Though tensions were high coming in, President Donald Trump left the World Economic Forum in Davos, Switzerland, with at least a temporary truce on one of his latest threatened tariff fights. Trump and French President Emmanuel Macron reportedly came to agreement to forestall until year’s end new rounds of tariffs proposed in response to France’s new 3% digital services tax (DST).

The pause in trade hostilities is meant to give leaders time to reach general agreement on a new international tax regime through the Organization for Economic Cooperation and Development (OECD). But the OECD process is fraught with its own perils, including some that are sure to entwine the global insurance and reinsurance sector.

As the OECD talks move forward, U.S. officials should be particularly skeptical of proposals that would bind the country to destructive taxes on capital, such as a “minimum” global corporate income tax, when our priority needs to be to keep up the framework for tax competition that has served the global economy and insurance consumers well.

Insurance is one of a number of international industries to be unwittingly drawn into a fray whose initial focus was taxation of primarily U.S.-based tech giants. As my colleague Clark Packard has pointed out, the French DST does unfairly burden American firms in ways that look a lot like a tariff, and there are good reasons for U.S. trade officials to respond. The proper place to adjudicate such concerns is through the World Trade Organization’s binding dispute-resolution process.

But the fight the DST kicked off is already far beyond that narrow battle, as the stakes are raised by the OECD’s parallel proposals to subject nearly all multinational corporations to a new tax regime.

In a rare sign of international industry unity, insurance groups from the United States, Europe, Bermuda and the Asia-Pacific region all have noted that OECD’s Pillar One proposal – unveiled in October and designed to allocate taxing rights based on a brand new set of profit and nexus-of-commerce rules – was remarkably ill-suited to insurance. As a highly regulated business that usually requires local capital and that frequently relies on highly volatile income streams that cannot assume regular profits, insurance must be carved out from the Pillar One framework, the Global Federation of Insurance Associations argued in a letter to the OECD.

It remains to be seen whether OECD leaders will agree to that carve-out. Whichever way they land, Pillar Two of the proposal may be even more fraught. Among the planks of this proposed “inclusive framework” are:

  • an income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate;
  • an undertaxed payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
  • a switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and
  • a subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

All of this would mean a shift to an international tax regime that has as its foundation the notion that corporate taxation – irrespective of longstanding principles like economic substance and nexus of business – is a fundamental norm for the “developed” world.

The central problem with that assumption, of course, is that the corporate income tax is a bad tax! Fundamentally, all corporate taxes ultimately fall in some proportion or another on employees, shareholders and consumers. There are far more direct and efficient ways to tax all three. Moreover, because corporations will always have the incentive and resources to engage in lobbying to game the tax system, any effort at a clean and equitable corporate tax code will always be an exercise in futility.

R Street is already on record as endorsing a proposing to zero out the U.S. corporate income tax entirely and replace it with a fee on carbon emissions. This is in line with our general philosophy that governments should endeavor to tax bad things, like pollution, rather than good things, like capital. Committing the United States to a minimum corporate tax regime would undermine such proposals.

Turning to the world of insurance, specifically, there long have been proposals to reshape the tax code in ways that would recognize the value of preferred tax treatment of capital used to pay insurance claims stemming from catastrophes. Going back to the late 1990s, former Rep. Mark Foley (R-Fla.) repeatedly introduced legislation called the Policyholder Disaster Protection Act, which would have permitted insurers to set aside tax-deferred reserves to cover future catastrophic losses.

The idea was later revived by Del. Eleanor Holmes Norton (D-D.C.) to allow such reserve accounts to be established in the District of Columbia. It would be terrible precedent for the United States to bind itself to any international agreement whose effect would be to nullify bipartisan proposals like these.

The latest reports out of Davos suggests U.S. Treasury Secretary has been “frustrated” by the ongoing focus on the digital tax and that he views moving on to Pillar Two as “far more important.” In fact, the most important priority should be to avoid any putative solution that would create more problems than it solves.