Prospects for a Global Minimum Tax Rate

HARIHARAN: Hello everyone, and welcome to today's Council on Foreign Relations virtual meeting on the prospects for a global minimum tax rate. I'm Tara Hariharan, director of global macro research at NWI Management, LP, a global macro hedge fund based in New York.

Our roundtable this morning will dissect the latest global minimum corporate tax proposals made at the G7 meetings recently, the feasibility and possible timeline of the passage, and the potential consequences for US and global corporations, as well as for the US consumer.

It is my honor today to discuss these subjects with my two esteemed fellow panelists. Ronald E. Creamer Jr., is partner and head of the tax group at Sullivan and Cromwell, LLP, with extensive experience regarding cross-border M&A transactions. Welcome, Ron.

CREAMER: Thank you, Tara.

HARIHARAN: And Bob Stack is a managing director in Deloitte's Washington national and international tax practice. And he was also deputy assistant secretary for international tax affairs at the US Treasury during the Obama administration, at which time he represented the US government at the OECD. Thank you for joining us, Bob.

STACK: Happy to be here.

HARIHARAN: Now, I will engage Ron and Bob in about half an hour of conversation, before we open the floor up for questions from our audience.

So to jump right in, Ron, let's start with you. Please give us a quick description of the G7's proposed 15 percent floor for a global minimum corporate tax, and the related criteria for tax eligibility and geographical allocations. What existing issues or loopholes would you see this tax proposal aiming to resolve?

CREAMER: Okay, well, I agree that… let's just jump in. And tax is one of these things where sometimes metaphors are necessary. So, my metaphor is: little Jimmy is out playing on the monkey bars, comes home, and says to his mom, "Can I have some cookies?" The mom says, "You can have dinner in an hour. No, you can't have any cookies." And Jimmy says, "Oh, Billy's mom lets him have cookies before dinner." And Jimmy's mom thinks for a second, and she says, "Well, okay, you can have one." But really, what Jimmy's mom wants to know is, did Billy's mom really say that? And could she talk to Billy's mom about making a rule that Billy can't get cookies. Because it'd be a lot easier for her not to give Jimmy cookies, if Billy didn't get cookies.

So, to depart from that, the idea of a minimum tax is--to get a little more technical--there are broadly two kinds of systems in the world. There is a system where... people talk about worldwide system of taxation or a territorial system. I think that that's a little bit of a misnomer. There are systems... the better way of thinking about it is that each country looks at subsidiary jurisdiction countries and says, either, I care about the tax, the amount of tax that's paid in those countries, or I don't care. And the jurisdiction that says "I do care" is a credit jurisdiction.

So, in the US, for example, we look at all the subsidiaries, and generally, we say, okay, those subsidiaries will let you do whatever you naturally do in those subsidiaries, be subject to whatever tax you are subject to, and then there's going to be a flow up to the top. And we'll give you a tax credit for the taxes that you pay on the foreign subsidiary, so paying nothing. Then, if it flows up, then you're not going to get a foreign tax credit, you're gonna have to pay full US tax, or, you know, as Bob will discuss, perhaps at a reduced rate, you know, the flow up will happen.

The exemption countries, which are probably most of the countries, are different. They say, in broad strokes, we don't care whether you paid a lot of tax down below, or none at all. You're just exempt on the income that flows up, because that happened somewhere else. And so the Jimmy's mom, in my way of thinking, is really mostly the credit countries. The US being the best example. And the Billy's mom are the participation exemption countries, where they, those countries, pretty much are more permissive in allowing low-taxed income to exist in the system, and not trying to top it up.

So then, with that construct, it's relatively easy to see why the credit countries would want such a system. Because they want to not allow too many cookies to be eaten. And they also don't want to be undercut by Billy's mom. The participation exemption countries, it's also true that they want such a system, because they, really honestly, don't want too many cookies either. Because there's other harm that happens to them as a result. And so, what's going to play out--and I think that this is sort of leading to the next question--what's going to play out is, how pure is this system going to be? How difficult is it going to be to administer? What carve-outs are going to be given to specific industries, or to low-tax jurisdictions where there actually is real substance? So somebody has one thousand employees in the Cayman Islands. Are they not allowed to have a zero rate for those that activity?

Those kinds of questions are going to come up. And maybe we'll come back to this, the idea that this is a minimum tax, and not an alternative minimum tax, which is also quite important, because in an alternative minimum tax, if you pay the minimum tax, then you kind of get a credit, if you blip up into the regular tax. And so being a little bit or above or below doesn't really matter, but in a minimum tax, it's quite important because you don't get a credit if you pay the minimum tax. So that's just a little bit of an advertisement for the future.

HARIHARAN: All right, Ronald. I think frankly, even at the G7, a discussion about cookies would have gone even better than talking about corporate tax the way we did. Bob, how do you see the G7 proposal for this 15 percent floor for a global minimum corporate tax? Considering the proposal seems to have originated with the US? How do you see this proposal relating to or complementing President Biden's proposals for his domestic tax strategies, including the plan that we originally heard about raising the US corporate tax rate to 28 percent? From 21 percent?

STACK: Sure, thanks for the question. You can almost view all the G7 comments that came out last week, the communiqué, through a domestic political US lens. Because the Biden administration would like to raise our corporate headline rate to 28 percent. And then have our own minimum tax rate at 21 percent. Now, you know, you don't have to be a DC lobbyist to know that US businesses are gonna go into Congress and into Treasury and say, wait a second, this is very difficult for us to compete, if we're the only ones in the world with a minimum tax. And so, going right back to Secretary Yellen's confirmation hearing and the like, you know, they focus very intently on the fact that we wanted to avoid this race to the bottom in terms of corporate rates. That's a theme, by the way, that goes back to what we were pursuing in our administration, when the UK was lowering interest rates, at one point hoping to get down to seventeen. And we've seen that the thrust for the US at the OECD has been, wow, we really need to tell Congress, you don't have to worry too much about raising the US minimum tax rate. Because look, we're being successful in getting the rest of the world to do the same. And even if the rest of the world doesn't get all the way up to where, you know, the Biden administration wants to go, you've kind of leveled that playing field, you know, to some degree.

So that's the perspective I think of, the connection with what the Biden folks want to do at the G7. And then ultimately, carry it through at the OECD. I will add a point, and we'll probably have more time to talk about this. You know, in my view, the G7 communiqué is very, very important for building momentum going into the inclusive framework meetings that are going to happen on June 30 and July 1, and the G20 meetings, July 9 and 10. We can talk more about why I think it's so important. But I actually think it was quite an achievement to get that number in the G7 communiqué for the Biden folks, and for their desire to, you know, push their domestic tax agenda.

HARIHARAN: I will ask you a bit later, Bob to opine further on what you think the timeline and the feasibility of this proposal passing is. But I want to go back to Ron, and start going into some specifics in terms of competitiveness, and which nations' corporates would stand to gain the most from this proposal, and which might lose the most from this proposal.

CREAMER: Yeah, that's very important, obviously. So, I think it's not exactly the same question, to see which countries derive the most increased revenue, and which countries' corporations benefit or detriment, and so it's important to ask both.

So, from a country perspective, this is not a Robin Hood kind of proposal. And in fact, it's sort of a rich-get-richer proposal. This informs, as Bob has noted, you know, as the rollout to more and more countries comes in, it's going to be more and more difficult to hold it together because the G7 are rich countries. And the reason that it's a rich-get-richer proposal is that the top jurisdictions are the ones that are going to get the extra tax revenue. So it's where the top company is incorporated. And usually, that decision is made based on capital markets and investor flows. And so you're going to find a lot more top-co issuers in rich countries. Which countries are detrimented? The countries that are detrimented are the ones that need to give tax incentives to bring activities to their jurisdiction, because those tax incentives are not going to be as valuable anymore. They might not be totally valueless, but they're certainly going to be less valuable. And so you're seeing already now people trying to protect their territory to say, well, you really don't mean that I can't give this kind of incentive, or this kind of activity, if there's now going to be this real scramble to try to protect things in those jurisdictions. But generally, it's a rich-get-richer proposal. From a company perspective, the way that I would term it is, the companies that have the most ability to move their income around the world to different jurisdictions are the ones that are most detrimented by the proposal, because that's not going to work anymore. The idea that you can stick your income in a low tax jurisdiction, yes, it'll have some benefit, but not as much as before. And which industries were they? They were the ones that were very intangible heavy. That's everyone's bugaboo, you know, so it's tech, it's pharma, those companies will have their tax rate increase the most. The more traditional businesses, the bricks and border businesses, the you know, the car dealer in Des Moines, you know, that kind of business is going to be the least effective because they weren't as mobile to begin with. So the, you know, they'll just have the normal system applied to them.

HARIHARAN: So as I understand it, the companies that you could say, deal a bit more in intellectual property than, as you say, in brick and mortar, would probably be more likely to be affected or have to change their business model.

Let me push you a little further, though, Ron, because you didn't mention any specific countries, even in your list of where you think tax revenues are going to increase the most. So, let me actually focus this discussion a little bit on the whole US-EU framework, because it seems that one of the issues that this G7 global minimum tax proposal seeks to help resolve is also the European concern that the US–the digital giants, the tech giants--are not being taxed properly.

CREAMER: Yeah, so there are two different things going on in the EU. One is a digital tax, and one is a minimum tax. And they're very politically connected. So in some ways, the US really wants, and again, Bob, I'd be interested in your reaction to this. I think the US really wants the minimum tax, they don't really want the digital tax. But they might be willing to give something on the digital tax to get the minimum tax. The EU is the opposite. The EU doesn't really want a minimum tax, they want a digital tax, and they might be willing to give something to get the other. Is that an oversimplification do you think, Bob?

STACK: No, I think that's exactly right. But it also demonstrates the difficulty of talking about the min tax in a vacuum. Because as Ron has pointed out, the rest of the world has said, particularly the UK, hey, we're willing to go along with his min tax proposal. But as Ron said, we really want this other proposal, that we call Pillar One, that's going to reallocate some of those excess profits of the, let's say, one hundred largest multinationals to the market jurisdictions. And so, this dynamic of, we'll go for two. And the rest of the world says, well, you better give us Pillar One. And oh, by the way, there's another tax we really haven't talked about which are these gross-based digital service taxes that the US also wants turned off. So it becomes very substantively interconnected. The Pillar One, which is the reallocation of taxing rights of the biggest companies, with Pillar Two, which is the min tax, and then sitting off on the side, is people want to get rid of these gross-based digital service taxes, which also originated in Europe, really as a way to bring the US business community and the US government back to the table after, let's say, in BEPS One, we were a little reluctant to rewrite US tax rules, or the world's tax rules, simply to let the rest of the world tax the US tech giants. And so the European said, okay, well, here's an incentive to come to the table. Until you do, we're going to propose some gross-based taxes on the digital tech flows. And I think that was frankly effective, kind of rejiggering, you know, the talks, and gets us to where we are today.

HARIHARAN: So Bob, do you think then that the Europeans now have enough information that they may want to take off these digital services taxes that are intended to target the US companies as well? Or, and I guess this also leads into the questions of the feasibility of this overall G7 global minimum tax proposal, do you think that the Europeans might be more likely to sort of keep a digital services tax regime going for some time until they really see how this works out?

STACK: Well, let me start with the end of your question, which is timing. The US, I think, in the G7, as reported in the Financial Times, went into the G7 meeting and said, hey, we have a political deal, everybody should take their digital service taxes off now. Which was a very big ask and a very heavy lift. But what the communiqué said was–this is really important–we're going to keep talking about getting rid of the digital service taxes (DSTs) in exchange for coming along on this reallocation that I called Pillar One. That is completely critical to the US participation in the whole deal, is a commitment by countries to take off the DSTs. However, it seems that many countries are going to want to take those DSTs off only when, not just because we have a political deal that we sing Kumbaya over a communiqué, but when Congress actually enacts the legislation, you know, ready to do Pillar One, which in our system of government, right, unlike parliamentary systems of government, just because Treasury agrees to something in a communiqué, doesn't really mean Congress is ready to go along. And we've seen letters already from Senator Crapo, around this question, asking questions about that, to inform the Congress of whether it would want to do that. So again, we have these very, very interconnected things. But from a US perspective, there's no deal if companies don't commit to do away with DSTs, at least, when things are implemented.

Now, here's a footnote, the EU is ready to roll out its own version proposal of a digital levy on July 14. And they're making noises, oh, well, this digital levy will be okay. And it's not expected to be one that the world will object to. And, you know, I'll just say, well, we'll see. Let's look at what the details of that are. But if countries start skirting the deal, by doing DSTs, that they kind of cleverly say, are not within the ambit of the deal, it completely lessens the incentive of the US ever to do Pillar One. And if you don't get Pillar One, you don't get Pillar Two, the min tax. So everything is tied together.

HARIHARAN: So Bob, then I have to ask you the million-dollar question, or I think, as the OECD tax director says, the 150 billion-dollar question, because that's how much revenues he thinks governments around the world will get from this tax. What is the feasibility of this G7 proposal passing both in the US, as well as abroad? And you're a veteran of the OECD tax conversations. So, what will it really take to get the OECD and the broader quorum of, I think 140 countries, to agree on this? And will they agree, or is there some sort of compromise that they might come to?

STACK: Yeah. But before we get to what the legislatures will do, let's just talk about the process going forward. So the G7 said something and some people say, oh well, it's just the G7. Obviously, they would say that, and they don't speak for these other 139 countries. Well, the 139 countries will meet in the inclusive framework. And if they approve the broad outlines approved by the G7, you know, it takes on a lot more momentum going forward. Now, let me pause on that. Well, would, you know, Ron already made the point, you know, gee, this doesn't do a lot for developing countries. In fact, the G7 communiqué didn't mention developing countries.

HARIHARAN: Right.

STACK: And so, having said that, though, in my experience at the OECD, the G7 will create positive momentum going into the inclusive framework meeting. And in a sense, that's the thing countries have to object. But the consensus process at the OECD, it's not everybody votes. It's the work goes through unless some countries or countries object to the direction of travel. Now, if you're sitting in the chair, let's say you're from a developing country, you might actually be working for the tax administration in your developing country, because that's a typical person at the OECD. It's not at all clear that that person has a mandate from their finance ministry or their foreign ministry to come into that meeting and say, we're going to hold back the tide, we object to this. So for the developing countries to pull it together at the inclusive framework and object, it's just not as easy as you might think.

There's a second group of countries, some countries like Ireland and Hungary have said, well, wait a second, we think for purposes of our sovereignty, and for purposes of, because we're small countries, and we can't compete on other resources, we like our low tax rates. Now, again, the question at the OECD is, you know, Ireland has been very cooperative in everything OECD has done in the various moves of the EU and the like. And so it would be unlikely for let's say, one or two countries at the inclusive framework, to be able to pause, you know, the workflow going forward on the minimum tax. Maybe there's a group of countries that might actually get together. But I would just emphasize, in my experience, that's really hard to do. It's hard for five or six small countries to band together and push back against, you know, what the G7 countries want. That leads—go ahead, Ron.

CREAMER: I was just going to ask you, because—I'm now playing Tara's role, sorry about that—so there's this thing between... the EU is in between. So there's a dynamic there, where, and I'd be very interested in your reaction, so the OECD, it may be hard for one or two countries to stand up and say I object. But the EU is designed to have one or two countries say, it's got to be unanimous, I… And so, maybe Ireland and Hungary express their views via the EU, and that's easier and more effective.

STACK: So recently, a German finance minister official was on a panel and he said, every member of the EU is a member of the inclusive framework, other than Cyprus. And so, you see, let's put Cyprus aside for a second, because they've already said, we're going to object to this at the EU, to your point, Ron. But if the Europeans can't stop this in the inclusive framework, they kind of lose the legitimacy to go to the EU, because you just sat in a body where you just agreed to this. And the Europeans regularly use the OECD as if it were a foil or a catalyst, if you will, for what they want to get in the EU, because they say, oh, the OECD set the international standard. So, the way I think about it, it puts a lot of pressure on the Europeans in the inclusive framework, who don't like it, to kind of see if they can halt it there. Because by the time it gets to the EU, it may be too late.

Now Cyprus made a comment, and I'm not an EU expert. EU politics, like all politics, is super complicated. But all I'll say is, it's not as easy for one country like Cyprus put out a thing saying, well, we think we'd vote against this. There's so many pressures on every country in the EU, because there's so many different issues swirling about at any one moment, you cannot simply predict that one issue they don't like, means they'll block it, you know, in the EU. So I think we have to wait to wait to see.

I was gonna pivot to China. Because, you know, Ron already made a reference to the fact that some countries want to be able to incentivize certain things to be done in their country, perhaps like R&D, perhaps manufacturing. And Pascal Saint-Amans, the director of the Center for Tax Policy and Administration at the OECD, already has come into the United States saying, well, we may make some accommodations. Senator Crapo picked up on this in his letter. Now, China is big enough to have an influence at the inclusive framework. And I think they'd be a strategic choice. Well, do we just blow up the whole thing and object? Or, as kind of Ron was suggesting, do we tweak these min tax rules, so countries can preserve some of the types of benefits that they like to give to attract investment. And in my way of thinking, that's what I'm going to be laser focused on, you know, after the inclusive framework. What type of adjustments did they make so countries can continue to have incentives? And if that's the Chinese agenda, I think it will be taken very, very seriously in the inclusive framework. And so that's kind of what I'm watching for.

CREAMER: Yeah. And Bob, what I would add on China is China is the quintessential long-term player, you know, they have a long term-view on things, very strategic. And so, I think they're willing to lose a battle and win the war. And so, this may be a battle that they're willing to lose in order to get something bigger.

STACK: Yep.

HARIHARAN: It's a great point. And for US-China watchers like myself, maybe this is one more area on which there could be some kind of possible compromise towards a greater rapprochement. But let me ask both of you, now that you've clarified the situation and the possibility that they may not be quite as much dissent at the OECD level, as I think some of the financial press suggests, what is the earliest that these proposals could pass? And when would they be implemented? And as Ron alluded to earlier, wouldn't global enforcement of this minimum tax be very complicated and difficult?

STACK: Yeah, let me jump in on that, if it's okay with you, Ron. So, here's the way to think about it. If we get some type of, quote, political agreement this year, what is it? We have one paragraph out of the G7, maybe we get a little more in the inclusive framework. We had 250 pages each for Pillar One and Two of technical detail last October. But these are not laws and statutes and treaty provisions that you need to have parliaments and Congress enact to make it go into effect. So the way I think about it is, all this political agreement still needs a lot of technical work, to turn it into statutes. And by the way, in that technical work, sometimes new political issues arise, because you know, as us tax folks know, little technical things can turn into big issues for countries and companies. So my estimation is that that technical work maybe takes all of ‘22 and ‘23. Then, you have something parliaments can enact, you might have a multilateral instrument, which is a treaty, which would then need to be ratified by countries. So, I personally handicap this at coming into effect in something like 2024 at the earliest, 2025, you know, more likely, on your point of enforcement....

CREAMER: Can I make one point before that, which is, so the Biden administration has a domestic tax proposal, right? And to say that that's waiting until 2025 is not possible. So, though, there's a mismatch.

STACK: Absolutely.

CREAMER: I'm totally with you that... the real process is very long-term. But then it forces the US to really front-run, because they have to get them.

STACK: Absolutely, Ron. And by the way, House Ways and Means Chairman Richard Neal made this point a couple of weeks ago. He said, you know, there's timing issues, because we're going to be asked as the Congress to go out and raise the min tax, when the whole rest of the world kind of maybe has made some promises, but it hasn't happened. And, and Ron, and as we all know, I think on this call, the Biden administration have to do tax reform this year. It's not waiting around for obvious political reasons. And so you get that additional timing mismatch. On enforcement, I'll just say this. First, Pillar Two is supposed to apply to big companies, over 750 million in revenues, and a lot of us know that, you know, big companies kind of self-enforce, because they want to apply with the rules, they're audited, etc. But second, a lot of Pillar Two is built for kind of backstop. So if Country A doesn't really enforce it, Country B gets to deny deductions. It's very complicated, I cannot. One of the things I'm fascinated by is all the technical work that needs to be done to write these rules. These are wickedly complicated sets of rules. But once they're there, they're trying to be structured in a way of... they will build administrative, by the way, frameworks to enforce this in the jurisdictions, which itself is a big task, given budgets and the like. So you'll have that, you'll have companies basically self complying, and then there are some rules built in, so that if, let's say Bermuda never adopts a min tax, which no one expects they would, there are rules to kind of make sure that that under taxed income gets taxed in the system. So there's a certain amount of, not everybody has to, like do this full hog in terms of enacting it into their law.

HARIHARAN: And actually, Bob, I have a related question, because you pointed out very correctly that the Biden administration has a small window to enact domestic tax proposals in. If the partisan climate changes in the US, and for that matter, elsewhere in the world, could we see, you know, some of this progress being undone in the next few years? Or is it a case that these sort of more international laws become more sticky and have enough inertia that they will eventually go through, that, you know, for instance, a change in US administration would not be able to unsettle them?

STACK: Yeah. So first of all, the area where the law change is most urgent is really Pillar One. That's the one we're going to agree to give taxing rights to big multinationals, to the rest of the world. And the premise of your question is exactly right. A change in the congressional, which parties have which house, etc., can absolutely upset the applecart so that the United States, you know, doesn't necessarily deliver on what it might have agreed to at the G7. And then, perhaps the whole thing unravels, as I said earlier, because if we don't deliver on Pillar One, maybe other countries lose the appetite for Pillar Two and taking away the DSTs. So that's that. And by the way, the rest of the world knows this, they know that the US system is not like a parliamentary system. And therefore, they know that this isn't going to be ready for a congressional vote this year, while the Democrats hold all three legislative and executive branches. So there's a big question mark, I think in the rest of the world, you know, can Congress, you know, deliver on this? And will they deliver? And that's something else we're all going to be watching.

HARIHARAN: Thank you for that. I will invite the audience to start preparing their questions. But before we start collecting questions from the audience, I'd love to know, both Ron and Bob, how you see the US worker and consumer faring amid this changing corporate tax environment. We are right now seeing, and I see it daily as a macroeconomic analyst, that consumer inflation expectations in the US are rising. And companies have started to pass on the input cost increases due to the pandemic distortions and the global supply chain bottlenecks that we're seeing. So do you think that a higher corporate tax environment will materially translate into higher prices for the consumer? And is it also going to dampen the corporate appetite to raise wages? Or do you just think that the companies will, especially the very large ones, will just take in the margin squeeze and not necessarily raise prices or delay any increase in wages?

CREAMER: Well, let me let me try. I think that neither Bob nor I are really, you know, technicians on this question, but we might have a few things that we could say. And we're not shy, so we'll try. So to my mind, there is... What Bob pointed out, was the digital services taxes that currently exist, were designed to incentivize behavior. Well, you know, the thing in my practice, that's really incentivizing corporate behavior even more is global populism. Global populism is very scary to the corporates of the world. And so placating that, you know, that trend is really a high priority. And so the signaling effects of these sorts of questions, which is, oh, you know, there's sometimes you raise taxes to raise revenue. Sometimes you raise taxes, too. It's a sin tax, you want to stop behavior. And, I think, overwhelmingly, the corporates, the multinationals, see an imperative to signal that, "I am a good citizen of the world," to forestall this populist thing. That's what we have now. And so, then your question is, well, what about the incidence of taxation, which is, you know, a company gets taxed? Do they pass it on? And the incidence of taxation, as you know, Tara, is a complicated question and a lot of disagreement. And it depends in what context it happens. The most important thing is, it's not really easily provable, right? Like, who knows? And yeah, prices might go up. But people say, well, that wasn't because of a passing on the taxes because of X, Y, and Z. And you can never really make a linear comparison. But the thing that's going to be very important to the corporates, not to be perceived as passing it on. Because then, the sin, you know, they haven't expiated the sin, at that point. And so, I think there's a lot more political signaling going on, than economic behavior.

STACK: Yeah, those are great observations. I mean, in all humility, I do not know. And I think Ron, I want to associate with what he said about the incidence of taxation. And these kind of follow-on effects, that they're hard to measure. We don't know. And certainly, I don't know, because it's not something I'm expert in. I do want to go back to something Ron said, though, about raising revenue. One thing in the US, right, we have to be aware of is, sometimes we want to do things. What the Biden administration wants to do is build some things that they're calling an infrastructure project. The US doesn't have a VAT (value added tax), or a source of revenue, if you will, other than the corporate income tax and the individual income tax. And so to some degree, it's to my mind, it's just a very interesting debate. Because if, as a policy matter, we conclude, there are things we want to spend money on... And if we conclude as a policy matter that we should pay for it, as opposed to, you know, increase the debt, we have very limited tools at our disposal, because that is kind of politically off the table in the US, whereas other countries have another kind of healthy source of revenue through the value added tax. And so it's not to dodge the question, but it's just to say that, in answering the question, you kind of have to go back to this first premise, which is, when the country wants to do things, what are the sources of revenue that can fund it? And then you, you're saying, whatever the consequences of that source of revenue are raising the revenue, that way, we're willing to pay that price, because we make a judgment that these other things we want to do–build roads, bridges, etc.–is worth it for the long term health–economic health and political health–of the country. So, that's the best I can do on that one.

CREAMER: And can I make one observation on that observation, which is, if you were just trying to raise revenue in the US, you would tax humans. You would not tax corporations. Corporations are very slippery things, you know. It's very tough to make a... it takes a lot of work to make a tax stick to a corporation. A human, it's politically difficult. But the human can do fewer things to avoid that problem. And so, if you really want revenue, then you raise, you know, taxes on human beings. But, you know, that's politically difficult. So, you know, I think we're in between a rock and a hard place from a revenue raising perspective.

STACK: Well, let me just add, the flipside of Ron's point, which is a lot of stock of US companies, is owned in things like, you know, my 401k, which doesn't pay tax, or by non-US people. And so, anytime you try to follow out the "let's tax the humans" piece, you start to realize that this, maybe not a lot of US, taxpaying humans, that own us corps. And so, the flip side is pushed back, forced into using the corporate tax, there's no doubt that I think people agree the corporate tax is not an efficient type of tax in the classic sense of the word. But I think in the in the last, I think, Senator Hatch look for a while before he left office and ways to kind of integrate the individual tax and the corporate tax. And it turns out to be it's just a very, very difficult thing to do.

HARIHARAN: Those are excellent points. And I think what I got out of this discussion that we had about, you know, companies--taxes on companies versus taxes on individuals--I came out with the two observations. First of all, of course, that this really does complicate the situation for the Biden administration, who is looking to raise revenues for a whole set of fiscal priorities, because you could argue even that, you know, the incoming revenue from something like a global minimum corporate tax will take some time to come in and as you say, companies can always find, probably find, ways to slip through the cracks. And so the question is whether then, the focus will go back to taxing, for instance, wealthy individuals in the US And the other point that is really well taken, is of course, you know, the populist angle and the fact that there is more than an economic element to this, there is a political element. Thank you for that. At this time, I would like to invite participants to join our conversation with their questions. Please be reminded that this round table is on the record. Erica, could you just remind us how to ask a question and see if we have any questions in the queue, please.

STAFF: (Gives queuing instructions.)

Q: Good morning. Thank you very much. Full disclosure, I'm Tara's father, so—

HARIHARAN: Hello!

Q: Look, this is an interesting discussion. But I had the benefit of watching headlines from Yellen's testimony in the Senate, as you were speaking. And I just want to mention, too, the one thing she said was, she said, she hopes that G7 would agree on a rate higher than fifteen. Just for information, whatever that means. But I want to go back to, I want to go back to the comments made about China, and so on and so forth. And I first want to ask you an ignorant question. And then a question specific to China. The ignorant question very quickly is, is there kind of an 80/20 angle to all this, with other words, although this is supposed to be 140 countries agreeing and so on, and so forth... Is it just possible that, you know, materially about ten, fifteen countries getting better accomplish this objective from especially a US lens perspective? And secondly, I've also seen comments to the extent that China is already asking for a carve-out, except that the carve-out they're asking for, is for the very industries in which they're trying to attract investment, which happens to be the great competition/confrontation issues for us, as the US So how realistic is that, that you know, the US and the West, and Europe, if you will, are going to agree to a Chinese carve-out for tax exemptions in investment in robotics and AI [artificial intelligence], etc., etc.? Thank you.

STACK: Let me... I'll try to do that. So, if you're a US business investing in China, your Chinese income is already going to be subject to the US min tax. And it won't necessarily benefit from these carve-outs. So from a US perspective, that's true. That doesn't impact them. The second set of questions is, well, what about rest of world investments into China? And I, I might not overstate the carve-outs. In other words, it does not appear to be, and by the way, I don't know that the Chinese government has spoken specifically to any of this, some of it's been secondhand. So I would be reluctant to kind of state what I think China wants, because, I'm not sure they've said it. But, if you look at some kind of loosening of the rules on the min tax, around things like R&D incentives that a country might give, or a manufacturing incentive, they don't necessarily have to gut the entire initiative. And let me just give you a concrete example. One of the rules being considered at the OECD, and Ron made a reference to it, is something called a substance carve-out. And if you have substance in a jurisdiction through things like fixed assets, and perhaps payroll, then some of that income doesn't have to be subject to the minimum tax, because it's basically viewed as not abusive. Because as Ron opened up, was saying, a lot of this is about intangible income floating around the world, where you don't need a lot of people or plan. And so, I think the accommodation with China, if it happens, and if I'm speculating correctly, of the type of accommodation they may want, you know, could be woven into the details of this... That might even please, other countries like develop... Am I back?

CREAMER: Yeah, you were, you were almost... you only cut out at the very end.

STACK: Okay. What the developing countries say is, as Ron said, if all the income earned in my jurisdiction flows up to the rich countries, what's in it for me? But if I can get some credit and the extended investor puts a plant, or has people in my jurisdiction, then maybe this gets better for me. So it's just a long way to say, I don't think this is black and white, you know, China versus others, and others will block it. I think a lot of this can happen on the margins, like often happens in tax, and perhaps different countries interests can be accommodated.

HARIHARAN: Bob, if I may ask a quick follow-up to my father's question. In terms of this, US-China sort of "competitiveness war" we're going through right now, whether it be in technology or innovation or manufacturing, do you think that then, the US might, in turn, want to do some carve-outs on the corporate tax side in order to benefit US competitiveness? Would that be something that could even be feasible in this picture, or would it just completely eliminate the credibility of any kind of corporate tax and minimum tax regime?

STACK: For very technical reasons I won't go into. Because the US already has its kind of own version of the minimum tax, which we called “GILTI.” The system that we're going to get the rest of the world to do and our system, they kind of sit side by side. And so from the point of view of, how... what China might be asking for could impact the global deal and how the US might counter it. It's not immediately obvious to me for some technical reasons that we have something we can do there. On a broader level, I'll say, the Biden administration wants to take away from our min tax–a reduction in our min tax–for plants that a US business might have outside the United States. And because the talking point there is that that encourages US business to put plants outside the United States, because the income can be taxed... can be in fact, tax free under current law, at least in the US. And so in that sense, we are making it a little harder for our businesses to invest abroad, and have that income not taxed in the US Whereas the OECD direction of travel is kind of the opposite–give home country companies a little break to the extent they have plants and people in other jurisdictions. So that's just... it's pretty weedy and I apologize, but it's a tension between, let's say, the US administration approach and the rest-of-world approach.

HARIHARAN: Thank you for that clarification. Erica, do we have another question?

STAFF: Alright, the next question will come from Christian Alele.

Q: Hi, this is Christian Alele, with Deloitte Consulting. I just had one clarifying question. Is this something that could be done through budget reconciliation with fifty-one votes in the Senate? Or would it be... Would it require a new treaty with sixty-seven votes that anybody could filibuster? And if so, how realistic do you think the chances of it passing it? Thank you.

CREAMER: Yeah, that is a really good question. Actually, Bob, why don't I jump in? I think most of this is saying... So, going back to the credit jurisdictions versus the exemption jurisdictions, the credit jurisdictions of which the US is one, have, I think, a lesser need to change treaties than the exemption countries to. And the Pillar One, which is the Digital Services Tax, puts more pressure and has more need for a treaty change than Pillar Two, which is the minimum tax. That being said, since, as Bob eloquently pointed out, they're all connected. And so, the idea that there might need to be a treaty change in the US, which is ultra difficult. That is something that you can't ignore. I don't know, Bob. What do you think about that?

STACK: Yeah. So I think I'm totally with you. On Pillar Two, the US already has GILTI, and it's doing its own architecture, and it doesn't really have to... Pillar Two, what the US is trying to do, is get the rest of the world to go along, and get it through their legislatures. Ron points out Pillar One, where we give the right to other countries to tax some of our big companies that don't have, what we call in tax world, a "permanent establishment" in the other countries. But the long standing way tax works is, another country can only tax our companies, if they have essentially a physical presence in their country. And that, we do by treaties. Pillar One says, forget about that. We're going to let you tax them under this new agreed formula. Now, in the first instance, one would think that because these are enshrined in treaties, that you change treaties with another treaty. Which, as the questioner suggests, means sixty-seven votes in our Senate. You do see, you do see, some discussion about the fact that, I'm not an expert in this at all, but I've started to poke into it a little bit, that things like NAFTA and the USMCA, that kind of feel treaty-like, were actually done through statute. And so, you know, there may be some really smart people saying, you know, can we do it with the statute?

And then you get to another question, that I'm really not competent to answer, which is, if it can be done through a statute, can it be done through reconciliation? Because the differences... a statute would typically be sixty votes, and reconciliation, you know, you can do with fifty-one. And, and I just, I think I would be, I think I'd be misleading if I try to interpret the arcane of Senate reconciliation rules. To answer that question, I will say that, I guess I would be surprised if at the end of the day, we wind up altering our treaties through a non-treaty process that only gets needs fifty-one votes. But I've been surprised before. But that's the best I can do on that. I don't know if you've any thoughts on the treaty point, Ron, yourself? I'm assuming you need the treaty, but maybe not.

CREAMER: Yeah, no, that is interesting. I hadn't really thought about the statutory, you know, sort of Enron. People will be thinking about that if it's necessary, because treaties are so hard to change. And as you point out, what is permissible within budget reconciliation, is its own arcane topic. And you can be Senate parliamentarian after this job. Seems like a pretty interesting one.

HARIHARAN: And it seems like there is already quite a lot that is being put on the reconciliation plate presently. So maybe a global minimum tax will...

STACK: Keep in mind just one last point. That's why it's important. This is virtually certain not going to be ready this year for this particular Congress. And so we just have to keep that in mind. Well, when this is finally ready to go to Congress, what does Congress look like at that point? And what will their feelings be about the deal that ultimately comes out? We don't know, because we don't know what that Congress is, as we sit here today.

HARIHARAN: It's an excellent point. Though, I just want to go back to what I seem to have gathered out of this conversation, which is, again, that if financial market participants, such as myself have been reading, you know, press articles that suggested this global minimum tax is very far off or that a consensus may not be feasible. That, Ron and Bob, correct me if I'm wrong, it does seem though, that there are there are paths to getting to a compromise, and to possibly be able to see that compromise within a couple of years. Would that be fair?

STACK: Yes. I think as I opened with, I think that's why I think the G7 agreement is very, very important and created a great impetus for the work going forward. And yes, I think there is a path. There's many obstacles, both technical and political. But there's clearly a path. And by the way, one of the reasons there's a path is the finance ministers around the world, if you're paying attention, they're all saying, "we want a deal, we're gonna have a deal." And, you know, if you're in government, like I was, and your bosses are saying, we're gonna have a deal, well, you go out and make a deal. And so you know, you get very practical about it, these governments are kind of committing to get something done here.

CREAMER: And then to Bob, to amplify Bob's point, I think that continuing the momentum is very important. So the political process now is: neutralize the bomb throwers, and allow things to move forward. So it becomes almost the Fed accompli as you get farther.

HARIHARAN: Now, I want to return back to the issue of countries and jurisdictions that might be affected, or at least make quite a bit of noise about a global minimum tax. How do you see the traditional tax havens setting in these situations?

CREAMER: Yeah, actually, could I try on that? Because I have heard it before to the fact that this is not an alternative minimum tax, it's a minimum tax. And so, how do multinationals optimize their tax rate, as a practical matter, what they do is they look at their operating jurisdictions, and they try to reduce first the tax and the operating jurisdictions. But then the techniques they use, obviously have to have a lens as you flow up and up and up through the structure that you don't undo the good thing that you did down below. That thinking style is important to see whether the tax havens get completely eviscerated by this or not. And I don't think they get completely eviscerated for the following reasons. Let's say that I'm subject to the 15 percent global minimum tax. I really don't want to pay 16 percent, I really don't want to pay 18 percent, I really don't want to pay 20 percent. I'd like to pay fifteen. Okay, what's the best way for me to optimize to fifteen? It's that I leave a little bit of slack in the system, so that my global rate is less than fifteen coming up. Because if I pay more than fifteen, I don't get credit for it. Right? So it's not like, if I paid twenty in one year, then I can pay ten the next year. I can't do that. So I really want to be at less than fifteen as income flows up. And so I think there still is going to be a reason to optimize for being as low as... it will be less important, but it will still be important, to try to optimize lower than fifteen, coming up through the system.

HARIHARAN: Bob, should I keep my money in the Cayman? Or is it time to move up?

STACK: Look, this is a kind of complicated question in the following way. Because I want to make a point about some... in the late 1990s and the early 2000s, with things like FATCA and common reporting standard, there has been a whole globalization around things like transparency and exchange of information that many of the countries that you would think have been labeled as tax havens actually have fully complied with. It's kind of what their objection is to the EU blacklist. They may have a zero rate, but they have made great strides to be good tax players in the tax transparency, move the exchange of information around financial accounts, etc. And so they, they consider themselves as kind of good citizens in the tax community, they just happen to have a zero rate. Now the zero rate, you know, actually has been destabilizing for the system. That's the view of governments. Why? It goes back to Ron's point. If you can take your intangible income and your capital, and put it anywhere in the world, because it doesn't really have an implication for, let's say, people in buildings, then putting it in zero jurisdictions, actually, I think led to a certain popular disenchantment with the global tax system, including transfer pricing, right? That's the prices among related entities that we have a lot of elaborate tax rules about. So yes, a lot of this is aimed at, let's say, neutralizing the impact of zero tax jurisdictions. But in doing so, what's so interesting about it, we don't tell those jurisdictions to do anything same with different, we kind of circumvented by saying, you can still have income, you know, in a zero tax place, it's just that we're going to tax it now in our jurisdiction, that means those jurisdictions, they're going to be more reliant on developing their home economies around their natural advantages, and less reliant on you know, things like letterbox companies in the like, you know, that might have, you know, produced some revenue for some sectors that they had in the past. So they have to, you know, turn to their natural, you know, strengths, as those countries are, because the reason to go to that country purely to get a zero tax rate will have been eviscerated.

HARIHARAN: Thank you for that. Now, in terms of a timeline for this year, even if these developments are going to take a couple of years to bear fruition, should we be looking at the mid-year G20 and the October OECD meetings for any kind of, you know, further understanding of how this proposal is going to work? Are those going to be pivotal meetings at all? Or do you think it will take longer to really get...

STACK: I think these are pivotal meetings. Because you know, either G7 created momentum or it didn't. And if we see in the next meeting, what I'm looking at is the July 9 and 10 G20 meeting, where you would think they're going to try to go a little further than the G7 did. And then if they don't get there, they'll try to, you know, do even better in their October meeting. Because remember, the political folks promised the deal by mid-2021. And the finance ministers have leaned very heavily into saying, you know, we're going to get there. So I'm looking at the next two G20 meetings. And to put a very fine point on it, if they can get the number in fifteen, and the G20 meeting in July communiqué, that's a huge accomplishment. If the number falls out, that's telling you it didn't go as well as you might have thought it would. So that's kind of what I'm looking for there. And I'm looking for, are they going to link Pillar Two a little more tightly to Pillar One and say, well, we're only going to do this, but you know, we've got to get these other countries to actually enact Pillar One. So those are the two things I'll be looking for in the language of the communiqués as we move through the year.

HARIHARAN: Excellent. And I think we will have to reconvene this panel later in the year to see whether these elements came together. I see we have reached the end of the hour. So Bob and Ron, you have my many thanks for sharing your expertise today. And I definitely have found that our conversation took quite a different tone to what, as I said, I've been I've been reading in, you know, the Financial Times and the newspapers suggesting that this proposal is more of a mythical element than it is something that can be translated into reality. So thank you so much for the clarifications, and thank you to our participants as well for their incisive questions. And given that policy is going to take some time to evolve into reality, I do hope that we can have a future follow-up discussion on the subject of global minimum taxes. Thank you all again, and have a great day. Thanks for having us.

CREAMER: Thank you.

END.