The G7’s proposed “side-by-side” solution for a global minimum tax has raised the question of whether it would give U.S. multinational corporations (MNEs) an unfair advantage. This potential deal would essentially exempt U.S.-based companies from Pillar Two’s income inclusion and undertaxed profits rules. To understand the implications, we can evaluate four key aspects: the U.S. tax environment, the stringency of its tax laws, the consequences of no deal, and the comparative compliance costs.
Is the U.S. a Tax Haven?
First and foremost, the U.S. is not a tax haven. With a 21% domestic corporate tax rate and a 15% corporate alternative minimum tax (CAMT), the U.S. meets the criteria of a high-tax jurisdiction under Pillar Two standards. Ironically, some European Union (EU) member states and smaller nations have been under greater scrutiny for this issue.
Are U.S. Rules Less Stringent Than Pillar Two?
The U.S. tax system’s net CFC-tested income (NCTI), formerly known as GILTI, is often compared to Pillar Two. While the NCTI’s rate is below 15% and it uses a blended formula, studies indicate that U.S. companies have consistently paid effective tax rates on their foreign income exceeding 15% since 2012, sometimes reaching over 25%. When considering factors like less generous foreign tax credits, the removal of the substance exclusion, and the lack of loss carryovers, the U.S. system might actually be more stringent than Pillar Two.
The Consequences of No Deal
Without a side-by-side solution, U.S. firms could face double taxation. This is due to the ordering rules and the treatment of tax credits under Pillar Two. Despite the U.S. being a pioneer in adopting a minimum tax in 2017, before Pillar Two’s inception, a lack of a cohesive agreement could lead to costly and inefficient outcomes for U.S. MNEs. The OECD itself outlined a similar “co-existence” concept in its Pillar Two blueprint in 2020.
Comparing Compliance Costs
The issue of which system has lower compliance costs is complex. The U.S. tax code is notoriously intricate, and taxpayers are estimated to spend billions of hours and hundreds of billions of dollars each year on compliance. For businesses, this can range from $15,000 for an average corporation to $140,000 for a large one.
A study of U.S. companies found that complying with GILTI was a greater cost driver than Pillar Two, partly because the GILTI rules have been in place longer. Companies reported an average 32% increase in compliance costs from 2017 to 2023, largely due to increasingly complex international rules.
On the other hand, studies in Germany predict that MNEs will face significant implementation costs for Pillar Two, with an average of €703,000 per firm for initial setup. A Deloitte survey of tax leaders worldwide found that 70% of respondents expect to spend over $500,000 annually on Pillar Two compliance, with 25% expecting to spend over $1 million. Many companies believe that compliance costs will exceed the actual tax payments under Pillar Two.
Ultimately, it is difficult to determine which system—the U.S. or Pillar Two—has a clear advantage in terms of compliance costs. The complexity of both systems and ongoing policy changes make precise calculations challenging. To ensure fairness, the OECD should focus on simplifying the rules to reduce compliance burdens, which would help justify a “side-by-side” solution and prevent future tax disputes.