 2015,” press release, November 16, 2015, http://www.g20.utoronto.ca/2015/151116-communique.pdf.
4 OECD, https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf, updated December 2022. 4 OECD, https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf, updated December 2022.
5 OECD, “International community strikes a ground-breaking tax deal for the digital age,” press release, October 10, 5 OECD, “International community strikes a ground-breaking tax deal for the digital age,” press release, October 10,
2021, https://www.oecd.org/tax/beps/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-2021, https://www.oecd.org/tax/beps/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-
age.htm. For a summary of the two-pillar solution, see OECD, age.htm. For a summary of the two-pillar solution, see OECD, Two-Pillar Solution to Address the Tax Challenges
Arising from Digitalization of the Economy, October 2021, https://www.oecd.org/tax/beps/brochure-two-pillar-, October 2021, https://www.oecd.org/tax/beps/brochure-two-pillar-
solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf. solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf.
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The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

subsidiaries) adopted Pillar 2.6 Other countries moving toward adopting Pillar 2 include Australia, subsidiaries) adopted Pillar 2.6 Other countries moving toward adopting Pillar 2 include Australia,
Canada, Japan, Hong Kong, New Zealand, Norway, Singapore, and South Korea.7 Canada, Japan, Hong Kong, New Zealand, Norway, Singapore, and South Korea.7
The Joint Committee on Taxation (JCT) has estimated that the adoption of GLoBE by The Joint Committee on Taxation (JCT) has estimated that the adoption of GLoBE by ~~these~~
~~countries~~countries that have already committed to Pillar 2 would result in a U.S. revenue would result in a U.S. revenue ~~loss~~loss of $175 billion or a revenue gain of $224 billion from 2023 to 2033, depending on how U.S. corporations respond with respect to profit shifting.8 These estimates, which the JCT terms the “lower bound” and “upper bound,” form the basis for JCT’s “modified baseline.” The JCT used its modified baseline to estimate the revenue effects of various scenarios involving the rest of the world (i.e., those not already committed to Pillar 2) and the United States. The JCT estimated that U.S. revenues would be reduced by $122 billion between 2023 and 2033 relative to its modified baseline if the rest of the world adopts GLoBE and the United States does not.9 If both the rest of the world and the United States adopt GLoBE, JCT estimated reduced U.S. revenues of $57 billion, relative to the modified baseline. If the United States adopts GLoBE and the rest of the world does not, JCT estimated increased U.S. revenues of $237 billion, relative to the modified baseline. If the United States adopts the major components of GloBE aside from the undertaxed payments rule (UTPR) and the rest of the world does not, JCT estimated increased U.S. revenues of $102.6 billion, relative to the modified baseline. ~~of $175 billion over nine years, although this~~
~~amount could be reduced or reversed with profit shifting. Using an intermediate assumption of~~
~~the degree of profit shifting, adoption of GLoBE by the rest of the world would cost $122 billion~~
~~over nine years. If both the rest of the world and the United States adopt GLoBE, JCT has~~
~~estimated a revenue gain of $235 billion.8~~
Profit Shifting: Methods and Evidence
Methods
Corporations shift profits to low- or no-tax jurisdictions using two primary methods: (1) transfer Corporations shift profits to low- or no-tax jurisdictions using two primary methods: (1) transfer
pricing, and (2) the location of debt.pricing, and (2) the location of debt.910 Transfer pricing refers to the pricing of transactions Transfer pricing refers to the pricing of transactions
involving the exchange of goods, services, and assets between firms under the same ownership involving the exchange of goods, services, and assets between firms under the same ownership
umbrella (parent company). To properly reflect income, the prices of goods, services, and assets umbrella (parent company). To properly reflect income, the prices of goods, services, and assets
exchanged by companies under the same ownership umbrella, also referred to as exchanged by companies under the same ownership umbrella, also referred to as related firms, ,
should be the same as those that would be agreed upon by two unrelated firms in the market. If should be the same as those that would be agreed upon by two unrelated firms in the market. If
transactions between related firms are in fact occurring at such prices, then they are referred to as transactions between related firms are in fact occurring at such prices, then they are referred to as
being made at being made at arms length. For example, transfer pricing would apply when a U.S. firm that has . For example, transfer pricing would apply when a U.S. firm that has
developed intellectual property (IP) sells the rights to use the IP in a particular geographic developed intellectual property (IP) sells the rights to use the IP in a particular geographic
location to a subsidiary in a low-tax country. Examples of IP, also known as intangible assets, are location to a subsidiary in a low-tax country. Examples of IP, also known as intangible assets, are
algorithms, copyrights, design plans, drug formulas, patents, trademarks, and the like. The algorithms, copyrights, design plans, drug formulas, patents, trademarks, and the like. The
~~growing importance of intangible assets is part of the motivation behind the two-pillar solution to~~
~~Action 1.10~~
~~Profits can be shifted from high-tax to low- or no-tax jurisdictions if transactions between related~~
~~firms are not priced in accordance with the arms-length principle. Continuing with the example~~
~~above, if the U.S. firm charges an artificially low price to the subsidiary, profits reported in the~~
~~low-tax country will be artificially high (because the subsidiary has a lower cost), while profits in~~
~~the United States will be artificially low (because the U.S. firm receives less income). With a~~
~~greater share of profits being reported in the low-tax country, the company’s overall tax is~~
~~reduced.~~

6 Council of the European Union, General Secretariat, Communication, December 15, 2022, 6 Council of the European Union, General Secretariat, Communication, December 15, 2022,
https://data.consilium.europa.eu/doc/document/CM-5860-2022-INIT/en/pdf. For further discussion, see Ernst and https://data.consilium.europa.eu/doc/document/CM-5860-2022-INIT/en/pdf. For further discussion, see Ernst and
Young, EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules, Young, EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules,
December 15, 2022, https://globaltaxnews.ey.com/news/2022-6224-eu-member-states-unanimously-adopt-directive-December 15, 2022, https://globaltaxnews.ey.com/news/2022-6224-eu-member-states-unanimously-adopt-directive-
implementing-pillar-two-global-minimum-tax-rules. implementing-pillar-two-global-minimum-tax-rules.
7 See PwC’s Pillar 2 Tracker Online, https://www.pwc.com/gx/en/services/tax/pillar-two-readiness/country- 7 See PwC’s Pillar 2 Tracker Online, https://www.pwc.com/gx/en/services/tax/pillar-two-readiness/country-
tracker.html#:~:text=tracker.html#:~:text=
Under%20an%20OECD%20Inclusive%20Framework,the%20digitalization%20of%20the%20economy. Under%20an%20OECD%20Inclusive%20Framework,the%20digitalization%20of%20the%20economy.
8 Joint Committee on Taxation, 8 Joint Committee on Taxation, Possible Effects of Adopting the OECD’s Pillar 2, Both Worldwide and in the United
States, June 2023, https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf. , June 2023, https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf.
~~9 For more information on profit shifting, see CRS Report R40623,~~ ~~Tax Havens: International Tax Avoidance and~~
~~Evasion, by Jane G. Gravelle.~~
~~10 For more on the growing importance of intangible assets, see CRS Report R47003,~~ ~~Corporate Income Taxation in a~~
~~Global Economy, by Jane G. Gravelle, Mark P. Keightley, and Donald J. Marples.~~
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See the appendix for a list of countries already committed to Pillar 2. 9 In all the scenarios discussed here, JCT assumes that if adoption occurs it would happen in 2025. 10 For more information on profit shifting, see CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane G. Gravelle. Congressional Research Service 2 link to page 7 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy growing importance of intangible assets is part of the motivation behind the two-pillar solution to Action 1.11 Profits can be shifted from high-tax to low- or no-tax jurisdictions if transactions between related firms are not priced in accordance with the arms-length principle. Continuing with the example above, if the U.S. firm charges an artificially low price to the subsidiary, profits reported in the low-tax country will be artificially high (because the subsidiary has a lower cost), while profits in the United States will be artificially low (because the U.S. firm receives less income). With a greater share of profits being reported in the low-tax country, the company’s overall tax is reduced. Debt-location concerns are related to where a multinational corporation borrows. One Debt-location concerns are related to where a multinational corporation borrows. One
straightforward way a corporation can use debt to reduce taxes is to borrow in relatively high-tax straightforward way a corporation can use debt to reduce taxes is to borrow in relatively high-tax
countries and deduct the associated interest payments. Deductions reduce taxes in proportion to countries and deduct the associated interest payments. Deductions reduce taxes in proportion to
the applicable tax rates, which results in the deduction of interest payments reducing taxes the the applicable tax rates, which results in the deduction of interest payments reducing taxes the
most in higher-tax jurisdictions. Another approach, known as most in higher-tax jurisdictions. Another approach, known as earnings stripping, involves a , involves a
subsidiary in a low-tax jurisdiction lending to another subsidiary or parent in a high-tax subsidiary in a low-tax jurisdiction lending to another subsidiary or parent in a high-tax
jurisdiction. The related firm in the high-tax jurisdiction will then make interest payments on the jurisdiction. The related firm in the high-tax jurisdiction will then make interest payments on the
loan, and those interest payments will be deductible in the high-tax country, thus reducing taxes. loan, and those interest payments will be deductible in the high-tax country, thus reducing taxes.
Action 4 of the BEPS Action Plan specifically addresses limiting interest deductions to curb profit Action 4 of the BEPS Action Plan specifically addresses limiting interest deductions to curb profit
shifting. The United States and around half of the 141 Inclusive Framework members already shifting. The United States and around half of the 141 Inclusive Framework members already
have rules in place to limit interest deductions.have rules in place to limit interest deductions.1112
A recent estimate suggests that transfer pricing accounts for the majority (72%) of profit A recent estimate suggests that transfer pricing accounts for the majority (72%) of profit
shifting.shifting.1213 It is important to note that decisions about transfer pricing and the location of debt do It is important to note that decisions about transfer pricing and the location of debt do
not solely reflect the desire to shift profits; they can also be made to support real economic not solely reflect the desire to shift profits; they can also be made to support real economic
business activity. Additionally, international corporate tax planning strategies are extremely business activity. Additionally, international corporate tax planning strategies are extremely
complex and require navigating not only U.S. tax law, but also the laws of each jurisdiction in complex and require navigating not only U.S. tax law, but also the laws of each jurisdiction in
which a corporation has subsidiaries. Corporations must also factor in bilateral international tax which a corporation has subsidiaries. Corporations must also factor in bilateral international tax
treaties between countries.treaties between countries.1314
Evidence
U.S. companies reported earning profits of $1.2 trillion abroad in tax year 2019, according to U.S. companies reported earning profits of $1.2 trillion abroad in tax year 2019, according to
Internal Revenue Service (IRS) data.Internal Revenue Service (IRS) data.1415 Table 1 shows that the 10 most popular places to report shows that the 10 most popular places to report
profits were responsible for 54% (or $639.2 billion) of the total $1.2 trillion in overseas earnings. profits were responsible for 54% (or $639.2 billion) of the total $1.2 trillion in overseas earnings.
Eight of the 10 reporting jurisdictions (i.e., excluding Canada and the U.K.) are generally Eight of the 10 reporting jurisdictions (i.e., excluding Canada and the U.K.) are generally
~~considered by international tax experts to be “tax havens” or “tax preferred.”15 Canada and the~~
~~U.K. are major industrialized countries with close trading ties to the United States, which~~
~~explains their inclusion in Table 1.~~
~~Table 1. Most Popular Places to Report Profits for U.S. Companies, 2019~~
~~Profits~~
~~Profits as % of Overseas Total~~
~~Rank~~
~~Jurisdiction~~
~~(millions)~~
1
~~United Kingdoma~~
~~$104,797~~
~~8.8%~~
2
~~Netherlands~~
~~$99,467~~
~~8.4%~~

11 11 For more on the growing importance of intangible assets, see CRS Report R47003, Corporate Income Taxation in a Global Economy, by Jane G. Gravelle, Mark P. Keightley, and Donald J. Marples. 12 For more information on Action 4, see Organisation for Economic Co-operation and Development, For more information on Action 4, see Organisation for Economic Co-operation and Development, Action 4
Limitation on Interest Deductions, https://www.oecd.org/tax/beps/beps-actions/action4/. For more information on U.S. , https://www.oecd.org/tax/beps/beps-actions/action4/. For more information on U.S.
rules on deducting interest payments and earnings stripping, see CRS Report R40623, rules on deducting interest payments and earnings stripping, see CRS Report R40623, Tax Havens: International Tax
Avoidance and Evasion, by Jane G. Gravelle. , by Jane G. Gravelle.
1213 Jost H. Heckemeyer and Michael Overesch, Jost H. Heckemeyer and Michael Overesch, Multinationals’ Profit Response to Tax Differentials: Effect Size and
Shifting Channels, Center for European Economic Research, Discussion Paper 13-045, 2013, https://ftp.zew.de/pub/, Center for European Economic Research, Discussion Paper 13-045, 2013, https://ftp.zew.de/pub/
zew-docs/dp/dp13045.pdf. zew-docs/dp/dp13045.pdf.
1314 For more on profit shifting methods, see CRS Report R40623, For more on profit shifting methods, see CRS Report R40623, Tax Havens: International Tax Avoidance and
Evasion, by Jane G. Gravelle. , by Jane G. Gravelle.
1415 U.S. Internal Revenue Service, U.S. Internal Revenue Service, Statistics of Income Tax Stats, International Business Tax Statistics, Country-by-
Country Report: Major Geographic Region and Selected Tax Jurisdiction with Positive Profit Before Income Tax, ,
2019. 2019.
~~15 For more information on tax havens, see CRS Report R40623,~~ ~~Tax Havens: International Tax Avoidance and~~
~~Evasion, by Jane G. Gravelle.~~
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~~Profits~~
~~Rank~~
~~Jurisdiction~~
~~(millions)~~
~~Profits as % of Overseas Total~~considered by international tax experts to be “tax havens” or “tax preferred.”16 Canada and the U.K. are major industrialized countries with close trading ties to the United States, which explains their inclusion in Table 1. Table 1. Most Popular Places to Report Profits for U.S. Companies, 2019 Profits Rank Jurisdiction (millions) Profits as % of Overseas Total 1 United Kingdoma $104,797 8.8% 2 Netherlands $99,467 8.4%
3 3
Switzerland Switzerland
$71,994 $71,994
6.1% 6.1%
4 4
Cayman Islands Cayman Islands
$70,203 $70,203
5.9% 5.9%
5 5
Ireland Ireland
$69,142 $69,142
5.8% 5.8%
6 6
Singapore Singapore
$65,347 $65,347
5.5% 5.5%
7 7
Luxembourg Luxembourg
$46,477 $46,477
3.9% 3.9%
8 8
Bermuda Bermuda
$44,595 $44,595
3.8% 3.8%
9 9
Puerto Ri Puerto Ricob
$34,755 $34,755
2.9% 2.9%
10 10
Canada Canada
$32,435 $32,435
2.7% 2.7%
Top 10

$639,210
54.0%
Stateless entities and

other countries not
$195,431
16.5%
separately specifiedc
All Foreign

~~Jurisdictions~~
$1,184,313
100.0%
Jurisdictions Source: U.S. Internal Revenue Service, U.S. Internal Revenue Service, Statistics of Income Tax Stats, International Business Tax Statistics, Country-by-
Country Report: Major Geographic Region and Selected Tax Jurisdiction with Positive Profit Before Income Tax, 2019. , 2019.
a. The United Kingdom includes England, Northern Ireland, Scotland, and Wales. a. The United Kingdom includes England, Northern Ireland, Scotland, and Wales.
b. Puerto Rico enacts and administers a tax code that is distinct from the federal tax code. b. Puerto Rico enacts and administers a tax code that is distinct from the federal tax code.
c. The IRS defines stateless entities as those “that are not residents of any tax jurisdiction.” The IRS also does c. The IRS defines stateless entities as those “that are not residents of any tax jurisdiction.” The IRS also does
not indicate the countries in its “other countries” category. not indicate the countries in its “other countries” category.
Table 1 indicates that a significant share of overseas profits (16.5%) were reported by stateless indicates that a significant share of overseas profits (16.5%) were reported by stateless
entities and in “other countries” outside the approximately 100 countries the IRS provides entities and in “other countries” outside the approximately 100 countries the IRS provides
information on. The IRS defines stateless entities as those “that are not residents of any tax information on. The IRS defines stateless entities as those “that are not residents of any tax
jurisdiction,” but warns that researchers are “strongly cautioned against inferring that income jurisdiction,” but warns that researchers are “strongly cautioned against inferring that income
reflected on the stateless line is not subject to tax.”reflected on the stateless line is not subject to tax.”1617 The IRS also does not indicate the countries The IRS also does not indicate the countries
in its “other countries” category. While the profits reported by stateless entities and companies in its “other countries” category. While the profits reported by stateless entities and companies
with operations in “other countries” may not be subject to zero tax, the cash tax paid by this with operations in “other countries” may not be subject to zero tax, the cash tax paid by this
group in the aggregate was 0.7%. A number of notable tax havens are not individually identified group in the aggregate was 0.7%. A number of notable tax havens are not individually identified
in the IRS data and are likely included in the stateless entity and other country category, in the IRS data and are likely included in the stateless entity and other country category,
including, for example, the Bahamas, British Virgin Islands, Jersey, Isle of Man, Guernsey, Malta, including, for example, the Bahamas, British Virgin Islands, Jersey, Isle of Man, Guernsey, Malta,
16 For more information on tax havens, see CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane G. Gravelle. 17 Internal Revenue Service, Tax Year 2019 Country-by-Country Report Data Sources and Limitations, https://www.irs.gov/pub/irs-soi/19itdocumentationcbc.pdf. Congressional Research Service 4 link to page 7 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy and Seychelles. The IRS data do capture the larger tax havens (as seen iand Seychelles. The IRS data do capture the larger tax havens (as seen in Table 1) and all major and all major
developed countries. developed countries.
The OECD/G20 Pillar 2 Proposal
Overview of the Minimum Tax
Pillar 2 proposes a coordinated global 15% minimum tax targeted at the intangible income of Pillar 2 proposes a coordinated global 15% minimum tax targeted at the intangible income of
multinational enterprise (MNE) groups under a set of global base erosion rules. The tax would be (MNE) groups under a set of global base erosion rules. The tax would be
levied on financial income after a deduction for substantive activities, and would apply to MNE levied on financial income after a deduction for substantive activities, and would apply to MNE

~~16 Internal Revenue Service, Tax Year 2019 Country-by-Country Report Data Sources and Limitations,~~
~~https://www.irs.gov/pub/irs-soi/19itdocumentationcbc.pdf.~~
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~~The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy~~

groups with revenues exceeding €750 million (equivalent to approximately $780 million as of groups with revenues exceeding €750 million (equivalent to approximately $780 million as of
June 15, 2022) in two of the past four years.June 15, 2022) in two of the past four years.1718 The proposed tax is similar in some ways to the The proposed tax is similar in some ways to the
current U.S. tax on global intangible low-taxed income (GILTI), but also differs in important current U.S. tax on global intangible low-taxed income (GILTI), but also differs in important
aspects, as discussed in the next section. Most notably, the GLoBE tax would apply separately to aspects, as discussed in the next section. Most notably, the GLoBE tax would apply separately to
the operations of the operations of constituent entities (e.g., subsidiaries and branches) in each country, rather than (e.g., subsidiaries and branches) in each country, rather than
applying on an overall basis to all foreign-source income, as is the case with GILTI. A constituent applying on an overall basis to all foreign-source income, as is the case with GILTI. A constituent
entity with operations in a country that are generating less than €10 million of revenues or less entity with operations in a country that are generating less than €10 million of revenues or less
than €1 million in losses would be excluded from the 15% minimum tax for those specific than €1 million in losses would be excluded from the 15% minimum tax for those specific
operations. operations.
~~Key Terms~~
•
~~Multinational Enterprise (MNE) Group—a company consisting of an ultimate parent entity that owns or~~
~~controls at least one other business entity with operations in a different jurisdiction.~~
•
~~Ultimate Parent Entity—a business entity with a direct or indirect control ing ownership interest in another~~
~~business entity and that is not owned by another entity.~~
•
~~Constituent Entity—a business entity (including an ultimate parent entity, subsidiary, permanent~~
~~establishment, or branch) that is included in the consolidated financial statement of a MNE group.~~
•
~~Excluded Entity—a business entity that is not considered a constituent entity, including government entities,~~
~~international organizations, nonprofits, pension funds, investment funds, and real estate investment vehicles~~
~~that are ultimate parent entities. Excluded entities are exempt from the GLoBE regime.~~
Source: OECD/G20 Base Erosion and Profit Shifting Project, ~~Tax Challenges Arising from the Digitalisation of the~~
~~Economy: Global Anti-Base Erosion Model Rules (Pillar Two), 2021, at https://www.oecd.org/tax/beps/tax-challenges-~~
~~arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pil ar-two.pdf. The OECD has~~
~~also provided a Commentary with additional information. See Article 10 Definitions, at https://www.oecd.org/tax/~~
~~beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pil ar-two-~~
~~commentary.pdf.~~
~~Under the GLoBE rules, an effective tax rate would be calculated for all constituent entities of a~~
~~MNE group located in each country. Income from interests accounted for under the equity~~
~~method in financial accounting, where a share of after-tax income is included in profits, is~~
~~excluded. The equity method applies when there is a significant, but not controlling, interest in~~
~~the entity, typically where the ownership share is between 20% and 50% in corporations and~~
~~certain partnerships, although it depends on the circumstances and entity structure. For example,~~
~~in a limited partnership, limited partners are not considered controlling if the general partner~~
~~controls the investment, even if a limited partner owns a large share of the investment. For~~

17 18 Pillar 2 also includes two treaty-based rules. One is a provision called the subject to tax rule (STTR), which is not Pillar 2 also includes two treaty-based rules. One is a provision called the subject to tax rule (STTR), which is not
part of GLoBE and would be implemented separately. It provides for a top-up tax on payments between related parties part of GLoBE and would be implemented separately. It provides for a top-up tax on payments between related parties
where the source country has ceded taxing rights through a treaty and the recipient country is a low- or no-tax where the source country has ceded taxing rights through a treaty and the recipient country is a low- or no-tax
jurisdiction. These payments generally involve interest and royalties. The rate is 7.5% to 9%. See OECD/G20 Base jurisdiction. These payments generally involve interest and royalties. The rate is 7.5% to 9%. See OECD/G20 Base
Erosion and Profit Shifting Project, Erosion and Profit Shifting Project, Addressing the Tax Challenges Arising from the Digitalisation of the Economy, ,
July 2021, https://www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-July 2021, https://www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-
the-economy-july-2021.pdf. These payments are subject to a lower rate but are taken into account in determining the the-economy-july-2021.pdf. These payments are subject to a lower rate but are taken into account in determining the
overall effective rate; SSTR would apply before the income inclusion rule (IIR). It is expected that STTR would be overall effective rate; SSTR would apply before the income inclusion rule (IIR). It is expected that STTR would be
requested largely by developing countries. The other provision is the switch-over rule, which allows jurisdictions that requested largely by developing countries. The other provision is the switch-over rule, which allows jurisdictions that
have agreed in treaties to exempt income of foreign branches to overturn those agreements and move to a foreign tax have agreed in treaties to exempt income of foreign branches to overturn those agreements and move to a foreign tax
credit to address double taxation. The United States taxes income of foreign branches and allows foreign tax credits to credit to address double taxation. The United States taxes income of foreign branches and allows foreign tax credits to
prevent double taxation. For the rules, see OECD/G20 Base Erosion and Profit Shifting Project, prevent double taxation. For the rules, see OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges
Arising from the Digitalisation of the Economy: Global Anti-Base Erosion Model Rules (Pillar Two), at , at
https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-
model-rules-pillar-two.pdf. The OECD has also provided a Commentary with additional information, at model-rules-pillar-two.pdf. The OECD has also provided a Commentary with additional information, at
https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-
model-rules-pillar-two-commentary.pdf. More recent guidance was proposed in February 2023, at model-rules-pillar-two-commentary.pdf. More recent guidance was proposed in February 2023, at
https://www.oecd.org/tax/beps/agreed-administrative-guidance-for-the-pillar-two-globe-rules.pdf. https://www.oecd.org/tax/beps/agreed-administrative-guidance-for-the-pillar-two-globe-rules.pdf.
Congressional Research Service Congressional Research Service

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The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

Key Terms • Multinational Enterprise (MNE) Group—a company consisting of an ultimate parent entity that owns or controls at least one other business entity with operations in a different jurisdiction. • Ultimate Parent Entity—a business entity with a direct or indirect control ing ownership interest in another business entity and that is not owned by another entity. • Constituent Entity—a business entity (including an ultimate parent entity, subsidiary, permanent establishment, or branch) that is included in the consolidated financial statement of a MNE group. • Excluded Entity—a business entity that is not considered a constituent entity, including government entities, international organizations, nonprofits, pension funds, investment funds, and real estate investment vehicles that are ultimate parent entities. Excluded entities are exempt from the GLoBE regime. Source: OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from the Digitalisation of the Economy: Global Anti-Base Erosion Model Rules (Pillar Two), 2021, at https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pil ar-two.pdf. The OECD has also provided a Commentary with additional information. See Article 10 Definitions, at https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pil ar-two-commentary.pdf. Under the GLoBE rules, an effective tax rate would be calculated for all constituent entities of a MNE group located in each country. Income from interests accounted for under the equity method in financial accounting, where a share of after-tax income is included in profits, is excluded. The equity method applies when there is a significant, but not controlling, interest in the entity, typically where the ownership share is between 20% and 50% in corporations and certain partnerships, although it depends on the circumstances and entity structure. For example, in a limited partnership, limited partners are not considered controlling if the general partner controls the investment, even if a limited partner owns a large share of the investment. For purposes of GLoBE, the income and tax items attributable to these entities would be excluded purposes of GLoBE, the income and tax items attributable to these entities would be excluded
from the calculation. International shipping income would also be excluded from coverage, as from the calculation. International shipping income would also be excluded from coverage, as
would investment funds and tax-exempt organizations, such as charities and pension funds. would investment funds and tax-exempt organizations, such as charities and pension funds.
To target To target intangible income in each country of operation, the minimum tax would apply to income in each country of operation, the minimum tax would apply to
income after a deduction for a share of the book value of a constituent entity’s income after a deduction for a share of the book value of a constituent entity’s tangible assets and assets and
for a share of the value of payroll. The allowance for these deductions is often referred to as the for a share of the value of payroll. The allowance for these deductions is often referred to as the
substance carve-out, and would eventually equal 5% after a 10-year phase-in period. The , and would eventually equal 5% after a 10-year phase-in period. The
deductible share of tangible assets would initially equal 8% and decline by 0.2 percentage points deductible share of tangible assets would initially equal 8% and decline by 0.2 percentage points
per year for the first five years, and then decline by 0.4 percentage points per year over the next per year for the first five years, and then decline by 0.4 percentage points per year over the next
five years to reach 5%. The deductible share of payroll would begin at 10% and decline by 0.2 five years to reach 5%. The deductible share of payroll would begin at 10% and decline by 0.2
percentage points per year for the first five years, and then by 0.8 percentage points per year over percentage points per year for the first five years, and then by 0.8 percentage points per year over
the next five years to reach 5%. According to the OECD, the substance carve-out is intended to the next five years to reach 5%. According to the OECD, the substance carve-out is intended to
allow tax incentives for routine activities without triggering the top-up tax. The OECD also allow tax incentives for routine activities without triggering the top-up tax. The OECD also
claims that the carve-out will cover a broad range of industries because it includes a deduction for claims that the carve-out will cover a broad range of industries because it includes a deduction for
payroll as well as tangible assets.payroll as well as tangible assets.1819
The Top-Up Tax
Under the GLoBE rules, a Under the GLoBE rules, a top-up, or additional, tax would be levied to increase a constituent , or additional, tax would be levied to increase a constituent
entity’s effective tax rate (ETR) to 15% if the entity’s tax was below the 15% minimum rate in its entity’s effective tax rate (ETR) to 15% if the entity’s tax was below the 15% minimum rate in its
country of operation. The calculation to determine whether a constituent entity’s effective tax rate country of operation. The calculation to determine whether a constituent entity’s effective tax rate
was below 15% would be made was below 15% would be made before deducting the substance carve-out. The top-up tax would deducting the substance carve-out. The top-up tax would
19 See OECD, Global Anti-Base Erosion Model Rules, Frequently Asked Questions, Question 7, https://www.oecd.org/tax/beps/pillar-two-model-GloBE-rules-faqs.pdf. Congressional Research Service 6 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy then be applied to income then be applied to income after deducting the substance carve-out. For example, assume a deducting the substance carve-out. For example, assume a
constituent entity has an effective tax rate of 10% before deducting the substance carve-out. Also constituent entity has an effective tax rate of 10% before deducting the substance carve-out. Also
assume that the entity has a carve-out equal to 20% of income. Then the top-up tax would be 4% assume that the entity has a carve-out equal to 20% of income. Then the top-up tax would be 4%
(5% times [100% minus 20%]). (5% times [100% minus 20%]).
The top-up tax would be achieved in one of three ways according to the following order: The top-up tax would be achieved in one of three ways according to the following order:
• First, the country in which the entity is operating can impose its own top-up tax, • First, the country in which the entity is operating can impose its own top-up tax,
known as a qualified domestic minimum top-up tax (QDMTT), to bring the known as a qualified domestic minimum top-up tax (QDMTT), to bring the
entity’s ETR up to 15%. This would preserve the first right of taxation to the entity’s ETR up to 15%. This would preserve the first right of taxation to the
source country, which would benefit from the tax revenue.source country, which would benefit from the tax revenue.1920
• Second, if the source country does not impose a QDMTT, the country in which • Second, if the source country does not impose a QDMTT, the country in which
the ultimate parent entity is located can impose a top-up tax on the parent entity the ultimate parent entity is located can impose a top-up tax on the parent entity
under the income inclusion rule (IIR). This rule would include the income of the under the income inclusion rule (IIR). This rule would include the income of the
foreign constituent entity that has an ETR of less than 15% in the income of the foreign constituent entity that has an ETR of less than 15% in the income of the
ultimate parent entity sufficient to raise the rate on the foreign constituent entity’s ultimate parent entity sufficient to raise the rate on the foreign constituent entity’s
income to 15%. If the parent entity owns less than 80% of the entity (called a income to 15%. If the parent entity owns less than 80% of the entity (called a
partially owned parent entity, or POPE), then the POPE would be responsible for , or POPE), then the POPE would be responsible for
the top-up tax. In either case, the tax revenue would accrue to the country in the top-up tax. In either case, the tax revenue would accrue to the country in
which the parent (or POPE) is located, and not the low-taxed entity’s country of which the parent (or POPE) is located, and not the low-taxed entity’s country of
operation. The IIR is proposed to be effective in 2023. operation. The IIR is proposed to be effective in 2023.

~~18 See OECD, Global Anti-Base Erosion Model Rules, Frequently Asked Questions, Question 7, https://www.oecd.org/~~
~~tax/beps/pillar-two-model-GloBE-rules-faqs.pdf.~~
~~19 Although there is no set way to structure this tax, it presumably would be imposed on the parent if a U.S.-parented~~
~~firm and its other domestic constituent entities pay low taxes, since this is the entity that pays taxes, and on the U.S.~~
~~subsidiary if its parent firm is foreign.~~
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~~The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy~~

• Third, if the ultimate or partially owned parent entity’s home country does not • Third, if the ultimate or partially owned parent entity’s home country does not
adopt an IIR, then all other countries in which the MNE group has constituent adopt an IIR, then all other countries in which the MNE group has constituent
entities could increase the effective tax rate on the constituent entities operating entities could increase the effective tax rate on the constituent entities operating
within their borders by invoking the undertaxed payments rule (UTPR). The within their borders by invoking the undertaxed payments rule (UTPR). The
UTPR would allow the denial of deductions in an amount to produce an UTPR would allow the denial of deductions in an amount to produce an
additional tax liability equal to the needed top-up tax in the low-tax jurisdiction additional tax liability equal to the needed top-up tax in the low-tax jurisdiction
such that the 15% minimum tax is achieved. Deductions could be denied for such that the 15% minimum tax is achieved. Deductions could be denied for
payments to group companies and third-party entities, and for other items as payments to group companies and third-party entities, and for other items as
determined by local law, including depreciation and interest. An additional tax determined by local law, including depreciation and interest. An additional tax
could also be applied. The right to the top-up tax increase would be allocated to could also be applied. The right to the top-up tax increase would be allocated to
countries imposing the UTPR based on 50% of their share of total tangible assets countries imposing the UTPR based on 50% of their share of total tangible assets
in the entities imposing the UTPR group plus 50% of their share of employees in in the entities imposing the UTPR group plus 50% of their share of employees in
the entities imposing the UTPR. The UTPR would, therefore, be imposed by the entities imposing the UTPR. The UTPR would, therefore, be imposed by
countries on constituent entities that are neither in the source nor headquarters countries on constituent entities that are neither in the source nor headquarters
country, and all revenue would accrue to the countries imposing the tax. It would country, and all revenue would accrue to the countries imposing the tax. It would
serve as a backstop to ensure that the minimum tax is imposed. If adjustments serve as a backstop to ensure that the minimum tax is imposed. If adjustments
could not be made to collect the full top-up tax, any uncollected tax would be could not be made to collect the full top-up tax, any uncollected tax would be
passed forward to be collected in the future. The UTPR is proposed to be passed forward to be collected in the future. The UTPR is proposed to be
effective in 2024. effective in 2024.
Treatment of Credits, Grants, Deductions, and Losses
Under GLoBE rules, refundable credits (to be received within four years) and grants would be Under GLoBE rules, refundable credits (to be received within four years) and grants would be
counted as increases in income (but not taxable) rather than reductions in taxes. Thus, for counted as increases in income (but not taxable) rather than reductions in taxes. Thus, for
example, if the tax rate is 20% before credits and there is a refundable credit equal to 15% of example, if the tax rate is 20% before credits and there is a refundable credit equal to 15% of
income, the effective tax rate would be reduced to 17.4% (0.20/1.15) and no top-up tax would income, the effective tax rate would be reduced to 17.4% (0.20/1.15) and no top-up tax would
20 Although there is no set way to structure this tax, it presumably would be imposed on the parent if a U.S.-parented firm and its other domestic constituent entities pay low taxes, since this is the entity that pays taxes, and on the U.S. subsidiary if its parent firm is foreign. Congressional Research Service 7 link to page 12 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy apply. If, however, the credit were nonrefundable, the tax rate would be reduced to 5%, and a apply. If, however, the credit were nonrefundable, the tax rate would be reduced to 5%, and a
10% top-up tax would apply to achieve the 15% minimum rate unless there was an applicable 10% top-up tax would apply to achieve the 15% minimum rate unless there was an applicable
exception. One exception would pertain to tax credits that accrue to operations that are treated exception. One exception would pertain to tax credits that accrue to operations that are treated
under the equity method of accounting.under the equity method of accounting.2021 The equity method is used when a company must The equity method is used when a company must
account for the profits or loss of another entity it has a substantial, but not controlling, ownership account for the profits or loss of another entity it has a substantial, but not controlling, ownership
interest in. Under GLoBE rules, the income attributable to these entities is not included in the interest in. Under GLoBE rules, the income attributable to these entities is not included in the
consolidation of earnings and would therefore be excluded from the effective tax rate calculation consolidation of earnings and would therefore be excluded from the effective tax rate calculation
for purposes of the minimum GLoBE tax. Thus, tax credits attributable to such operations would for purposes of the minimum GLoBE tax. Thus, tax credits attributable to such operations would
not be affected by GLoBE. not be affected by GLoBE.
The GLoBE calculation of the tax allows for temporary timing differences in the financial and tax The GLoBE calculation of the tax allows for temporary timing differences in the financial and tax
accounting treatment of deductions (such as depreciation), so lower taxes for this reason (e.g., tax accounting treatment of deductions (such as depreciation), so lower taxes for this reason (e.g., tax
depreciation occurs before book depreciation) would not trigger a top-up tax. (This tax benefit depreciation occurs before book depreciation) would not trigger a top-up tax. (This tax benefit
can be recaptured, however, if not resolved in five years for certain items, although this five-year can be recaptured, however, if not resolved in five years for certain items, although this five-year
rule does not apply to cost recovery.) Any losses are valued at the minimum tax rate and carried rule does not apply to cost recovery.) Any losses are valued at the minimum tax rate and carried
forward as credits to offset future taxes. forward as credits to offset future taxes.

~~20 The equity method generally applies when the firm has a substantial interest but does not have control. For an~~
~~investment in a corporation, control is generally based on more than 50% ownership, but it varies for other types of~~
~~investments depending on context and structure. For example, for passive investments in limited partnerships, the~~
~~equity method would apply when the general partner (who may own a negligible share) has control.~~
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~~link to page 11~~ ~~The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy~~

The U.S. Tax Proposals
Several proposals have been made to conform the U.S. tax system to the Pillar 2 proposals, Several proposals have been made to conform the U.S. tax system to the Pillar 2 proposals,
including the revisions to GILTI in the Build Back Better Act that were not enacted and the including the revisions to GILTI in the Build Back Better Act that were not enacted and the
proposed replacement of the base erosion and anti-abuse tax (BEAT) with the undertaxed proposed replacement of the base erosion and anti-abuse tax (BEAT) with the undertaxed
payments rule (UTPR) in the FY2023 budget proposals. An Administration official has indicated payments rule (UTPR) in the FY2023 budget proposals. An Administration official has indicated
the need to undertake reforms in light of the adoption of Pillar 2 by the European Union and the the need to undertake reforms in light of the adoption of Pillar 2 by the European Union and the
consideration of Pillar 2 now taking place in Australia, Japan, Switzerland, and the United consideration of Pillar 2 now taking place in Australia, Japan, Switzerland, and the United
Kingdom.Kingdom.2122
Changes to GILTI in the Build Back Better Act
As noted, the United States has a minimum tax on global intangible low-taxed income, which is As noted, the United States has a minimum tax on global intangible low-taxed income, which is
similar in some ways to GLoBE, but different in important respects. GILTI only corresponds to similar in some ways to GLoBE, but different in important respects. GILTI only corresponds to
the income inclusion rule and thus does not address low tax rates on the parent company. The the income inclusion rule and thus does not address low tax rates on the parent company. The
Build Back Better Act (BBBA; H.R. 5376) proposed revisions to GILTI.Build Back Better Act (BBBA; H.R. 5376) proposed revisions to GILTI. Table 2 compares the compares the
GLoBE provisions with GILTI as it currently stands and as proposed under the BBBA. As can be GLoBE provisions with GILTI as it currently stands and as proposed under the BBBA. As can be
seen, the proposed changes in the BBBA would bring GILTI rules closer to GLoBE, including a seen, the proposed changes in the BBBA would bring GILTI rules closer to GLoBE, including a
similar tax rate and a per-country application. These changes were not adopted in the final version similar tax rate and a per-country application. These changes were not adopted in the final version
of H.R. 5376, the Inflation Reduction Act (P.L. 117-169). That act adopted an alternative of H.R. 5376, the Inflation Reduction Act (P.L. 117-169). That act adopted an alternative
minimum tax based on adjusted financial statement income that would increase taxation of some minimum tax based on adjusted financial statement income that would increase taxation of some
large multinational corporations, although it is uncertain how this tax would be taken into account large multinational corporations, although it is uncertain how this tax would be taken into account
under GLoBE.under GLoBE.22
23 21 The equity method generally applies when the firm has a substantial interest but does not have control. For an investment in a corporation, control is generally based on more than 50% ownership, but it varies for other types of investments depending on context and structure. For example, for passive investments in limited partnerships, the equity method would apply when the general partner (who may own a negligible share) has control. 22 Stephanie Soong, U.S. Must Reform GILTI in Line With OECD Pillar 2, Grinberg Says, Tax Notes Today Federal, December 19, 2022. 23 See CRS Report R47328, The 15% Corporate Alternative Minimum Tax, by Jane G. Gravelle for a discussion of the new alternative minimum tax, including how it might relate to GLoBE. Congressional Research Service 8 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy Table 2. Comparison of Basic Features of GLoBE and GILTI
GILTI as Proposed in

GLoBE
GILTI (Current Law)
the BBBA
Tax Rate Tax Rate
15.0% 15.0%
10.5% (13.125% after 10.5% (13.125% after
15.015% with some tax 15.015% with some tax
2025) with some tax 2025) with some tax
applying to income earned applying to income earned
applying to income earned in countries with tax rates applying to income earned in countries with tax rates
in countries with tax rates of 15.8% or less if the in countries with tax rates of 15.8% or less if the
of 13.125% or less (16.4% of 13.125% or less (16.4%
foreign tax credit limit foreign tax credit limit
after 2025) if the foreign after 2025) if the foreign
applies applies
tax credit limit applies tax credit limit applies
How Tax is Applied How Tax is Applied
Per Country Per Country
Overall Overall
Per Country Per Country
Tax Base Tax Base
Financial Income Financial Income
Taxable Income Taxable Income
Taxable Income Taxable Income
Substance Carve-Out Substance Carve-Out
5% of tangible assets, 5% 5% of tangible assets, 5%
10% of tangible assets 10% of tangible assets
5% of tangible assets 5% of tangible assets
(deduction) (deduction)
of payrol costs after a10- of payrol costs after a10-
year phase-down (rates year phase-down (rates
start at 8% of tangible start at 8% of tangible
assets and 10% of payrol ) assets and 10% of payrol )
Avoiding Double Taxation Add-on or top-up tax, Avoiding Double Taxation Add-on or top-up tax,
Foreign tax credit Foreign tax credit
Foreign tax credit Foreign tax credit
applied based on priority applied based on priority
allowed, but limited to allowed, but limited to
allowed, but limited to allowed, but limited to
80% of foreign taxes 80% of foreign taxes
95% of foreign taxes 95% of foreign taxes

~~21 Stephanie Soong, U.S. Must Reform GILTI in Line With OECD Pillar 2, Grinberg Says, Tax Notes Today Federal,~~
~~December 19, 2022.~~
~~22 See CRS Report R47328, The 15% Corporate Alternative Minimum Tax, by Jane G. Gravelle for a discussion of the~~
~~new alternative minimum tax, including how it might relate to GLoBE.~~
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~~GILTI as Proposed in~~

~~GLoBE~~
~~GILTI (Current Law)~~
~~the BBBA~~
Losses Losses
15% of losses carried 15% of losses carried
No loss carryforward No loss carryforward
One-year loss One-year loss
forward as future credits forward as future credits
carryforward carryforward
Other features Other features
Credits for deferred Credits for deferred

income and deductions to income and deductions to
address timing differences address timing differences
between tax and financial between tax and financial
income income
Excluded Industries Excluded Industries
International shipping International shipping
International shipping International shipping
International shipping International shipping
income income
income and foreign oil income and foreign oil
income income
and gas extraction income and gas extraction income
Source: Congressional Research Service. Congressional Research Service.
An important difference between current-law GILTI and GLoBE is the overall treatment of An important difference between current-law GILTI and GLoBE is the overall treatment of
foreign income and foreign tax credits. Income, losses, and foreign tax credits are measured on an foreign income and foreign tax credits. Income, losses, and foreign tax credits are measured on an
overall basis for all foreign countries under GILTI. As a result, losses in one jurisdiction can overall basis for all foreign countries under GILTI. As a result, losses in one jurisdiction can
offset income in another, and credits in excess of U.S. taxes in a high-tax jurisdiction can offset offset income in another, and credits in excess of U.S. taxes in a high-tax jurisdiction can offset
U.S. taxes in low-tax jurisdictions. GLoBE would apply separately to each country, and the U.S. taxes in low-tax jurisdictions. GLoBE would apply separately to each country, and the
BBBA would apply this per-country treatment under GILTI. BBBA would apply this per-country treatment under GILTI.
The GILTI base is taxable income, whereas the base under GLOBE is financial income. The GILTI base is taxable income, whereas the base under GLOBE is financial income.
Presumably, GLoBE proposes using financial income because financial accounting rules are more Presumably, GLoBE proposes using financial income because financial accounting rules are more
standardized across countries, whereas computing taxable income depends on the structure of standardized across countries, whereas computing taxable income depends on the structure of
each individual country’s tax system. The GLoBE rules include provisions to address timing each individual country’s tax system. The GLoBE rules include provisions to address timing
differences based on when income and expense are recognized under tax accounting and financial differences based on when income and expense are recognized under tax accounting and financial
accounting principles. GLoBE also allows for tax rules regarding deferred compensation, such as accounting principles. GLoBE also allows for tax rules regarding deferred compensation, such as
stock options. stock options.
Tax rates are also lower under the current GILTI regime than under GLoBE. Although the current Tax rates are also lower under the current GILTI regime than under GLoBE. Although the current
GILTI tax rate is 10.5%, the GILTI tax actually applies if the foreign tax rate is slightly higher GILTI tax rate is 10.5%, the GILTI tax actually applies if the foreign tax rate is slightly higher
due to the limitation on foreign tax credits. Specifically, GILTI taxes will apply as long as the due to the limitation on foreign tax credits. Specifically, GILTI taxes will apply as long as the
foreign tax rate is below the U.S. tax rate divided by the share of foreign tax credits allowed, foreign tax rate is below the U.S. tax rate divided by the share of foreign tax credits allowed,
Congressional Research Service 9 link to page 7 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy which is 80%. Thus, the 10.5% tax applies to income earned in foreign tax jurisdictions with rates which is 80%. Thus, the 10.5% tax applies to income earned in foreign tax jurisdictions with rates
less than 13.125% (0.105/0.8) under current law. After 2025, when the GILTI tax rate increases to less than 13.125% (0.105/0.8) under current law. After 2025, when the GILTI tax rate increases to
13.125%, GILTI taxes will apply to income earned in foreign tax jurisdictions with rates less than 13.125%, GILTI taxes will apply to income earned in foreign tax jurisdictions with rates less than
16.4% (0.13125/0.8). 16.4% (0.13125/0.8).
GLoBE and GILTI take different approaches to reducing double taxation. The method of avoiding GLoBE and GILTI take different approaches to reducing double taxation. The method of avoiding
double taxation under GLoBE is to apply the minimum tax as a top-up tax with the right to tax double taxation under GLoBE is to apply the minimum tax as a top-up tax with the right to tax
first belonging to the source country, via a QDMTT, then belonging to the home country of the first belonging to the source country, via a QDMTT, then belonging to the home country of the
parent company (or partially owned parent entity) through the IIR, then finally to the countries parent company (or partially owned parent entity) through the IIR, then finally to the countries
where other constituent entities operate through the UTPR. The method of avoiding double where other constituent entities operate through the UTPR. The method of avoiding double
taxation under GILTI is allowing a credit against U.S. taxes for up to 80% of foreign taxes paid. taxation under GILTI is allowing a credit against U.S. taxes for up to 80% of foreign taxes paid.
A study by the Penn Wharton Budget Model computed effective tax rates for 51 countries under A study by the Penn Wharton Budget Model computed effective tax rates for 51 countries under
the OECD proposal, the current GILTI rules, and the rules in the BBBA.the OECD proposal, the current GILTI rules, and the rules in the BBBA.2324 All of the countries in All of the countries in
Table 1 except Canada and the U.K. would experience increased taxes under GLoBE compared except Canada and the U.K. would experience increased taxes under GLoBE compared

~~23 Penn Wharton Budget Model,~~ ~~Effective Tax Rates on U.S. Multinationals’ Foreign Income Under Proposed Changes~~
~~by the House Ways and Means and the OECD, September 28, 2021, https://budgetmodel.wharton.upenn.edu/issues/~~
~~2021/9/28/effective-tax-rates-multinationals-ways-and-means-and-oecd#:~:text=~~
~~In%20aggregate%2C%20PWBM%20estimates%20that,the%20statutory%20rate%20of%2035%25.~~
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to present law, suggesting that, without change, other countries could collect additional taxes on to present law, suggesting that, without change, other countries could collect additional taxes on
U.S. foreign operations. With the changes proposed in the BBBA, the U.S. tax rate would be U.S. foreign operations. With the changes proposed in the BBBA, the U.S. tax rate would be
higher than the GLoBE rate except in Canada, so the United States would collect the residual higher than the GLoBE rate except in Canada, so the United States would collect the residual
taxes. The study also indicated the importance of the per-country rule in producing tax rates taxes. The study also indicated the importance of the per-country rule in producing tax rates
higher than the GLoBE rate. Overall, under current law, U.S. multinationals are estimated to higher than the GLoBE rate. Overall, under current law, U.S. multinationals are estimated to
collect a residual tax of 2.1% with the combined U.S. and foreign tax rate of 12.7%. GLoBE collect a residual tax of 2.1% with the combined U.S. and foreign tax rate of 12.7%. GLoBE
would increase the residual tax to 6.1% for a total of 16.7%. That is, other countries would collect would increase the residual tax to 6.1% for a total of 16.7%. That is, other countries would collect
revenues of 4% of income. With the changes in the BBBA, the U.S. residual tax would rise to revenues of 4% of income. With the changes in the BBBA, the U.S. residual tax would rise to
7.4% and the total tax to 18.1%, with the United States collecting those additional revenues. 7.4% and the total tax to 18.1%, with the United States collecting those additional revenues.
FY2023 Budget Proposals
The Administration’s FY2023 budget proposals contain some additional provisions to conform The Administration’s FY2023 budget proposals contain some additional provisions to conform
the U.S. tax system with GLoBE and to ensure that the United States exercises its rights to the U.S. tax system with GLoBE and to ensure that the United States exercises its rights to
taxation.taxation.2425
Under current law, the base erosion and anti-abuse tax provides for an alternative calculation of Under current law, the base erosion and anti-abuse tax provides for an alternative calculation of
tax by adding certain payments to related foreign parties (such as interest and royalties) and tax by adding certain payments to related foreign parties (such as interest and royalties) and
taxing this income at 10%. Payments for the cost of goods sold are not included. BEAT does not taxing this income at 10%. Payments for the cost of goods sold are not included. BEAT does not
allow tax credits, including the foreign tax credit, except for a temporary allowance of the allow tax credits, including the foreign tax credit, except for a temporary allowance of the
research credit along with 80% of the low-income housing tax credit and two energy credits. research credit along with 80% of the low-income housing tax credit and two energy credits.
After 2025, the BEAT rate will rise to 12.5% and no credits will be allowed. After 2025, the BEAT rate will rise to 12.5% and no credits will be allowed.
The Administration’s proposal would replace BEAT with a UTPR similar to the proposal in The Administration’s proposal would replace BEAT with a UTPR similar to the proposal in
GLoBE that would apply to multinational firms with $850 million in revenues in two of the past GLoBE that would apply to multinational firms with $850 million in revenues in two of the past
four years. As with GLoBE, it would be applied to financial income and allocated based on the four years. As with GLoBE, it would be applied to financial income and allocated based on the
share of employees and tangible assets. The proposal would also apply a QMDTT to ensure that share of employees and tangible assets. The proposal would also apply a QMDTT to ensure that
the United States collects the top-up tax on U.S.-source income. This measure is projected to raise the United States collects the top-up tax on U.S.-source income. This measure is projected to raise
$239 billion over 10 years, although there is no separate estimate for the QMDTT, which would $239 billion over 10 years, although there is no separate estimate for the QMDTT, which would
apply to domestic operations. The proposal states that it will ensure that taxpayers benefit from apply to domestic operations. The proposal states that it will ensure that taxpayers benefit from
24 Penn Wharton Budget Model, Effective Tax Rates on U.S. Multinationals’ Foreign Income Under Proposed Changes by the House Ways and Means and the OECD, September 28, 2021, https://budgetmodel.wharton.upenn.edu/issues/2021/9/28/effective-tax-rates-multinationals-ways-and-means-and-oecd#:~:text=In%20aggregate%2C%20PWBM%20estimates%20that,the%20statutory%20rate%20of%2035%25. 25 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals, March 2022, https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf. Congressional Research Service 10 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy tax credits and other tax incentives encouraging U.S. jobs and investments, though specifics of tax credits and other tax incentives encouraging U.S. jobs and investments, though specifics of
how this will be accomplished are not provided. how this will be accomplished are not provided.
The Administration also proposes raising the corporate tax rate to 28%, while maintaining the The Administration also proposes raising the corporate tax rate to 28%, while maintaining the
proposed treatment of GILTI in the BBBA. Under GILTI, the 15.015% rate results from a 28.5% proposed treatment of GILTI in the BBBA. Under GILTI, the 15.015% rate results from a 28.5%
deduction of income under a 21% corporate tax rate (i.e., 1-0.285) multiplied by 21% equals deduction of income under a 21% corporate tax rate (i.e., 1-0.285) multiplied by 21% equals
15.0155. Leaving the deduction of 28.5% raises the GILTI rate to 20% with a 28% tax rate (i.e., 15.0155. Leaving the deduction of 28.5% raises the GILTI rate to 20% with a 28% tax rate (i.e.,
(1-0.285) x 0.28). (1-0.285) x 0.28).
Implications for Revenues and Incentives
GLoBE has a broader scope than GILTI. GILTI and its proposed revisions focus on U.S. taxation GLoBE has a broader scope than GILTI. GILTI and its proposed revisions focus on U.S. taxation
of its own multinationals’ operations abroad. GLoBE could affect U.S. multinationals’ operations of its own multinationals’ operations abroad. GLoBE could affect U.S. multinationals’ operations
in the United States as well as abroad through the UTPR, even absent U.S. action with respect to in the United States as well as abroad through the UTPR, even absent U.S. action with respect to
the GLoBE proposal. This is because the UTPR could be imposed by a foreign country on a the GLoBE proposal. This is because the UTPR could be imposed by a foreign country on a
foreign constituent entity of U.S. multinationals (e.g., foreign subsidiary of a U.S. parent) by foreign constituent entity of U.S. multinationals (e.g., foreign subsidiary of a U.S. parent) by
disallowing deductions or making equivalent changes. The UTPR would be equivalent to raising disallowing deductions or making equivalent changes. The UTPR would be equivalent to raising
the tax in the United States, since it is triggered by the tax rate in the United States, even though it the tax in the United States, since it is triggered by the tax rate in the United States, even though it

~~24 U.S. Department of the Treasury,~~ ~~General Explanations of the Administration’s Fiscal Year 2023 Revenue~~
~~Proposals, March 2022, https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf.~~
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is collected by a foreign government. Similarly, a domestic U.S. investment made by a foreign is collected by a foreign government. Similarly, a domestic U.S. investment made by a foreign
multinational could be subject to taxes in the country where the foreign parent is located through multinational could be subject to taxes in the country where the foreign parent is located through
an IIR or in the country where another constituent entity of the MNE group is located through the an IIR or in the country where another constituent entity of the MNE group is located through the
UTPR. UTPR.
The Joint Committee on Taxation (JCT) has estimated that the adoption of GLoBE by countries The Joint Committee on Taxation (JCT) has estimated that the adoption of GLoBE by countries
that have already committed to Pillar 2 would result in a U.S. revenue that have already committed to Pillar 2 would result in a U.S. revenue ~~loss~~loss of $175 billion or a revenue gain of $224 billion from 2023 to 2033, depending on how U.S. corporations respond with respect to profit shifting.26 These estimates, which the JCT terms the “lower bound” and “upper bound,” form the basis for JCT’s “modified baseline.” The JCT used its modified baseline to estimate the revenue effects of various scenarios involving the rest of the world (i.e., those not already committed to Pillar 2) and the United States. The JCT estimated that U.S. revenues would be reduced by $122 billion between 2023 and 2033 relative to its modified baseline if the rest of the world adopts GLoBE and the United States does not.27 If both the rest of the world and the United States adopt GLoBE, JCT estimated reduced U.S. revenues of $57 billion, relative to the modified baseline. If the United States adopts GLoBE and the rest of the world does not, JCT estimated increased U.S. revenues of $237 billion, relative to the modified baseline. If the United States adopts the major components of GloBE aside from the undertaxed payments rule (UTPR) and the rest of the world does not, JCT estimated increased U.S. revenues of $102.6 billion, relative to the modified baseline. ~~of $175 billion over~~
~~nine years, although this amount could be reduced or reversed with profit shifting. The upper-~~
~~range profit-shifting scenario assumes that 75% of profits are shifted to the United States,~~
~~resulting in a revenue gain of $224 billion rather than a loss. Using an intermediate assumption of~~
~~the degree of profit shifting, adoption of GLoBE by the rest of the world would cost $122 billion~~
~~over nine years. If both the rest of the world and the United States adopt GLoBE, JCT has~~
~~estimated a revenue gain of $235 billion.25~~
Thus, if GLoBE is widely adopted (and it has already been adopted by the European Union and a Thus, if GLoBE is widely adopted (and it has already been adopted by the European Union and a
number of other important trading partners), changes in U.S. taxes as proposed in the BBBA or number of other important trading partners), changes in U.S. taxes as proposed in the BBBA or
by the Administration (increasing GILTI and adopting the UTPR and the domestic top-up tax) by the Administration (increasing GILTI and adopting the UTPR and the domestic top-up tax)
might shift the receipt of revenue to the United States, but higher taxes will apply to both foreign might shift the receipt of revenue to the United States, but higher taxes will apply to both foreign
entities and domestic operations. This issue has led to concerns about the effects on domestic entities and domestic operations. This issue has led to concerns about the effects on domestic
investment. investment.
26 Joint Committee on Taxation, Possible Effects of Adopting the OECD’s Pillar 2, Both Worldwide and in the United States, June 2023, https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf. See the appendix for a list of countries already committed to Pillar 2. 27 In all the scenarios discussed here, JCT assumes that if adoption occurs it would happen in 2025. Congressional Research Service 11 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy At the same time, several aspects of the GLoBE proposal would limit its effect on domestic tax At the same time, several aspects of the GLoBE proposal would limit its effect on domestic tax
policy and incentives that have been provided to encourage certain types of investment. First, the policy and incentives that have been provided to encourage certain types of investment. First, the
carve-out for payroll and tangible assets will reduce any top-up tax. Second, incentives that carve-out for payroll and tangible assets will reduce any top-up tax. Second, incentives that
involve only timing differences, such as accelerated depreciation, should not be affected by involve only timing differences, such as accelerated depreciation, should not be affected by
GLoBE because the proposal contains adjustments for temporary timing differences between GLoBE because the proposal contains adjustments for temporary timing differences between
financial and tax accounting. Bonus depreciation is the most significant tax incentive in the financial and tax accounting. Bonus depreciation is the most significant tax incentive in the
current U.S. code and allows investment in equipment to be deducted immediately rather than current U.S. code and allows investment in equipment to be deducted immediately rather than
over a period of time. Bonus depreciation is scheduled to be phased out over five years beginning over a period of time. Bonus depreciation is scheduled to be phased out over five years beginning
in 2023, although tangible assets will still have accelerated depreciation. Similarly, GLoBE would in 2023, although tangible assets will still have accelerated depreciation. Similarly, GLoBE would
allow deductions for stock options, which often reduce effective tax rates for financial purposes, allow deductions for stock options, which often reduce effective tax rates for financial purposes,
to be treated as under the tax law, so they would not be affected. to be treated as under the tax law, so they would not be affected.
The third aspect is the treatment of provisions in the form of credits. The major U.S. business tax The third aspect is the treatment of provisions in the form of credits. The major U.S. business tax
credits include the research and experimentation (R&E) tax credit, the low-income housing tax credits include the research and experimentation (R&E) tax credit, the low-income housing tax
credit (LIHTC), and credits for renewable energy; there are also smaller credits programs, such as credit (LIHTC), and credits for renewable energy; there are also smaller credits programs, such as
the new markets tax credit (NMTC) and the historic rehabilitation tax credit (HTC). None of the new markets tax credit (NMTC) and the historic rehabilitation tax credit (HTC). None of
these credits are refundable and, without an exception, they could trigger a top-up tax and these credits are refundable and, without an exception, they could trigger a top-up tax and
potentially reduced investment in the activities that generate these credits.potentially reduced investment in the activities that generate these credits.2628 Community Community
development interest and advocacy groups expressed this concern to Treasury Secretary Yellen in development interest and advocacy groups expressed this concern to Treasury Secretary Yellen in
an April 5, 2022, letter.an April 5, 2022, letter.2729 However, outside the R&E tax credit, and some business energy credits However, outside the R&E tax credit, and some business energy credits
that relate to the core business, most of the investments using these credits are accounted for that relate to the core business, most of the investments using these credits are accounted for
using the equity method and appear not to be affected by GLoBE.using the equity method and appear not to be affected by GLoBE.2830 The R&E credit and other ~~The R&E credit and other~~

~~25 Joint Committee on Taxation,~~ ~~Possible Effects of Adopting the OECD’s Pillar 2, Both Worldwide and in the United~~
~~States, June 2023, https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf. See JCT document for a~~
~~list of countries already committed to Pillar 2.~~
~~26 The BBBA proposed making the energy credits refundable, which would significantly reduce any impact of GLoBE.~~
~~27 Letter to Janet Yellen, U.S. Secretary of the Treasury, April 5, 2022, https://cdn.ymaws.com/www.nalhfa.org/~~
~~resource/resmgr/alert_files/Community_Development_Financ.pdf.~~
~~28 Most of the investment financing raised through LIHTC and renewable energy credits is from banks and financial~~
~~institutions. The interest from banks and financial institutions in LIHTC is partly motived by the Community~~
~~(continued...)~~
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business credits not accounted for under the equity method would lower the effective tax rates, business credits not accounted for under the equity method would lower the effective tax rates,
which would introduce the potential for a top-up tax to apply and for the credit’s incentive to be which would introduce the potential for a top-up tax to apply and for the credit’s incentive to be
diminished. diminished.
A number of energy business credits are transferable, so that credits can be sold to firms that can A number of energy business credits are transferable, so that credits can be sold to firms that can
use them. It is not entirely clear how these transferable credits will be treated under Pillar 2. In use them. It is not entirely clear how these transferable credits will be treated under Pillar 2. In
economic effect, a credit that is transferable is similar to a refundable credit. However, under economic effect, a credit that is transferable is similar to a refundable credit. However, under
accounting rules transferable credits will likely be treated the same as nontransferable credits, that accounting rules transferable credits will likely be treated the same as nontransferable credits, that
is, reducing tax liability.is, reducing tax liability.2931 There is no indication thus far from the OECD that transferable, or There is no indication thus far from the OECD that transferable, or
transferred, credits will be treated any differently from ordinary credits. transferred, credits will be treated any differently from ordinary credits.
One option to preserve these credits’ incentives under the GLoBE framework would be to make One option to preserve these credits’ incentives under the GLoBE framework would be to make
them refundable. This change would cause the credit to increase income rather than reduce taxes, them refundable. This change would cause the credit to increase income rather than reduce taxes,
significantly reducing its impact on effective tax rates. One study estimated that making all significantly reducing its impact on effective tax rates. One study estimated that making all
general business credits refundable would cost $193 billion over FY2023-FY2032, although this general business credits refundable would cost $193 billion over FY2023-FY2032, although this
~~cost would be reduced to $172 billion if it excluded the refundability of previously accrued~~
~~credits.30~~
~~Like the research credit, the deduction for foreign-derived intangible income (FDII) could also~~
~~lead to a top-up tax. FDII allows a deduction for income associated with foreign-derived income~~
~~of intangible assets held in the United States. It was enacted to equalize the treatment of~~
~~intangible assets held in the United States with those held abroad that benefit from the lower tax~~
~~rates imposed by GILTI. Tax-exempt interest income is another tax preference that could lower~~
~~effective tax rates.~~
~~Aggregated data from the IRS’s Country-by-Country report can be used to examine industry-level~~
~~effective tax rates under GLoBE, and the effect of substance carve-outs (Table 3).31 Effective tax~~
~~rates were calculated as U.S. taxes accrued (to capture timing differences) divided by profits from~~
~~the United States. This table relates to the permanent effects, since the carve-outs are larger~~
~~during a 10-year transition period.~~

28 The BBBA proposed making the energy credits refundable, which would significantly reduce any impact of GLoBE. 29 Letter to Janet Yellen, U.S. Secretary of the Treasury, April 5, 2022, https://cdn.ymaws.com/www.nalhfa.org/resource/resmgr/alert_files/Community_Development_Financ.pdf. 30 Most of the investment financing raised through LIHTC and renewable energy credits is from banks and financial institutions. The interest from banks and financial institutions in LIHTC is partly motived by the Community Reinvestment Act, though both LIHTC and the renewable tax credits are attractive to banks because they typically Reinvestment Act, though both LIHTC and the renewable tax credits are attractive to banks because they typically
expect to have tax liabilities to offset with the credits. A review of recent 10K reports of three of the largest banks expect to have tax liabilities to offset with the credits. A review of recent 10K reports of three of the largest banks
indicated use of this method as well as significant low-income housing credits. For more information on the LIHTC indicated use of this method as well as significant low-income housing credits. For more information on the LIHTC
investor landscape, see CohnReznick, LLP, investor landscape, see CohnReznick, LLP, Housing Tax Credits Investments: Investment and Operational
Performance, November 18, 2019. For more information on the renewable tax credits investor landscape, see Oliver , November 18, 2019. For more information on the renewable tax credits investor landscape, see Oliver
Metcalfe and Tara Narayanan, “U.S. Clean Energy Boom Strains Tax Equity Supply,” Metcalfe and Tara Narayanan, “U.S. Clean Energy Boom Strains Tax Equity Supply,” BloombergNEF, August 12, , August 12,
2021. 2021.
2931 See Peter R. Merrill et al., “Where Credit Is Due: Treatment of Tax Credits Under Pillar 2,” See Peter R. Merrill et al., “Where Credit Is Due: Treatment of Tax Credits Under Pillar 2,” Tax Notes, March 20, , March 20,
2023, pp. 1967-1979. 2023, pp. 1967-1979.
~~30 Ibid.~~
~~31 Effective tax rates for specific companies or more specific industries are not available. These data generally cover the~~
~~firms that would be subject to GLoBE. Inclusion in IRS data is triggered by revenues in the previous year, while~~
~~inclusion in GLoBE is triggered by two out of the past four years. GloBE revenue triggers are measured in euros, while~~
~~IRS reporting is based on dollars.~~
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Congressional Research Service 12 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy cost would be reduced to $172 billion if it excluded the refundability of previously accrued credits.32 Like the research credit, the deduction for foreign-derived intangible income (FDII) could also lead to a top-up tax. FDII allows a deduction for income associated with foreign-derived income of intangible assets held in the United States. It was enacted to equalize the treatment of intangible assets held in the United States with those held abroad that benefit from the lower tax rates imposed by GILTI. Tax-exempt interest income is another tax preference that could lower effective tax rates. Aggregated data from the IRS’s Country-by-Country report can be used to examine industry-level effective tax rates under GLoBE, and the effect of substance carve-outs (Table 3).33 Effective tax rates were calculated as U.S. taxes accrued (to capture timing differences) divided by profits from the United States. This table relates to the permanent effects, since the carve-outs are larger during a 10-year transition period. Table 3. Effective Tax Rates in the United States by Major Industry Group, 2019, and
the Permanent OECD Carve-Outs
Percentage
Percentage
Total
Reduction in
Reduction in
Percentage
Tax Base Due
Tax Base Due
Reduction in
Effective
to Wage
to Capital
Base Due to
Industry
Tax Rate
Carve-Outs
Carve-Outs
Carve-Outs
Agriculture, Fishing, Forestry, Mining, Agriculture, Fishing, Forestry, Mining,
-0.9% -0.9%
7.3% 7.3%
159.2% 159.2%
166.5% 166.5%
Oil and Gas Construction, Utilities, Oil and Gas Construction, Utilities,
Construction Construction
Manufacturing Manufacturing
12.8% 12.8%
4.4% 4.4%
18.3% 18.3%
22.7% 22.7%
Wholesale and Retail Trade, Wholesale and Retail Trade,
7.9% 7.9%
9.8% 9.8%
25.8% 25.8%
35.6% 35.6%
Transportation, Warehousing Transportation, Warehousing
Information Information
20.8% 20.8%
4.1% 4.1%
19.3% 19.3%
23.4% 23.4%
Finance, Insurance, Real Estate Finance, Insurance, Real Estate
11.1% 11.1%
2.6% 2.6%
17.0% 17.0%
19.6% 19.6%
Professional, Scientific, and Technical Professional, Scientific, and Technical
16.9% 16.9%
13.7% 13.7%
13.7% 13.7%
27.4% 27.4%
Services Services
Management of Companies, Other Management of Companies, Other
18.2% 18.2%
9.4% 9.4%
18.1% 18.1%
27.6% 27.6%
Services Services
Source: CRS calculations from Internal Revenue Service, CRS calculations from Internal Revenue Service, Statistics of Income, International, Country-by-Country
Report: Tax Jurisdiction Information, Major Industry Group, Geographic Region, and Selected Tax Jurisdiction, ,
https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report. https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report.
Notes: Taxes accrued in the United States divided by profit in the United States. Profit is reduced by 5% of Taxes accrued in the United States divided by profit in the United States. Profit is reduced by 5% of
employees multiplied by $67,000 plus 5% of tangible assets when incorporating carve-outs. Average wages are employees multiplied by $67,000 plus 5% of tangible assets when incorporating carve-outs. Average wages are
from Statista, https://www.statista.com/statistics/243842/annual-mean-wages-and-salary-per-employee-in-the-from Statista, https://www.statista.com/statistics/243842/annual-mean-wages-and-salary-per-employee-in-the-
us/#:~:text=Annual%20mean%20wages%20and%20salary%20per%20employee%20in%20the%20U.S.%202000%2Dus/#:~:text=Annual%20mean%20wages%20and%20salary%20per%20employee%20in%20the%20U.S.%202000%2D
2020&text=In%202020%2C%20the%20average%20wage,and%20payments%2Din%2Dkind. 2020&text=In%202020%2C%20the%20average%20wage,and%20payments%2Din%2Dkind.
32 Ibid. 33 Effective tax rates for specific companies or more specific industries are not available. These data generally cover the firms that would be subject to GLoBE. Inclusion in IRS data is triggered by revenues in the previous year, while inclusion in GLoBE is triggered by two out of the past four years. GloBE revenue triggers are measured in euros, while IRS reporting is based on dollars. Congressional Research Service 13 The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy Although the high degree of aggregation makes the numbers in ~~Although the high degree of aggregation makes the numbers i~~n Table 3 less informative, there are less informative, there are
differences in tax rates. Some are well above 15%. In cases where the top-up tax applies, it will differences in tax rates. Some are well above 15%. In cases where the top-up tax applies, it will
typically be reduced by the deduction of carve-outs. In addition, compensation relating to stock typically be reduced by the deduction of carve-outs. In addition, compensation relating to stock
options and similar forms of compensation would be allowed as deductible items, raising the options and similar forms of compensation would be allowed as deductible items, raising the
effective tax rate compared to financial income. Thus, it seems unlikely that GLoBE would have effective tax rate compared to financial income. Thus, it seems unlikely that GLoBE would have
a significant impact on domestic tax incentives, especially in the near term. a significant impact on domestic tax incentives, especially in the near term.

Author Information

Jane G. Gravelle Jane G. Gravelle
Mark P. Keightley Mark P. Keightley
Senior Specialist in Economic Policy Senior Specialist in Economic Policy
Specialist in Economics Specialist in Economics

~~Congressional Research Service~~

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~~The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy~~

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