As the Biden administration and governments around the world celebrate another advance toward an historic global tax accord, an obscure legal question in the U.S. threatens to tear it apart.
At a congressional committee hearing last month, Republican Senator Pat Toomey, who opposes the agreement, told Treasury Secretary Janet Yellen that a key portion of the tax deal would require a formal treaty approved by a super-majority in the Senate.
While Republicans have assailed the agreement generally, Toomey’s claim marked the opening salvo in what could be a crucial legal debate over what exactly is required of Congress to bring the U.S. into line with the international accord.
While the details may be arcane, the consequences could be enormous. If Toomey is correct and a formal treaty is required, the administration will need 67 votes in a Senate where Democrats currently have just 50.
“If the Senate is ultimately required to ratify a treaty, it would take a Herculean effort and complete departure from our current political divide to see this passing,” said Isaac Boltansky, director of policy research at investment bank BTIG.
At stake is a global deal backed by 136 countries. In negotiations organized by the Organization for Economic Cooperation and Development, officials took another step forward Friday in settling key details, and three European holdouts got on board. World leaders hope to give their stamp of approval at an Oct. 30-31 Group of 20 summit in Rome.
The pact aims to accomplish two chief goals: Set a global minimum tax rate of 15% to combat corporate profit shifting to low-tax havens, and agree on a formula for taxing the biggest multinationals based, in part, on where they do business instead of where they book profits—a move driven by the increasingly digital nature of international commerce.
Under the deal, Congress must first enact legislation to alter existing U.S. tax laws in two stages. Yellen said Sunday she’s confident Congress will soon approve the minimum-tax portion.
But the other part isn’t expected to come before Congress until at least next spring. Potentially more importantly, the question is whether the Senate must ratify the deal as a treaty.
Article II of the U.S. Constitution states the president can make treaties “provided two-thirds of the senators present concur.” But the U.S. also has entered into all types of binding international agreements without a formal treaty. Examples include the North American Free Trade Agreement and the pact that created the World Trade Organization.
Most of these have come into force through congressional-executive agreements, resolutions approved by both houses of Congress.
“Despite the fact that the constitutional text includes a specific Treaty Clause but no other means to enter into international agreements, a broad intellectual consensus exists that congressional-executive agreements may serve as full substitutes for treaties,” John Yoo, a professor at the University of California at Berkeley School of Law, wrote in The Michigan Law Review in 2001.
That explains why Yellen responded to Toomey’s challenge by saying there were “a number of ways” Congress could implement the agreement.
Toomey countered that since the deal would override many existing bilateral treaties, it would require another treaty. “Changing those treaties requires ratification in the Senate—there’s no way around that that I can see,” he said.
Toomey and Idaho Senators Mike Crapo and Jim Risch, the ranking Republicans from three key committees, wrote a letter to Yellen on Oct. 8 making the same point and accusing the administration of seeking to circumvent the Senate’s treaty-making authority.
Even Democrats seem unsure. When asked whether a treaty would be necessary, Ron Wyden, chairman of the Senate Finance Committee, responded cryptically. “I think there are going to be some procedural issues there,” he said.
Toomey’s argument was challenged by some tax and treaty experts.
Oona Hathaway, a professor at Yale Law School, said Congress can override an existing treaty either by passing a new formal treaty or by enacting a subsequent law “through the normal legislative process.” U.S. courts have recognized the validity of such legislation under what’s known as the “last in time rule,” she said.
Barbara Angus, global tax policy leader at consultancy Ernst & Young, said tax agreements have traditionally gone through the Senate treaty process, but that didn’t make it a requirement. “Certainly there may be the potential to follow a different path,” she said.
Based on what’s easiest, the Biden administration may logically want to pursue a congressional-executive agreement. But the decision isn’t simply at the discretion of the White House, officials said.
The State Department’s Office of the Legal Adviser is required to provide a recommendation on whether any international deal should be brought into force as a treaty or as “an international agreement other than a treaty.” It must consider a specific set of factors spelled out in the department’s Foreign Affairs Manual and, under certain circumstances, consult with Congress.
A White House official, speaking on condition of anonymity to discuss internal processes, said there’s no definitive process under the manual on how the recommendation is made, and it would be subject to dialogue between the executive branch and Congress.
If the U.S. fails to fully come on board, it could risk successful implementation of the broader tax deal. It would be difficult for the profit reallocation plan to work without the participation of the U.S., home to many of the largest multinationals. For their part, European governments have said U.S. participation in the tax-sharing component is necessary for them to agree to a global minimum tax and withdraw digital levies that the U.S. has demanded be abolished.
Meanwhile, which countries will lose how much tax revenue—a detail that could heavily influence how lawmakers from both parties receive the deal—still has to be negotiated.
“Members will be asking quite a bit about what the U.S. gets out of the agreement, about changing the tax base and how we reach into other foreign countries’ tax bases and how they reach into ours,” Beth Bell, a staff director for Democrats on the House Ways and Means Committee, said at an event Tuesday.
James Lucier at Capital Alpha Partners LLC said he doesn’t see Congress giving a full stamp of approval before 2025, if at all.
“Put me down as skeptical,” he said.