Tax News & Views International Weekly: The Global Tax Shutdown Dilemma

As the government shutdown stretches into its third week—with little reason to hope it will be resolved soon—the tax world is scrambling to understand the implications. Taxpayer services have been reduced or suspended, guidance from the U.S. Treasury Department may be delayed, and audits are expected to slow down.

One matter has gotten less attention, but could still be crucial for many taxpayers—will Treasury and the Organization for Economic Cooperation and Development be able to hash out details for the 15% global minimum tax agreement in time, as the U.S. officials remaining at work struggle to keep everything running?

U.S. negotiators face a self-imposed year-end deadline to work out the details of the “side-by-side” agreement, which will prevent U.S. companies from being taxed by other countries under the OECD’s “Pillar Two” global minimum tax. Whether or not that deadline could be delayed, the safe harbor currently protecting most U.S. companies from Pillar Two taxes is set to expire at the end of 2025—so something will have to be worked out soon to avoid a potential conflict over the issue.

When the side-by-side agreement was announced over the summer, it was sparse on details. But, the commitment from the U.S. and G-7 countries was enough to convince Congressional Republicans to drop from the One Big Beautiful Bill Act a provision to retaliate against countries which use Pillar Two taxes against U.S. companies. Those same Republicans have vowed to resurrect that legislation should the deal go off the rails.

There are still many questions about how the agreement will work, including whether the U.S. will be exempt specifically, or whether they will use objective standards to determine when a country is in or out. U.S. officials have argued that the current U.S. minimum tax—now the14% tax on Net CFC Tested Income (NCTI)—is strong enough to prevent tax avoidance, the original goal with Pillar Two.

Another issue is how the system should treat nonrefundable, expenditure-based tax credits such as the U.S. credit for research and experimentation. In the current formula, those credits count more harshly than refundable tax credits when calculating whether a company has an effective tax rate below 15%, the rate at which the Pillar Two taxes start to apply. This was a key point of disagreement between the U.S. and the OECD, and even if U.S. companies are exempt, resolving this is likely crucial to keeping the agreement intact.

According to Treasury’s plan for the shutdown, the Office of Tax Policy is still open to perform certain tasks, such as consultation with Congress on pending legislation. Through unspent Inflation Reduction Act funds, it will continue to work on OBBBA implementation. And the department also said that policy experts could be recalled to “address issues related to domestic and international economic affairs,” as well as other non-tax issues. While the department's plan doesn't specify how many employees have been furloughed in each office, it states that of the 2,714 workers who are not with department agencies such as the Internal Revenue Service, Inspector General or Bureau of Fiscal Service, about 70% will keep working, with most paid through funds other than annual appropriations. It is not clear how long those funding sources will last.

Even before government spending lapsed on Sept. 30, Treasury had a lot on its plate. This latest development will add another serving of uncertainty as winter quickly approaches.

Noteworthy Items This Week

Countries Press Ahead With Pillar 2 Minimum Tax Implementation – Stephanie Soong, Tax Notes ($):

Countries in the EU and beyond are continuing to implement pillar 2 global minimum tax rules through guidance and draft reforms and regulations, with one jurisdiction proposing to introduce the rules for the first time.

The Swedish Ministry of Finance on October 14 sent final draft legislation to the Riksdag, Sweden’s Parliament, that would amend the country's law adopting Council Directive (EU) 2022/2523, which implements the global anti-base-erosion rules in the EU. The draft legislation, which was submitted to the Council on Legislation in August for legal review, incorporates GLOBE administrative guidance issued by the OECD in June 2024.

U.N. Fields Diverse Tax Committee Suggestions – Nana Ama Sarfo, Tax Notes ($):

The new U.N. Tax Committee is tasked with maintaining that momentum and navigating several unfolding developments in international tax, as the OECD continues its two-pillar project and the U.N. negotiates a framework convention on international tax cooperation. In some cases, the U.N. Tax Committee is being asked how it can contribute to those efforts while maintaining its own path.

The international tax community not only has some answers, but it seems energized: 43 stakeholders responded to the secretariat’s call, which is nearly triple the amount of responses it received for a similar request four years ago. This time, issues like dispute resolution, tax administration reform, and remote work seem to rank highly for stakeholders. So do issues surrounding environmental taxation and the taxation of climate change.

Shipping Braces for Carbon Tax That Fueled US Tariffs Threat – Jack Wittels, Bloomberg News ($):

The world’s shipping regulator is on the verge of green-lighting a global charge on the industry’s emissions, something that has prompted the Trump administration to threaten tariffs in response.

The International Maritime Organization will this week decide on sweeping new rules to make the sector start paying for the more than 1 billion tons of greenhouse gases it emits each year. While a draft plan had wide support in April, the US has called it a “global carbon tax” on Americans, and has said it would consider measures such as tariffs and port levies.

Relief Concerns Grow As Sectoral Tariff Actions Build – Dylan Moroses, Law360 Tax Authority ($):

Trump, in addition to a bevy of other tariff actions since taking office a second time, has often tapped Section 232 of the Trade Expansion Act of 1962 to raise duties on imports across industries. The law gives the president authority to impose tariffs on imports deemed to pose a national security threat following an investigative process carried out by the U.S. Department of Commerce's Bureau of Industry and Security.

The pace at which actions under Section 232 have occurred — new investigations, the imposition of new tariffs and the expansion of already imposed duties — has kept importers busy just trying to comply with the latest changes to the Harmonized Tariff Schedule.

Opinion: A Tax-Reform Alternative to Trump's Tariffs – Paul Ryan and Kyle Pomerleau, The Wall Street Journal:

Rather than pursuing new tariffs, Mr. Trump should work with Congress to adopt a destination-based cash flow tax, or DBCFT. This business-tax reform would address many of the president’s concerns over trade, expand the American economy, and offset the lost tariff revenue.

The DBCFT has three important features. First, all investment costs can be immediately deducted rather than depreciated over years or decades. Second, there is no deduction for borrowing costs. Third, a “border adjustment” would subject all imports to a single rate tax while providing all exports with a subsidy at the same rate.

Adopting a DBCFT would finish the job that Congress and Mr. Trump began in 2017 with the Tax Cuts and Jobs Act. That legislation made it more attractive to invest in the U.S. by cutting the corporate income-tax rate and introducing temporary 100% bonus depreciation. Mr. Trump’s One Big Beautiful Bill Act built on this by making the expensing provision permanent and temporarily expanding it to manufacturing structures. The DBCFT would make expensing universal and permanent, eliminating all remaining penalties on investment.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: The Duke of Darkness

Debut Year: 1945

Debut Publication: K-O Komics #1

Origin Story: A police officer killed in the line of duty, he continues to fight crime and evil as an "Earth-bound spirit."

Superpowers: Aside from ghostly powers such as the ability to float through walls and fly, he also has super-strength and can sense other supernatural entities.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

Tax News & Views International Weekly: The Global Tax Shutdown Dilemma

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