New Global Tax Set to Raise Billions --- U.S. won't benefit because Congress hasn't changed law to conform to deal

"The 15% global minimum tax is here, and it is raising corporate tax payments -- just not in the U.S.

Johnson & Johnson, Baxter International and Zimmer Biomet are warning investors that the 2021 international tax deal will result in higher tax bills this year as Switzerland, South Korea, Japan and European Union nations implement the pact.

U.S. companies that enjoyed single-digit tax rates in some foreign countries now must pay at least 15% in each. 

But even though Treasury officials were crucial in forging the international agreement and President Biden has pushed to implement it, Congress hasn't changed U.S. tax law to conform to it. Republicans generally oppose the global deal, contending that Biden administration negotiators gave away too much of the U.S. tax base.

So for now, the U.S. isn't directly collecting any money from domestic or foreign companies because of the deal.

J&J is forecasting a roughly 1.5-percentage-point increase in its tax rate. Joseph Wolk, J&J's chief financial officer, told analysts that the global minimum tax, as it stands, is "reducing U.S. incentives for innovation and resulting in U.S.-based multinational companies paying more tax revenue to foreign governments."

Other companies pointing to potentially higher taxes in 2024 include Johnson Controls, Henry Schein, Teleflex, Enovis, Edwards Lifesciences and Methode Electronics.

The corporate warnings mark the first concrete estimates of how the global minimum tax deal is affecting companies -- and, by extension, governments -- around the world. 

The agreement was backed by about 140 jurisdictions and hailed by their leaders as a crucial step toward reducing cross-border tax competition and making companies pay more to support governments.

Thirty-six countries have implemented the deal or have new rules in progress, and businesses with global revenues exceeding 750 million euros, about $810 million, could pay new taxes on profits.

The Organization for Economic Cooperation and Development, which spearheads the minimum-tax project, recently estimated that businesses altogether will pay additional taxes of between $155 billion and $192 billion annually, an increase of between 6.5% and 8.1% from current tax payments. Some analysts looking at company projections have said it could be lower.

The U.S. created a minimum tax on companies' foreign income in 2017, but it applies to their global profits, not country-by-country as required by the international deal. The U.S. created a second minimum tax in 2022, but that, too, doesn't align with other countries' levies. China also hasn't implemented the agreement.

American companies are facing higher tax bills even though the U.S. hasn't changed its rules because the deal allows countries to make global businesses operating in their jurisdictions pay at least 15% there. So Switzerland can make U.S. and Japanese companies pay 15% tax on their Swiss operations.

In many cases, American companies have maxed out U.S. foreign tax credits. So paying more abroad won't reduce their U.S. taxes. Instead, they effectively will pay taxes in two countries on the same income.

Meanwhile, the U.S. isn't benefiting directly. The rules say countries can require that their home companies pay 15% in every country where they operate. So South Korea can ensure that a South Korean company pays 15% in the U.K., the U.S. and France. If it doesn't pay enough in those countries -- for instance, because U.S. research incentives lower its tax rate there -- it must pay more to South Korea, not the U.S.

The OECD estimates that the U.S. will get some new revenue even without implementing the global deal because some companies could shift operations and profits to the U.S. as tax rates become more similar around the world.

"I'm not seeing so much of that actually happening yet," said Jason Yen of Ernst & Young.

Suky Upadhyay, CFO of medical-technology company Zimmer Biomet, said the company would see a tax rate increase of about 1.5 percentage points. That is "not devastating but still impactful nonetheless," he said.

While that won't change Zimmer Biomet's strategy in the short term, Upadhyay said the company might consider putting future investment in the Americas rather than Europe because of the shrinking financial gap between the two locations." [1]

1. World News: New Global Tax Set to Raise Billions --- U.S. won't benefit because Congress hasn't changed law to conform to deal. Rubin, Richard; Williams, Jennifer; Hannon, Paul.  Wall Street Journal, Eastern edition; New York, N.Y.. 02 Feb 2024: A.16.