Tax News & Views International Weekly: Getting Congress Informed

We all know that international tax can be a niche topic—a little too niche, according to one Congressional representative.

“One thing that should be improved is the overall knowledge in Congress about international tax and how important it is. We sort of have isolated thinking in the legislative process,” said Rep. Kevin Hern, R-Okla., during a Feb. 13 event in Washington, sponsored by the media firm Punchbowl News. “It can't be that one person, or two people in all of Congress--535 members--that really know anything about it.”

This is a dynamic that has long been known to anyone who’s worked on the Hill in this area. Global taxes are just one issue among hundreds for a member of Congress—and perhaps one of the most complicated. Bringing members of Congress up to speed on issues like the Organization for Economic Cooperation and Development’s 15% global minimum tax has been a challenge, for the agreement’s supporters and for its critics.

While House Ways and Means Chairman Jason Smith has been engaged on the issue—and brought several fellow Republicans to Paris in 2023 to meet with OECD officials—he's had some difficulty getting the rest of Congress interested. Rep. Hern and a few other legislators, such as Rep. Ron Estes, R-Kan., and Rep. Lloyd Doggett, D-Texas, have taken the lead in this area. The lack of familiarity with these issues can affect policy—the simplest, most intuitive way to explain them to non-tax members of Congress can become the most likely plan to win out.

Hern added that, despite the lack of knowledge, Republicans are in “lockstep” in their opposition to “giving up our tax sovereignty,” through the Pillar Two plan. He said that countries want to use Pillar Two taxes, such as the under-taxed profits rule, targeting American companies to make up for their own revenue shortfalls and economic roadblocks.

“It is not the United States of America's problem that you prioritize social welfare spending over doing things that prop up your industrial base, that grow your job market,” he said.

During his first day in office, President Donald Trump issued an executive order calling for the Department of Treasury to investigate retaliatory measures against countries which use Pillar Two taxes against U.S. firms. Since then, the administration has not followed up on the proclamation.

Tariffs and Taxes

Companies around the world, both in the U.S. and abroad, are still trying to wrap their heads around the multitude of tariffs and tariff threats issued by the Trump administration in its first month in office. While some of those levies haven’t yet gone into effect—most notably, broad 25% tariffs against Canada and Mexico—others have already been implemented.

In Tax Notes ($), economist and writer Martin Sullivan looks at whether the promised revenue gains from tariffs—which Republicans hope could offset some of the costs for renewing the 2017 Tax Cuts and Jobs Act—will ever materialize:

Future revenue from tariffs is extremely difficult to predict for two major reasons. First, there is a lack of detail on future tariff policies, and the imposition of tariffs is often subject to sudden change or delay. Second, the strategies that U.S. importers use to mitigate the burden of tariffs will likely vary widely across industries and over time.

Also writing in Tax Notes ($), Mindy Herzfeld speculates on how the new U.S. tariffs could eventually open the door for a consumption-based value-added tax:

Tariffs are a tax on but a small subset of U.S. consumption. And to some extent, the costs of tariffs are absorbed by the importing countries. However, they disproportionately affect certain industries, and other countries’ retaliatory tariffs affect U.S. exporters.

Less distortionary effects could be achieved with a much lower consumption tax rate on a broader range of goods. A VAT with an export exemption could achieve many of the benefits of tariffs without some of their harmful side effects. Enactment of a VAT could also smooth the way for income tax cuts while appeasing deficit hawks. In January Rep. Earl L. “Buddy” Carter, R-Ga., introduced the Fair Tax Act (H.R. 25), which would abolish the income tax and replace it with a consumption tax.

In Bloomberg Tax ($), Michael Rapoport outlines why the Trump administration claims it is targeting VATs with reciprocal tariffs:

In particular, Trump has criticized the European Union’s minimum VAT of 15%. He and his advisers have argued that VATs amount to unfair trade barriers that give the countries that impose them an unfair advantage and discriminate against US companies. “A VAT tax is a tariff,” Trump said Thursday.

But observers say that fundamentally misconstrues how VATs work. Trump’s tariff plan would damage the US economy and throw global trade into chaos, they say.

Kevin Pinner in Law360 ($) explains some of the complications with Trump’s other big promise regarding tariffs—that the will bring complex manufacturing, such as for semiconductors or pharmaceuticals, back to the U.S.:

The White House's planned tariffs on semiconductors, computer chips and pharmaceuticals are likely to raise prices for consumers and businesses, but won't necessarily lead to the president's stated goal of growing domestic manufacturing, attorneys and others told Law360.

And Kyle Pomerleau at the American Enterprise Institute writes about border adjustment—one of the things that the Trump administration claims make tariffs necessary.

Border adjustments are a broadly misunderstood policy. Border adjustments do not have the trade effects some suggest, but can have real economic effects. Regardless, basing US tariffs on foreign VATs would make a bad policy even worse.

Other notable international items:

In Tax Notes ($), Ryan Finley looks at how a recent Internal Revenue Service memo could change how the commensurate with income standard is used in transfer pricing.

In Bloomberg Tax ($), Michael Rapoport examines how a royalty case could shake up how Australia taxes software companies.

Also in Bloomberg Tax ($), James Munson reports that the France and Canadian digital taxes could get swept up into Trump’s push for reciprocal tariffs.

See you next week with more on the international scene, plus a new special feature!

Eide Bailly's International Tax Team and our affiliates at HLB, the Global Advisory and Accounting Network stand ready to help with your worldwide tax planning and compliance needs.

Tax News & Views International Weekly: Getting Congress Informed

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