Tax News & Views International Weekly: Congress and the Global Tax Deal

In D.C., the rickety wheels of Congress have slowly started to turn, as Republican lawmakers from both the House and Senate are moving to pass the first requirements of a bill under the "reconciliation" process. At least in the House of Representatives, this would include measures to extend expiring provisions of the 2017 Tax Cuts and Jobs Act, a major priority of the Trump administration.

Whatever tax bill ends up passing, there's a good chance it could include some retaliatory measure against countries which use provisions of the Organization for Economic Cooperation and Development's global minimum tax to target U.S. companies. The minimum tax, also known as Pillar Two, was one of President Biden’s chief accomplishments in the international tax field, and aims to apply a 15% rate of taxation on income wherever it is held in the world.

A new law to retaliate against Pillar Two may not be strictly necessary, even though legislation has been proposed by Republican lawmakers. President Trump has already threatened to use existing law to hike taxes on individuals and corporations from countries that use Pillar Two against the U.S. But a newly enacted tax code provision aimed at Pillar Two could bolster the U.S. position, and increase U.S. leverage. Such a measure would enjoy overwhelming support from Republican lawmakers, even though it likely wouldn't raise much new revenue to help cover the reconciliation bill's astronomical expected cost.

This doesn't necessarily mean that all hope for a U.S./OECD agreement on Pillar Two is lost. There have been some hints that some detente or co-existence could be reached, if countries repeal or significantly alter the Pillar Two enforcement rule, also known as the under-taxed profits rule, and exempt U.S. companies from higher taxation. Rep. Kevin Hern, R-Okla., one of Pillar Two's biggest critics, said that if the OECD deemed the U.S. to be in compliance, "then we could talk to them about it." And former Treasury official Scott Levine noted that Trump's executive order, as sweeping as it was, didn't call for the U.S. to exit the OECD entirely, and gave time for both sides to consider next steps.

Of course, whether other countries want to grant the U.S. any leeway, especially as trade wars flare up around the world, will be the big question in this space for the months to come.

Tariff Tangle

Tariffs are a big deal on their own, but as we posted last week, they can also seriously affect international taxes. That’s true for taxpayers and for legislators, as Trump’s tariffs and whatever revenue they bring in will affect the dynamics around the 2025 tax legislation. That new cash could help offset some of the tax bill’s cost, but as these two pieces highlight, it comes with many political pitfalls.

Trump’s Threatened Tariffs Fall Far Short of Paying for Tax Cuts -- Jarrell Dillard, Bloomberg News ($):

Republicans have promised to extend and expand the 2017 tax cuts while also reducing the deficit. Trump has pointed to revenue from higher tariffs as a way of defraying the cost of tax cuts and has even suggested that tariffs could eventually replace the income tax.

Even much more expansive tariffs Trump promoted during his election campaign — a 60% additional tariff on China and as much as 20% on all other nations — would fall short of the cost of offsetting a tax-cut extension, raising $3.8 trillion over a decade, according to the Tax Foundation.

Trump's Tariffs, GOP Tax Goals Pose Political Puzzle – Dylan Moroses, Law360 Tax Authority ($):

Politically, the tension between the tax and trade agenda of the Trump administration and how their effects could fall on U.S. income earners could create new issues for Republicans.

Retaliatory Measures

The rest of the world is paying attention to Trump’s threats on the tax and trade fronts—but that doesn’t necessarily mean he’s always going to get his way. Especially when it comes to digital or international taxation, foreign lawmakers have their own constituents to think of.

EU Tax Commissioner Vows to Keep an Open Mind on Pillar 2 – Elodie Lamer, Tax Notes ($):

Hoekstra said the EU will meet in early April with “a broader group of allies” in the tax domain within the OECD “and see where the U.S. actually wants to go and what will be a calibrated and smart response there.” He said that at the same time, he will discuss the way forward with EU member states because the stance of the new U.S. administration on the global tax plan “is more than a theoretical ‘what if’ by now.” The bloc cannot allow its companies “to be put in harm’s way just because of the uncertainty,” he said.

France Says It Will Keep Digital Tax Despite Retaliation Risk -- William Horobin and Tom Mackenzie, Bloomberg News ($):

France will not give up on its digital tax that hits major US tech multinationals to appease Donald Trump amid heightened trade tensions, Finance Minister Eric Lombard said.

“It is not a negotiating tool, we have it already in place,” Lombard said in a Monday interview with Bloomberg Television. “It’s not changing.”

Retaliation Against Discriminatory Taxes: The Tax Code Route – Mindy Herzfeld, Tax Notes ($):

Retaliatory taxes imposed under section 891 — and by the Smith bill, if it passes — would have immediate consequences for other countries’ voters. One bright spot for nonresidents subject to U.S. income taxes is that the president’s plans to curtail the size of the IRS would make it even harder for the U.S. government to enforce these rules. More broadly, the rhetoric around eliminating the IRS could make these measures moot.

Other Notable International Items:

Observers Ponder Biden’s Tax Policy Legacy – Tax Notes ($). Alexander Rifaat takes a look at the former president’s accomplishments in tax and the threats they face today, including the tax agreement at the OECD and the 15% alternative minimum tax.

UN Tax Talks Persist Despite Trump’s Hard Line on Global Deals – Bloomberg Tax ($). From James Munson, the U.S. departure from the process hasn’t stopped the United Nations from working on a potential tax agreement.

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: Congress and the Global Tax Deal

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