Secretary-General of the Organization for Economic Cooperation and Development Mathias Cormann speaks with Secretary of State Antony Blinken at the OECD headquarters in Paris, June 25.

Secretary-General of the Organization for Economic Cooperation and Development Mathias Cormann speaks with Secretary of State Antony Blinken at the OECD headquarters in Paris, June 25.

Photo: afp contributor#afp/Agence France-Presse/Getty Images

Leaders from 130 countries last week agreed to a major overhaul of global tax rules, and we have some advice for Congress: Read the fine print carefully. The deal represents an intersection of Europeans’ longstanding dream to tax American tech companies and the Biden Administration’s attempt to bamboozle lawmakers into passing a competition-killing corporate-tax hike at home.

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The agreement is the latest step in years-long negotiations at the Organization for Economic Cooperation and Development to change the way companies are taxed around the world. It comes in two parts. “Pillar One” would introduce a new tax targeting mainly U.S. tech giants. “Pillar Two” creates a global minimum corporate-tax rate of 15%.

Finance ministers from the G-7 countries signed on in principle in June. Last week’s announcement includes assent from China and India—for now—that were holdouts. Proponents hope the path is now clear for a final agreement in the autumn after technical negotiations that will make or break this exercise. Major questions remain, including which companies would have to pay the taxes to which jurisdictions based on which earnings and with which deductions and exemptions.

The details that are in the five-page outline should alarm Congress. One is that the scope of the taxes already is expanding. Before the G-7 reached its agreement last month, Treasury Secretary Janet Yellen had proposed applying pillar one only to companies with annual revenue above $20 billion (almost €17 billion) and profit margins above 10%. This would capture primarily big Silicon Valley firms without having to single out tech by name. The OECD deal suggests reducing that to €10 billion in annual revenue.

This highlights the folly of Ms. Yellen’s negotiating strategy. By concocting a complex mechanism to give European leaders the tech tax they desired without calling it a “tech tax,” she removed any limiting principle on the tax’s reach in the future.

For now, the OECD deal maintains its focus on U.S. tech firms in a more obvious way than the G-7 pact did. But it formalizes an exemption from pillar one for extractive industries such as mining and financial services; the latter was a demand by U.K. Chancellor Rishi Sunak.

The OECD also takes pains to include a special Amazon tax. Amazon in its entirety would fall outside pillar one’s scope because its pretax profit margin of about 6.3% is too small. Last week’s deal gets around this by allowing for “segmentation.” This would let governments apply the tech tax to a company’s business units even if the company as a whole doesn’t meet the revenue threshold. Amazon’s Web Services division would become taxable, which foreign leaders such as French Finance Minister Bruno Le Maire demanded.

Another question is what negotiators will have to sacrifice to keep China and India on board. In India’s case, the cost is probably a limit to the binding dispute-resolution provision companies would require to defend themselves from double- or triple-taxation. New Delhi has long resisted such arbitration clauses and last week’s deal limits dispute resolution to parts of the pillar-one tech tax.

Buying Beijing’s support will be costlier. The deal leaves substantial scope for countries to negotiate further carve-outs and exemptions from both the tech and global-minimum taxes, and to exempt younger companies. Beijing has resisted any global agreement that would limit its scope to set tax policy as it sees fit, and the pact leaves wide open the possibility that China could sign on to a deal that wouldn’t require Beijing to follow any of its terms.

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The Biden Administration bucked bipartisan tradition to join this global tax agreement in large part to persuade Congress that lawmakers can raise taxes on U.S. companies without hurting their competitiveness. Last week’s agreement is a warning that this won’t work.

The OECD deal, for all its flaws, is still more lenient than President Biden’s plan to tax American companies’ overseas profits. That proposal, built on a tax called the Gilti created in 2017, would set a tax rate of 21% with few carve-outs and no loss carry-forwards, to cite two problems. The OECD will offer foreign companies more generous exemptions and deductions from the pillar-two minimum tax.

Ms. Yellen also hoped an OECD tax rate of 15%, compared to earlier discussions of 12.5% or so, would reassure Congress it could safely impose a 21% Gilti with limited competitive fallout. But the deal makes clear that the higher leaders push the headline OECD rate, the more likely they are to introduce exemptions to keep the effective global minimum-tax rate at or below 15%.

The bigger sleight-of-hand concerns timing. The OECD promises to implement this once-in-a-century overhaul of global taxation by 2023—including scores of tax-treaty renegotiations to implement the tech tax and national legislation in all 130 signatories. Presumably this is meant to goad Congress into moving first with Mr. Biden’s tax hikes in the expectation other governments will follow.

Don’t be so sure. Ireland, Hungary, Cyprus and Estonia didn’t sign last week’s agreement, and their consent will be necessary for the EU to adopt the minimum tax. Every other government will have ample opportunity to tweak its laws on the minimum tax to its advantage. All while the U.S. would impose damaging global taxes on American companies.

This is still a bad deal for the U.S. Congress will need to pay close attention to what is—and isn’t—in it before making American firms less competitive around the world.

Wonder Land: Emmanuel Macron welcomed Joe Biden to “the club.” He was talking about the European welfare state. Image: Kevin Lamarque/Reuters The Wall Street Journal Interactive Edition