Tax News & Views International Weekly: Year-End Global Tax Negotiations

It’s been an eventful year, in Washington, D.C. and the world. And, even though there’s only weeks left, it’s not over yet.

Congress is currently debating whether and how to extend enhanced healthcare tax credits before the year is out. Meanwhile, at the Organization for Economic Cooperation and Development and around the world, negotiations continue on how to design a “side-by-side” agreement to ultimately exempt U.S. companies from the Pillar Two 15% global minimum tax. The parties have a self-imposed deadline of the end of the year—otherwise, under the Pillar Two rules U.S. companies could be subject to new taxes from participating nations.

Last week, Republicans in the House of Representatives sought to remind the OECD, and tax officials at other participating nations, of the potential consequences should the agreement break down.

“Congressional republicans stand ready to take immediate action if the other parties walk away from this bill or slow-walk its implementation,” said Rep. Jason Smith, R-Mo., chairman of the House Ways and Means Committee during a recent hearing about international tax issues.

Smith said he expected to see new details about the agreement imminently, although in the week that has passed there has been no new announcement from either the OECD or the U.S. Department of the Treasury.

Proposed Sec. 899, the so-called Revenge Tax, would retaliate against countries which use Pillar Two taxes against U.S. companies by targeting companies in those jurisdictions for higher taxes. It would do this by increasing withholding taxes, as well as other tax regimes such as the base erosion and anti-abuse tax, on transactions between U.S. subsidiaries and their foreign parent organizations. As it was previously written, the law would be set to levy those new charges automatically if it is triggered, without a decision from the White House or Secretary of the Treasury.

Sec. 899 was pulled from the One Big Beautiful Bill Act when the side-by-side agreement was announced in June. But that announcement was light on details, and in the months since then negotiators have worked to fine-tune some potentially difficult mechanisms to make the deal work. Other countries may be wary of granting an exemption to a single country, even if it has its own minimum tax.

Now that the OBBBA is law, Republicans would need another legislative vehicle to enact Sec. 899. That would probably need to be a second reconciliation bill to pass through Congress without any votes from Democrats—a notion that was initially the subject of some talk, but has since mostly fallen off the radar.

Ultimately, the details on the exact mechanism may not end up mattering. If Congress doesn’t pass Sec. 899, President Trump could use existing laws—such as Sec. 892, a 100-year-old statute with a broader and more cumbersome retaliatory taxing tool. And there are many tariffs he could resort to, even if the Supreme Court knocks down the reciprocal tariff regime.

The Republican threat on Sec. 899 is more about making the political statement–that both Congress and the White House oppose Pillar Two. We may soon see if that threat is enough to make this agreement a reality.

Noteworthy Items This Week

Trump Threatens Mexico With Tariffs Over Texas Water Spat – Jonathan Curry, Tax Notes ($):

According to Trump, Mexico owes the United States over 800,000 acre-feet of water in total for the five-year cycle that ended October 24. “As of now, Mexico is not responding, and it is very unfair to our U.S. Farmers who deserve this much needed water. That is why I have authorized documentation to impose a 5 percent Tariff on Mexico if this water isn’t released, IMMEDIATELY,” he wrote.

The 1944 Mexico-U.S. water treaty governs the sharing of water flows from the Rio Grande and the Colorado River. It specifies that Mexico must deliver certain amounts of water from the Rio Grande to the United States and the United States must deliver water from the Colorado to Mexico. An August 4 Congressional Research Service report notes that while the United States has consistently held up its end of the bargain on the Colorado River flows, Mexico has repeatedly failed to meet its five-year cycle water delivery requirements over the last 30 years.

‘Only so long’ before Trump’s tariff costs hit consumers, businesses warn – Daniel Desrochers, Politico:

Retail giants have proven more adept than expected at cushioning the blow of President Donald Trump’s steep tariff hikes over the spring and summer, keeping prices for consumer goods from surging this year by as much as many economists anticipated. But business executives and corporate analysts are warning they can’t do that forever.

“In the first half of next year, we are concerned that consumers are going to start to see the price increases become a little more broad based, and there may not be all the [holiday sales] promotion to help clear through some of that,” Joseph Feldman, a senior managing director at Telsey Advisory Group, who focuses on the retail sector, said in an interview. “So that could be a little bit of a sticker shock for some people.”

5 Takeaways From Eaton Trial On Acquisition Financing, Part 1 – Molly Moses, Law360 Tax Authority ($):

Expert witnesses and former Eaton officials during the first weeks of trial addressed the company's lowered credit rating after the acquisition, which Eaton argues justified the high interest and guarantee fees. They also spoke about the data used to calculate the rating and the company's decision, as part of its restructuring, to transfer a $14 billion asset from a U.S. Eaton subsidiary to Eaton PLC.

Tax Court Judge Albert Lauber's questions seemed to indicate that while he viewed the guarantee fees as having some value, he considered the interest rates artificially high and was skeptical of the lowered credit rating assigned to the U.S. company after the acquisition. Other comments suggest he isn't likely to find that the IRS abused its discretion in the case — or give much weight to its alternative argument that the debt was not real and should be recharacterized as equity.

Global Mobility, Remote Work Issues Next on OECD’s Tax Agenda – Shefali Anand, Bloomberg Tax ($):

The OECD plans to soon focus on global mobility and helping tax systems adjust to remote working, Manal Corwin, director of the organization’s Center for Tax Policy and Administration, said Saturday.

Corwin said it’s critical for the Organization for Economic Cooperation and Development to respond to changing geopolitical and economic situations.

“A diagnostic and scoping process is under way” to gather inputs from various stakeholders, she said in a virtual address at the conference of the Foundation for International Tax in Mumbai.

Pillar 2 Runs Into Political, Legal, and Administrative Obstacles – Mindy Herzfeld, Tax Notes ($):

Given that the G7 agreement is supposed to exempt U.S.-parented companies from having their profits subjected to the UTPR, the United States might be unconcerned about the less favorable treatment of nonrefundable credits. But the status of those credits still matters greatly for U.S. subsidiaries of foreign-parented multinationals, since they aren’t part of the constituency receiving priority treatment as the United States negotiates exemptions from the IIR and the UTPR. The profits of those U.S. companies could still be subject to a top-up tax in another jurisdiction if their ETR is less than 15 percent as calculated under the GLOBE rules. That in turn could result in other countries soaking up tax incentives enacted by Congress to spur U.S. investment..

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Stuart Taylor

Debut Year: 1938

Debut Publication: Jumbo Comics #1

Origin Story: A scientist who helped build a time machine, he travels through time fighting evil-doers throughout the ages, and in the future.

Superpowers: No superpowers, exactly, but the daring swashbuckler has developed his skill with a sword through battle through the millennia. He also has access to futuristic weapons and his time machine.

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

Tax News & Views International Weekly: Year-End Global Tax Negotiations

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