On March 21st, Treasury Secretary Janet Yellen indicated that she was optimistic that the U.S. would be able to maintain the value of its Federal-Level R&D Tax Credit Program that was originally introduced into the U.S. Internal Revenue Code under President Reagan’s Economic Recovery Tax Act of 1981 for companies conducting qualified R&D on U.S. soil, in the face of concerns that the new global minimum tax could compromise it. The Department of Treasury believes it has an opening to negotiate over the tax treatment of the U.S. Federal-Level R&D Tax Credit Program with countries moving ahead with the global minimum-tax agreement reached in 2021 by more than 140 companies under the Organization for Economic Cooperation and Development (hereinafter “OECD”), requiring companies to pay taxes at a minimum effective tax rate of at least 15% no matter where in the world they reside and conduct business. Companies are concerned that if the U.S. Federal-Level R&D Tax Credit Program reduces their effective tax rate below 15%, the requirement for companies to pay that minimum level of tax could essentially negate the benefits of the U.S. Federal-Level R&D Tax Credit.
Senator Todd Young (R-Ind.) challenged Treasury Secretary Janet Yellen on this issue during the hearing, saying President Biden’s administration and countries participating in the OECD agreement would completely “undermine important U.S. tax credit programs” such as the U.S. Federal-Level R&D Tax Credit Program. Senator Todd Young cited comments from the Department of Treasury earlier this week that legislation might ultimately be needed to address this matter.
Similar concerns arose in 2023 over how select U.S. green-energy tax credit programs would be treated under the global minimum tax agreement. Those concerns were resolved when the OECD agreed to treat those green energy tax credits as largely refundable, which had the effect of lessening their impact on the calculation of a company’s minimum effective tax rate. However, it should be duly noted that the U.S. Federal-Level R&D Tax Credit Program is a non-refundable credit program, and the future of the program’s impact will need to be successfully negotiated for its continued success.
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