Key Takeaways
- Starting with Estonia, countries are starting to air opposition to a special U.S. exemption to Pillar Two taxes.
- These countries want to receive the same treatment as the U.S.
- If the differences can’t be worked out before year-end, the world runs the risk of another trade war with the U.S.
- As Pillar Two disagreement continues, countries press ahead with implementation.
- The IRS is testing a new international tax theory in a case against Meta.
December was supposed to be when nations at the G-7 and Organization for Economic Cooperation and Development finalized details of the side-by-side agreement with the United States over the Pillar Two 15% global minimum tax. But that timeline has been thrown into doubt as countries are becoming more public about objections.
If the impasse stretches into 2026, it could be a whole new ballgame.
When it was announced back in June, all of the G7 and OECD countries were on board—along with the other countries in the Inclusive Framework, the 147-jurisdiction coalition also implementing the minimum tax. Or at least, no one in the IF publicly protested. The agreement would exempt U.S. companies from the Pillar Two taxes that other countries would apply if entities in those companies are taxed at lower than 15%. The agreement was announced as Congress considered Sec. 899, a retaliatory measure against Pillar Two countries. After the agreement, lawmakers removed that provision from the One Big Beautiful Bill Act.
The June announcement left many details unresolved—including how the exemption would work and how broad it would be. Negotiators were also publicly mulling whether it would expressly exempt only the U.S., or if it would be a country-neutral set of standards. That issue has apparently come to the forefront as Estonia issued a statement last week stating opposition to the agreement, unless it could receive the same treatment as the U.S. They say they have little to gain and face significant administrative burdens from Pillar Two compliance.
According to reports, also raising objections are Malta, Latvia, Lithuania, Slovakia, the Czech Republic—and China. (Poland also protested at one point, but has decided to keep supporting the measure, Bloomberg Tax has reported.) Most of these countries won’t have to comply with Pillar Two immediately, due to their small number of qualifying corporate taxpayers. But they want assurances that their exclusion will be permanent. China, of course, is a much bigger player, and it has never been a full-throated supporter of the project. These reluctant participants may spot an opening to leave the project, or kill it altogether.
Despite these signs of discord, the U.S. still seems confident they’ll reach a deal, with U.S. Treasury Secretary Scott Bessent urging countries to move ahead in a statement on X, formerly known as Twitter. They do appear to be on the cusp—the OECD even apparently released agreement details in error last week, only to quickly retract them.
Originally, the rationale for giving the U.S. special treatment was that it already has a global minimum tax regime with the tax on global intangible low-taxed income. (Now called net CFC tested income.) U.S. officials said the system was already “robust” enough to block profit-shifting, the ostensible goal of Pillar Two. But not everyone seems to totally agree with this logic, and other countries are now asking for similar treatment despite not having a minimum tax regime.
Next year, the temporary safe harbor that has been protecting U.S. businesses from Pillar Two taxation will expire, and they could be subject to new foreign taxes. Republicans have Congress have been adamant that if this happens, they’ll re-enact Sec. 899, and a trade war could commence.
This could just be the usual rhetoric and jockeying that happens before compromises are made. Or, it could be a sign that this fragile truce is breaking down. We’ll find out very soon.
Noteworthy Items This Week
The Dutch Tax Administration on December 15 published guidance about how tax under the Netherlands’ income inclusion rule, a key provision of the Minimum Tax Act, should be calculated when a low-taxed group entity is transferred from a Dutch parent entity to a parent entity in another state.
The guidance confirms that, in the event of an internal transfer, the IIR top-up tax of that transferred entity must be allocated on a pro rata basis over the reporting year based on the length of each parent entity’s direct or indirect controlling interest.
IRS Takes a New Shot at Meta’s Foreign Tax Strategy – Richard Rubin, The Wall Street Journal:
The core issue is how the U.S. taxes income from intangible assets such as patents that can be easily moved or licensed across borders. Especially before the U.S. cut tax rates in 2017, companies had incentives to use transactions with subsidiaries to concentrate profits in countries with low tax rates and concentrate deductions in the U.S.
OECD Tackles Tax Complexities of International Remote Work – Gregory Price and Edward Hughes, Bloomberg Tax:
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.
Corporate Transparency Act Block Lifted After Trump Rule Shakeup – John Woolley and Tristan Navera, Bloomberg Tax ($):
“By requiring these corporate entities to provide beneficial ownership information, the CTA regulates how they operate and the level of secrecy with which they do business,” Judge Andrew L. Brasher wrote for the court. “The maintenance and operation of a separate corporate entity is comparable to other regulated activities the Supreme Court has found commercial in nature.”
For example, French lawmakers moved in October to increase the rate of the country’s DST, and Italy expanded its DST in 2024. Countries are revising — or attempting to revise — their DSTs, and these efforts raise a question: How are these DSTs performing against their initial revenue estimates? A review of five DSTs from the United Kingdom, Italy, France, Spain, and Austria shows a mixed bag of outcomes. Some countries’ DSTs are exceeding their estimates while others’ are falling short. No matter the outcome, it is apparent that some countries are using their DST results as a justification to enhance their DSTs. Revenue performance — good or bad — is being used politically to entrench DSTs, not retire them. Simply put, some countries are refusing to take “no” for an answer when it comes to maintaining DSTs, and this raises questions for the future of unilateral digital taxes.
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: Captain Flash
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Debut Year: 1954
Debut Publication: Captain Flash #1
Origin Story: A science professor who absorbed radiation from a botched experiment, he can transform into a superpowered giant by clapping his hands.
Superpowers: Aside from his size, the radiation gives him super-strength and other extraordinary powers.
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