President Donald Trump issued an executive order on his first day back in office, rejecting an international initiative to reform how multinational enterprises (MNEs) are taxed. He also left open the possibility of imposing retaliatory taxes or tariffs against businesses of nations that implement the global tax deal.
In the Jan. 20 executive action, Trump expressed strong opposition to the effort led by the Organisation for Economic Co-operation and Development (OECD) to change how medium-size and large MNEs are taxed. The president explained that the international tax deal supported by more than 100 nations “not only allows extraterritorial jurisdiction over American income but also limits our Nation’s ability to enact tax policies that serve the interests of American businesses and workers.”
Trump instructed the Treasury secretary to prepare “a list of options for protective measures or other actions” that the United States could take if other nations put tax rules in place that “are extraterritorial or disproportionately affect American companies.”
To learn more about what the executive order might mean for businesses, The Tax Adviser contacted Cory Perry, a principal in Grant Thornton’s National Tax Office in Washington, who is also vice chair of the AICPA’s International Taxation Technical Resource Panel.
As background to the written Q&A below, the OECD-led global tax reform effort has two pillars. Essentially, Pillar 1 seeks to address the tax challenges of the digitalized economy by requiring the biggest MNEs to pay tax in the locations where their customers and users are located. Pillar 2 introduces a 15% global minimum corporate tax on multinational groups with consolidated revenue over €750 million, with the goal of reducing profit shifting as well as tax competition among jurisdictions.
Can you provide some background on Pillar 2?
Cory Perry: The Pillar 2 rules (also referred to as the Global Anti-Base Erosion rules, or the GloBE rules) are designed to ensure that large multinational enterprises pay a minimum tax of 15% on income earned in each jurisdiction where they operate. The GloBE framework generally consists of three interlocking rules. First, the income inclusion rule (or the IIR) will allow parent countries to impose “top-up” tax on earnings of foreign subsidiaries with effective rates below 15%. Next, the under-taxed profits rule (or the UTPR) will impose additional tax on certain income with effective rates under 15% and not topped up under one of the other charging mechanisms. Finally, the qualified domestic minimum top-up tax (or the QDMTT) “tops up” tax on domestic entities to 15% in the local jurisdiction before another country’s UTPR or IIR applies.
Currently, no laws incorporating the GloBE rules have been enacted in the U.S. However, the U.S. has the global intangible low-taxed income (GILTI) regime, which, in its own right, functions as a minimum tax system on global income. Nevertheless, there are notable differences between GILTI and the GloBE rules, making the U.S. system noncompliant with the Pillar 2 framework.
Although various U.S. legislative proposals have been introduced to align U.S. law with the OECD’s Pillar 2 framework, none have received sufficient support to become law. Despite the lack of momentum in the United States, global adoption of Pillar 2 continues, with dozens of countries having already enacted final legislation.
What did the recent executive order do?
Perry: The executive order (EO) is broken into two sections.
In the first section, the EO states that the Trump administration will notify the OECD “that any commitments made by the prior 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.” As it’s a U.S. EO, it does not prevent Pillar 2 from continuing to apply to U.S. corporations in foreign countries that have enacted Pillar 2. It does, however, convey the administration’s view on the ongoing OECD process. Additionally, given that the OECD operates on a consensus-based model, if the United States opts not to participate or opposes future Pillar 2 actions, the OECD guidance process could be delayed or stymied.
In the second section, the EO calls for the secretary of the Treasury in consultation with the U.S. trade representative to “investigate whether any foreign countries are not in compliance with any tax treaty with the United States or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies, and develop and present to the President … a list of options for protective measures or other actions that the United States should adopt or take in response.” This list of options and other actions could include the imposition of tariffs, or the use of Sec. 891, which allows the president to double tax rates on citizens and corporations of certain foreign countries if they impose discriminatory or extraterritorial taxes on U.S. entities, or the use of other protective measures. To my knowledge, Sec. 891 has never been used, but it provides the president with a potential mechanism that does not require congressional approval.
Is there a greater risk now that the United States or other countries will impose retaliatory taxes?
Perry: Yes. This lays the groundwork for the U.S. to take retaliatory action, which would almost certainly trigger countermeasures from affected foreign jurisdictions. Similar actions were taken by the previous Trump administration in response to digital services taxes (DSTs). Moreover, recent developments suggest that the Trump administration is increasingly willing to use these tactics to advance its global policy objectives.
What are digital services taxes, and how do they relate to this topic?
Perry: DSTs are levies on certain sectors of the digital economy where value is generated through nontraditional means, such as a user base. The most common form of DST is a tax on the gross revenue of large digital companies.
As part of the OECD tax deal, alongside Pillar 2, there is an ongoing initiative known as Pillar 1, which aims to curb the proliferation of these controversial DSTs. However, the Pillar 1 project has largely stagnated and has made little progress. At this point, reaching a consensus on a Pillar 1 agreement seems unlikely, and failure to do so could lead to further escalation — or even a trade war.
What should businesses do to prepare for what may lie ahead on this topic?
Perry: At this point, I don’t believe businesses should change course. They should continue preparing for Pillar 2, as it is already in effect in many countries. While the EO could lead to escalation and potential concessions from the OECD regarding its application to U.S. companies, it is still too early to determine what impact the Trump administration may have on this global tax initiative.
Taxpayers should position themselves for compliance, including preparing for assessment of any potential tax liabilities. However, they should also closely monitor developments, as Pillar 2 may continue to evolve — especially given the economic pressures that the current administration may exert on implementing jurisdictions and the OECD itself.
Can you explain what Pillar 2’s UTPR is and how it would work?
Perry: The UTPR generally denies deductions for group members or applies other mechanisms to impose additional tax on GloBE income that is subject to an effective tax rate below 15% and is not otherwise covered by an IIR or QDMTT. I refer to this as the “backstop rule” because it captures all low-taxed income that is not addressed by other charging mechanisms under Pillar 2. It then allocates taxing rights across Pillar 2 jurisdictions where the group has activities or subsidiaries.
This rule is both novel and controversial, as it allows jurisdictions to impose tax even when they lack traditional nexus with the income being taxed.
As you know, a few years ago the United States enacted a corporate alternative minimum tax. Would this tax satisfy the requirements of Pillar 2? After all, it’s a minimum tax on large corporations.
Perry: Structurally, the U.S. corporate alternative minimum tax (CAMT) functions in a fundamentally different way than Pillar 2. As a result, it does not qualify as a QDMTT or an IIR under the Pillar 2 rules and would not prevent the application of Pillar 2 rules to the United States in other jurisdictions. Although the CAMT may be considered when determining the effective tax rate under Pillar 2, it would not constitute a qualifying system under the rules.
Additionally, there is a significant difference in scope. The CAMT applies only to a few hundred companies that have average annual financial statement income exceeding $1 billion, whereas Pillar 2 applies to many more entities, those with revenue exceeding €750 million.
— To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.
