By David Lawder
WASHINGTON (Reuters) -Treasury Secretary Janet Yellen on Tuesday defended a global corporate tax deal against Republicans' accusations that it would siphon away U.S. revenues and said she was working to carve out an allowance for the U.S. research and development tax credit.
During a four-and-a-half-hour hearing before the tax-writing U.S. House Ways and Means Committee, Yellen said that failure by Congress to fully implement the 15% global minimum tax would erode U.S. global leadership and leave American firms vulnerable to top-up taxes imposed by other countries.
The so-called Pillar 2 agreement for a 15% global minimum tax, first reached in October 2021 by nearly 140 countries, is aimed at halting a downward spiral of competitive corporate tax cuts by countries to attract investment and the shifting of profits to their jurisdictions by multinational firms.
Yellen, who pushed hard for the Organisation for Economic Cooperation and Development (OECD) deal in her first year in office, said the minimum tax was good for the U.S. and "the entire world."
"We've pushed our allies," Yellen said. "Now, on the order of 40 countries have adopted it - most major countries - and I think they see it as a failure on our part, not to be willing to adopt it ourselves, and so it does undermine our ability to exhibit leadership with our allies."
But Republican U.S. Representative Kevin Hern, citing Joint Committee on Taxation estimates of potential U.S. revenue losses from adoption of the global minimum tax of up to $122 billion under an adverse scenario, said Republicans would not agree to implementation.
Republicans have "made it very clear that Pillar 2 is not going to take place under a Republican-led Ways and Means Committee," he said. "We're not going to give away our tax dollars."
Republicans control the tax-and-trade panel by way of a razor-thin majority in the House of Representatives, with future control of the chamber to be determined by the U.S. elections to be held in November.
Yellen said that if Congress adopts the minimum tax and China fails to do so, it would be able to collect taxes from Chinese firms operating in the U.S. under an "undertaxed payment rule."
But the opposite could be true if the U.S. fails to adopt the tax and other countries implement it.
U.S. firms currently receive generous tax credits for research and development expenses, which in some cases lower their effective tax rate below the 15% global minimum tax rate. Yellen said the Treasury is in talks with other countries to carve out an allowance that would not penalize U.S. firms for these investments.
"We are negotiating with other countries right now to try to get favorable treatment for the R&D tax credit and I am hopeful these negotiations will be successful," she said.
Yellen said she would keep the House Ways and Means panel's members informed on this and on negotiations toward the OECD "Pillar 1" arrangement that covers a redistribution of taxing rights on large, highly profitable companies.
Yellen said the tax deal would not hurt U.S. companies' competitiveness, saying they "did just fine" when the U.S. had the sole global minimum tax of 10.5% and other countries had none.