Accounting
UN tax deal may replace OECD framework after Trump executive order
Negotiations at the United Nations began last week in New York over a global tax framework, and those talks may gain new impetus after President Donald Trump signed an executive order rejecting the two-pillar framework that the Biden administration had been negotiating with the Organization for Economic Cooperation and Development.
On Inauguration Day,
The U.S. has not yet ratified the OECD/G20 Inclusive Framework on tax base erosion and profit-shifting framework, or BEPS for short, due to opposition from Republican lawmakers. But Trump’s repudiation of the global tax framework on his first day in office was a striking move for some observers.
“I was not so much surprised by this kind of policy direction, but just the timing,” said Zorka Milin, policy director of the FACT (Financial Accountability and Corporate Transparency) Coalition, a nonpartisan alliance of over 100 state, national and international organizations. “I don’t think any of us who follow international tax expected this to be a day one priority issue, so that came as a surprise.”
She sees a risk in the gains made on a global tax agreement. “In addition to all the trade wars, if we’re going to have a tax war, which is what they want this order threatens, that would not be in anyone’s interest,” said Milin.
Trump’s executive order threatens punitive action against other countries that are implementing parts of the OECD plan such as the Under-Taxed Profits Rule and the top-up tax, or the digital services taxes that countries like France and Canada have levied on multinational tech giants.
It says, “The Secretary of the Treasury in consultation with the United States Trade Representative shall investigate whether any foreign countries are not in compliance with any tax treaty with the United States or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies, and develop and present to the President, through the Assistant to the President for Economic Policy, a list of options for protective measures or other actions that the United States should adopt or take in response to such non-compliance or tax rules. The Secretary of the Treasury shall deliver findings and recommendations to the President, through the Assistant to the President for Economic Policy, within 60 days.”
The Trump administration’s stance toward the OECD framework on global minimum taxes and country-by-country reporting could shift the action over to the United Nations now, where negotiations are underway on the UN Framework Convention on International Tax Cooperation. The Biden administration wasn’t able to get the OECD framework passed in Congress despite former Treasury Secretary Janet Yellen’s support for the effort.
“It doesn’t change anything, because everyone knew that the Biden administration couldn’t get these things through, but in some ways, it just clarifies that they’re not going to apply in the U.S.,” said Alex Cobham, chief executive of the Tax Justice Network, a U.K. advocacy group concerned about tax avoidance. “But I think it’s the other piece of the memorandum that’s more significant. It’s the threat to go after other countries that are introducing elements of the OECD proposals, or indeed other types of tax incentive responses to the OECD’s failure, like digital services taxes. That takes things to a different level, and there’s an interesting possibility that it might backfire. What it won’t do is show countries, perhaps particularly in the European Union, that there’s no hope for getting any improvements on what’s already quite a weak OECD proposal, and instead push them into the United Nations process where something more significant could be achieved, which is exactly what I think the Trump administration would want to avoid. They may have given it rather a big push.”
Bargaining power
The U.S. may lose some of its bargaining power in the UN negotiations. “The U.S. effectively has a veto of the OECD, and that’s why the last negotiations were so difficult,” said Cobham. “The first Trump administration couldn’t get to a deal within the two years. So then in came the Biden administration, and completely flipped and put their own proposal in instead, and really added to the approach on the second pillar. We’re now back to a Trump administration, and both of those pillars really look frozen. So that’s the degree of control the U.S. has had. In the United Nations, most decisions are made by consensus. But where there isn’t consensus, it will go either to a simple majority or perhaps a supermajority of two-thirds of countries. That’s still to be determined for this negotiation of the convention. And what that means is, unless the U.S. can bring lots of countries with it, it won’t be able to block individual items, or indeed the convention as a whole. So you might see the U.S. not withdrawing, but kind of staying at the table in order to be somewhat obstructive. But it won’t actually be able to stop anything. And in the end, if a significant number of countries sign the convention, it will become effective for U.S. multinationals in other countries, even if the U.S. stays outside.”
The UN tax negotiations have not been receiving as much attention as the OECD’s Pillar One and Pillar Two framework, but the move could shift momentum toward the UN.
“We need to have a multilateral agreement on tax issues because these are global problems, and the solution also has to be global,” said Milin. “I think that the OECD has done a lot of good work over the years and made a lot of progress, and the agreement was supported by something like 140 countries. It’s a big achievement, and maybe the UN can build on that achievement. But whether we’re talking about the OECD or the UN, I think it is unfortunate that the U.S. as a major international economic actor wouldn’t be at the table in those discussions. To be clear, I don’t expect that to happen necessarily, because if we read and parse carefully the text of that order, it’s not that the U.S. is withdrawing from their membership in the OECD. They will stay at the table, and I suspect try to gain additional leverage. I don’t think that this is the end of the story for the OECD process. I think it’s something that we’ll have to continue to watch to see how it evolves. If certain provisions of the previous agreement have to be reopened, that will be interesting to see, but I don’t think it will just be thrown out. I’m not even sure that that’s the policy goal of the Trump administration.”
DST impact
Canada’s digital services tax could pose a problem for the U.S., no matter what happens at the OECD or the UN. “There will be a test case very soon with Canada’s DST,” said Cobham. “Will Canada accept the tariffs, or whatever is going to be imposed? We’ll see that by the end of March. I think we’ll see the proposals come forward. Will Canada fold and give up their DST, or will they fight? That will be interesting to see, but it’s different when it’s one country. If we have 100 countries signing the UN convention, I think there will be a commitment to play together, to pass that into law collectively, perhaps to face collective punishment, but without the same kind of ability to pick off individual countries. I think we will see a move, almost because the U.S. multinationals will move first. In 2017 and 2018, it only took a few countries to start the process of introducing DSTs, and the big tech multinationals in the U.S. forced the administration into negotiations again at the OECD. Once it becomes clear that the UN convention could go much further than that, I think the U.S. Treasury will be hearing very clearly that they need to be full participants in the negotiations, even if that’s largely trying to block it. That’s going to be difficult, because you need a significant minority, at least, to be able to block at the UN.”
GILTI vs. UTPR
The upcoming negotiations in Congress over the extension of the Tax Cuts and Jobs Act of 2017 may also play a role. The TCJA includes some international tax provisions, such as Global Intangible Low-Taxed Income, or GILTI for short, and Foreign-Derived Intangible Income, or FDII. Similarly, the Biden administration’s version of a global minimum tax in the Inflation Reduction Act of 2022, known as the corporate alternative minimum tax, mainly applies to companies earning over $1 billion and
Trump’s executive order could be one way for the U.S. to regain leverage in the OECD process.
“Maybe they think they can get a better deal than what was negotiated under the previous administration,” said Milin. “That’s how I read the order, especially when we think about the context and the history here. The process was initiated under the first Trump administration, actually. It goes back to the days of [former Treasury] Secretary [Steven] Mnuchin and some of the policy ideas that were included in the 2017 Republican tax bill around the Global Intangible Low-Taxed Income. The U.S. was the first to introduce a tax like that, and the OECD was a forum where that policy idea could go global. I think that this has actually been a policy win for Republicans, even though it’s strange that they don’t see it that way. What is unfortunate is the order seems to be targeting — but It’s not explicit — an aspect of the international tax agreement that is called Under-Taxed Profits Rule, which is something that was included in order to deal with companies from nonimplementing countries, in particular China, at the insistence of U.S. negotiators. If they’re successful in undermining UTPR, that’s a gift to China, and I don’t think that’s what they would want.”
In contrast, Trump’s new executive order authorizes the Treasury Secretary to retaliate against other countries that seek to impose taxes on U.S. multinational companies.
“If we take the order on its face, the results would be that the U.S. would be imposing these punitive, retaliatory taxes on some of our major trade partners and political allies in Europe, Canada, Australia, Japan, while on the other hand, helping out China, and that makes no sense,” said Milin. “I don’t think that that is consistent with foreign policy of this or any other U.S. administration.”
Democrats are in the minority in both houses of Congress now, and Republicans plan to pass a tax bill through the budget reconciliation process that would sideline Democrats, allowing Republicans to bypass the requirement for a two-thirds majority in the Senate to overcome a filibuster. Nevertheless, Democrats nevertheless reintroduced a bill last week that might have some influence on the tax debate, especially since the Trump administration has expressed the desire to bring jobs back to the U.S. from abroad. Sen. Sheldon Whitehouse, D-Rhode Island, and Rep. Lloyd Doggett, D-Texas,
The Trump executive order seems to envision possible retaliatory actions by the U.S. against other countries that could come in the form of tariffs or even sanctions.
“It could be a form of trade sanctions, or even potentially an additional tax on U.K. companies operating in the U.S.,” said Cobham. “The U.K., because it’s quite isolated now, having left the European Union, is one that you can see being picked off in that way. But the European Union has also committed to introduce the UTPR, the Under-Taxed Profits Rule, and that’s the one where you where you can say, if the headquarters country is not applying a reasonable minimum rate of tax and the multinational operates in your country, then you can use the UTPR to apply that top-up tax. So I think that will be the big clash. Canada’s DST is interesting, but the European Union’s UTPR is the big one. If in effect, the Trump administration’s investigation over the next 60 days finds that the EU’s UTPR is effectively in breach, in their view, because they they would say it’s extraterritorial to try to top up the taxes being paid in the U.S., whereas the EU would say this is making sure that economic actors within the EU are paying fair tax. But that’s the difference, the tension this is bringing out. If there is a specific proposal to put some kind of tariff or tax measures on European Union countries or their multinationals, this very quickly comes to a head. It feels like the OECD proposals are already faltering. I think this is really the end of any prospect of global adoption, certainly, and the question is really whether it boosts momentum for the UN process instead.”
Disillusionment
The U.S. isn’t the only country that has become more skeptical about the OECD framework, and that could pave the way for the UN framework to make more headway.
“Hstorically, the OECD has really led the way here, but what happened in 2022 was a UN resolution,” said Cobham. “That’s something that the G77, the countries of the developing world, have really wanted for about 20 years, but have never been able to make progress with. What happened in 2022 was that so many OECD member countries had become so disillusioned with the OECD process that the resolution to begin looking at a UN convention went through the General Assembly by consensus. And that was quite remarkable, really unprecedented. Since then, they’ve had an ad hoc committee, as they call it, of delegates from every country in the world putting together the terms of reference for the full negotiations.”
Those delegates began meeting last week and plan further talks. “We have a schedule now for about two and a half years of negotiations to create a framework convention,” said Cobham. “That can do two things, really. It can create new rules within the convention, but as we have with the UNFCCC [United Nations Framework Convention on Climate Change], it will create a framework body. They’ll be able to set new tax rules in the future, on top of anything that’s agreed in this two and a half years in the convention. Potentially, this will displace the OECD as the global tax rule setter, and in that shift, the U.S. will lose the power of veto that it effectively has in the OECD.”
On the same day Trump signed an executive order repudiating the OECD global tax deal, he signed another
“I think the dynamics are different in the sense that in the Paris Agreement, there isn’t any mechanism against noncooperating countries,” said Cobham. “It may make it harder for the world to limit the degree of climate damage, but it doesn’t give anyone else the power to try to punish the U.S. And nothing that other countries do on climate, unless they were to come up with some kind of sanctioning measure around U.S. carbon emissions, let’s say, but that’s really not being thought of. Whereas on the tax side, you can move ahead very quickly — and you might move ahead quicker if you don’t have the U.S. at the table — with measures that will apply to U.S. multinationals in other countries where they operate, so almost without anyone trying, the tax convention will have an impact on U.S. economic actors. And I think that means the dynamics are different. I think it would be very hard for Trump to ignore that this is happening, even if he thinks the UN is worthless or illegitimate or anything else. The fact that this will affect the taxes paid by U.S. multinationals may affect the access of U.S. financial institutions to world markets if they’re seen as outside the cooperative sphere. The convention could do things in that space too. All of that means that the lobbying pressure from business and finance on the Trump administration on the Treasury, I think, would be hard to resist.”
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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