On 20 January, President Trump issued around a hundred executive orders, including two relevant to international tax. In the first, The Organization for Economic Co-operation and Development (OECD) Global Tax Deal (Global Tax Deal) (the OECD Pillars EO), President Trump withdrew the U.S. from the OECD Pillars project (see our OECD Pillars series), asking the OECD to be notified that “any commitments made by the prior [Biden] administration on behalf of the United States with respect to the Global Tax Deal have no force or effect within the United States absent an act by the Congress adopting the relevant provisions of the Global Tax Deal”. This in itself is not that surprising and probably will not have a huge impact given it was proving difficult for the U.S. to implement the OECD Pillars under President Biden, with a Republican-controlled House, so it was already thought highly unlikely that President Trump would take this forward in his administration. However, the OECD Pillars EO may result in some countries that were reluctant to adopt the OECD Pillars delaying the implementation of local legislation or abandoning the OECD Pillars outright.
More concerning is that the OECD Pillars EO also states that the Secretary of the Treasury is to investigate whether any foreign countries are not in compliance with tax treaties with the U.S. or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies. The Secretary of the Treasury is to present to President Trump within 60 days a list of options for “protective measures or other actions” that the U.S. could adopt in response to such taxes.
In the other executive order of relevance, the American First Trade Policy, President Trump invokes section 891 of the U.S. Code as a mechanism for taking action against foreign countries that “subject U.S. citizens or corporations to discriminatory or extraterritorial taxes”. This provision, which dates back to 1954, allows for a doubling of the tax rate on citizens of those foreign countries. Crucially, this is based on the President’s view (without needing to go through Congress). It is worth noting that no regulations have been promulgated by the United States Treasury Department under section 891, and it has never been invoked, so it is unclear how this provision would in apply in practice.
In addition, House Republicans on 22 January reintroduced their Defending American Jobs and Investment Act (H.R. 591) (first proposed by House Republicans in May 2023). According to a press release issued by the House Ways and Means Committee, under this proposal, “the tax rates on U.S. income of wealthy investors and corporations in those foreign countries [identified as having extraterritorial and discriminatory taxes] will increase by five percentage points each year for four years, after which the tax rates remain elevated by 20 percentage points while the unfair taxes are in effect. The tax ceases to apply after a foreign country repeals its extraterritorial and discriminatory taxes.” Although the text of the legislation has not yet been released, the prior bill would have also required that the Secretary of the Treasury take any extraterritorial or discriminatory taxes into account when assessing whether to enter into, or update, a bilateral tax treaty with any country that has adopted such taxes. However, the text of the prior bill notably did not express an intention to: (i) modify the obligations of the U.S. under its existing bilateral tax treaties or (ii) eliminate other exemptions under the U.S. Code available to non-U.S. persons, including the exemption under the U.S. Code for tax on “portfolio interest,” the exemption for interest on bank deposits and the exemption for certain income received by non-U.S. governments and international organizations.
Finally, although President Trump has not formally proposed tariffs against countries that have enacted extraterritorial and discriminatory taxes, based on President Trump’s recent tariff threats against multiple countries, including Mexico, China and Canada, and the prior Trump administration’s threatened tariffs in response to digital services taxes, retaliatory tariffs may also be one of the options being considered.
All three of the current initiatives refer to taking action against extraterritorial and discriminatory taxes. President Trump has made no secret of his opposition to the global minimum tax (Pillar Two) and in particular the UTPR (Under Taxed Profits Rule) component of Pillar Two, so this aspect comes as no surprise (see our recent article here), although other OECD members may have been hoping that there would be a bit more time for reflection before he took action on this.
However, Pillar Two is not the only tax that could fall within the scope of these measures. In his previous administration, President Trump took aim at various national digital services taxes, with the United States Trade Representative threatening tariffs and launching section 301 investigations against a number of jurisdictions with such taxes including the U.K., France, Spain, Italy and India (amongst others). These look set to once again be in the President’s sights.
In addition, other measures could be in scope. Depending on the definitions of ‘extraterritorial tax’ and ‘discriminatory tax” that are adopted, and guidance issued by the Treasury and the IRS in interpreting such terms, this could bring within scope a large number of measures such as the German IP register tax cases (i.e. German taxation of U.S. companies in relation to IP where the only nexus is registration in a German register), the implementation (in Spain and elsewhere) of the EU Anti-Tax Avoidance Directive in relation to controlled foreign companies,, taxes on emissions and countless more. To the extent that the U.S. administration feels any of these disproportionately target U.S. companies, those measures could well be in scope.
We have 60 days until we hear what options are being put on the table on the U.S. side in relation to Pillar Two which will give us a better idea of the likely response from other governments and in turn the potential impact for business. How other governments will respond to these initiatives remains to be seen. EU Member States may be hampered in their ability to act given that changes to the existing Pillar Two Directive, including eliminating or modifying the UTPR, require unanimity. However, others outside the EU and particularly those who have not yet enacted their UTPR legislation, including the U.K., may have more leeway to do so. The fact that President Trump and House Republicans have taken action on day one indicates this is a high priority for the Trump administration and the Republican-controlled legislature. Whilst we don't yet know exactly what steps will be taken, we can be certain we are in for a bumpy ride in the months and years ahead.