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US roadblocks to the OECD deal

US/UK Private Client Consultant John Havard looks at two potential roadblocks to the OECD two pillar tax deal.

Despite the Biden administration having welcomed the OECD two pillar tax deal, there are two potential US roadblocks to its implementation. One concerns timing: some Democrats argue that US implementation should not precede widespread ratification of the OECD agreement among the OECD’s member countries. The second is potentially more serious: whether implementation requires a formal treaty, rather than merely a Congressional/Executive agreement.

The OECD has achieved what many thought it could not: a near-global agreement on tax that will apply to the largest multinationals, including the tech giants. But the road to implementation may be bumpy, especially in the US.

While President Biden’s administration has welcomed this historic agreement, the focus has now shifted to the domestic process required for its incorporation into US law – and two potential roadblocks have emerged. One concerns the timing of the agreement’s implementation. The second is a more fundamental point on the interpretation of the US constitution.


President Biden’s domestic agenda includes changes to the taxation of US companies doing business internationally.

Some moderate Democrats in the House of Representatives are concerned that implementing these changes should not precede widespread ratification of the OECD agreement among the OECD’s member countries. This argument amounts to saying that the US should not put itself in a position where it might be taken advantage of. Those Democrats say that would happen if the US goes ahead with the President’s proposals, but it is then some time before the bulk of OECD member countries get round to full implementation of the deal.

It remains to be seen if a subsequent, separate agreement between the US and five European countries (UK, France, Italy, Spain and Austria) does anything to address those fears.

According to the press release this second agreement sets out a transitional framework, and in particular:

  • For the time being, the European countries will retain their digital services taxes on US giants like Facebook and Amazon.
  • If the new global tax regime comes into force in the next two years, the European countries will offer a credit to effectively refund any taxes collected that exceed what US corporations would pay under the global tax deal.
  • The US has agreed to drop the retaliatory tariffs it had introduced (and then temporarily suspended) against the five European nations.
  • If the global accord is not implemented by 31 December 2023, the European digital levies remain in force and the US would be free to reimpose its tariffs.


The second potential impediment to the US ratification of the OECD deal is potentially far more serious.

Leading Republican members of the Senate have raised a fundamental constitutional issue. They argue that a formal treaty is required in order to implement the OECD deal, whereas the administration considers that implementation can be achieved via a Congressional/Executive Agreement.

This matters because of the number of votes that the administration can count on in the US Senate. The administration can rely on only 50 votes of the 100 senators. In the event of a tied vote, Vice President Harris has a casting vote. As a Congressional/Executive Agreement requires only a simple majority in the Senate, the Vice President’s casting vote makes that achievable.

In contrast, the US constitution sets a much more stringent requirement when a treaty is involved: although the President is authorised to negotiate treaties, ratification requires 67 votes in the Senate. In recent years, there has been little indication in the Senate of any areas of bi-partisan cooperation.

It clearly is possible for the US to enter into a binding international agreement without having a formal treaty. Examples include the North American Free Trade Agreement and the pact that created the World Trade Organization.

However, the dispute about whether this agreement contains elements which will require a treaty is likely to end up in the courts. Even if fast tracked through that legal process, it is likely that whoever loses the argument will want to appeal the decision, leading to significant delays, even if the agreement eventually goes through.

What does this mean for the rest of the world?

At the very least, it means the road ahead is unlikely to be smooth. As readers will know, the two pillars have differing effects: pillar one is a reallocation of some of the profits from the residence jurisdiction to the market jurisdiction, while pillar two imposes additional taxes on any large group with a tax rate below 15%. In many ways, pillar two is the easier one to implement even if the US does not come to the table: if there is a multinational group which fulfils the conditions but the US, as the parent jurisdiction, does not apply the income inclusion rule, then other countries are likely to deny deductions or impose withholding taxes. The result of this would be that extra taxes are imposed on multinationals but none of it would flow to the US.

Pillar one, however, should be a zero-sum game: to the extent that profits are allocated to a market jurisdiction, the residence country should exempt those profits or give credit for the extra tax suffered. But if the US does not implement the OECD agreement, then for those affected companies which are US-resident (which is likely to be a majority of them), there will be a high risk of double taxation.

So, by failing to implement the agreement, the US would be likely to cause extra taxes for its multinationals under pillar one, while receiving no benefit from the additional tax collected under pillar two. Applying a ‘prisoner’s dilemma’ analysis, it is therefore clearly more beneficial for the US to sign up to implement the OECD measures, rather than fail to implement them. But rational political behaviour is not something that can be relied upon, it would seem.

First published in Tax Journal Thursday 18 November 2021.

If you would like to discuss this further, please contact John Havard using the details on this page.