Following an agreement between the U.S. and the G7 countries on global minimum tax in late June, the Association of International Certified Professional Accountants submitted a letter requesting guidance and making recommendations on Pillar Two framework co-existing with U.S. tax rules for U.S. multinational enterprises in a side-by-side system to the Organisation for Economic Co-operation and Development.
The Sept. 4 letter, which was sent to officials at the OECD Center for Tax Policy and Administration, provides recommendations on the timing of the guidance, as well as on substance-based non-refundable tax credits, such as the Internal Revenue Code Section 41 research credit.
The G7 statement is a proposed agreement between the U.S. and other G7 countries to protect U.S. multinational enterprises from certain international tax rules that could make them pay extra taxes in other countries, doubling their tax burdens.
A side-by-side system “would fully exclude U.S. parented groups from the Income Inclusion Rule and Undertaxed Profits Rule in respect of both their domestic and foreign profits,” the Treasury Department said in a statement on June 28.
Treasury also said the side-by-side system “would be undertaken alongside considering changes to the Pillar Two treatment of substance-based non-refundable tax credits that would ensure greater alignment with the treatment of refundable tax credits.”
“Delivery of a side-by-side system will facilitate further progress to stabilize the international tax system, including a constructive dialogue on the taxation of the digital economy and on preserving the tax sovereignty of all countries,” Treasury said.
The rules are part of the Pillar Two framework, which is meant to stop companies from avoiding taxes by shifting profits to low-tax countries. However, the way the rules are written could unfairly hurt U.S. companies, the Association of International Certified Professional Accountants said.
Additionally, the current rules are confusing and expensive for companies to maintain compliance, the letter states, while tax credits, such as the Section 41 research credit, are treated unfairly when compared to similar credits in other countries, which could discourage innovation and investment in the U.S.
“Section 41 research credit has long been a cornerstone of federal policy to incentivize innovation and domestic investment. However, the mechanics of Pillar Two create a mismatch by penalizing non-refundable credits, such as the section 41 research credit, while providing favorable treatment to refundable credits commonly offered outside the U.S.,” the letter says. “This structural inconsistency risks undermining the competitiveness of U.S. companies, discouraging domestic research and development (R&D) activity, and creating distortions by reducing effective tax rate (ETR) calculations in ways that do not reflect the taxpayer’s true tax burden.”
The association is requesting the following:
- Clear and consistent guidance from global tax authorities.
- Fair treatment of U.S. tax credits.
- Quick action to help companies avoid unnecessary costs and confusion.
“The G7 agreement has been broadly welcomed by the U.S. business community; however, until the agreement is finalized, companies must continue to comply with the reporting obligations,” Reema Patel, senior manager for tax policy and advocacy with the Association of International Certified Professional Accountants, said in a statement. “The association recommends the OECD and Treasury issue harmonized guidance to minimize unnecessary administrative and reporting costs for U.S.-based MNE groups.”
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