Tax News & Views International Weekly: U.S. Treasury Speaks

While President Trump used his first day in office to blast the Organization for Economic Cooperation and Development’s 15% global minimum tax, his administration has been uncharacteristically silent on the matter since.

Of course, there’s plenty else–from his unprecedented tariffs to the massive tax bill in Congress–that’s been front and center in the time since.

In one of the first public statements on international taxes since those initial executive orders, a new official from the U.S. Treasury Department offered some thoughts on how the administration is approaching the issue. The tone was remarkably different from the defiant stance Trump initially took when he officially rejected U.S. participation in the international system.

Derek Theurer, a former Republican Congressional staffer now serving as a counselor to Treasury, said the department’s position is that “coexistence” should be achieved between the Pillar Two system and the similar minimum tax previously adopted by the U.S., the tax on global intangible low-taxed income (GILTI).

“This is the viable path to preserve gains within the two global minimum tax systems,” Theurer said, while speaking at the Pacific Rim Tax Conference in Redwood City, California, according to media reports.

GILTI was enacted in 2017 by the Tax Cuts and Jobs Act. It imposes a 10.5% tax on the foreign income of U.S. companies, if it meets certain conditions to be classified as low-taxed intangible income. Pillar Two works in a similar way for the countries that adapt it, but it uses a higher 15% tax rate. It also imposes that rate in every jurisdiction a company operates in, rather than GILTI, which aggregates all foreign income together.

What exactly Theurer meant by “coexistence” is somewhat vague, perhaps on purpose. What the U.S. likely wants is for the GILTI tax to be considered “qualified” under the Pillar Two system, meaning it would be treated the same as other Pillar Two taxes, despite the variations in their design. When a country is considered in compliance, Pillar Two’s enforcement taxes, such as the under-taxed profits rule that countries can impose on foreign companies, do not apply.

That may sound like a simple request, but it could be a heavy lift. U.S. officials likely want an exemption broad enough to cover income earned by U.S. companies anywhere, including domestically. It would allow the U.S. to continue using valuable non-refundable tax credits like those for R&D, even as Pillar Two penalizes them elsewhere. Other countries may push back on this idea, especially since Pillar Two is supposed to be already be finalized.

The OECD may also look at permanent safe harbors and new protections for tax incentives as a way to ease some of the tensions, but those could still leave room for dispute. Can they bridge the divide, or is another trade war with the U.S. inevitable? 

 

A Pax Romana? 

Is the Trump administration going through a new Friendly Phase? In another development that got noticed across the tax world, the White House released a joint statement between the U.S. and Italy following Trump's meeting with Italian Prime Minister Giorgia Meloni. Among other topics, the release touched on the controversy on digital services taxes, stating that "non-discriminatory environment in terms of digital services taxation is necessary to enable investments from cutting-edge tech companies."

Italy has a 3% tax on digital activities, which is among the levies that the U.S. Trade Representative is investigating for potential retaliatory action. The U.S. position, through multiple administrations, is that such taxes target U.S. companies unfairly.

Is this another sign of a potential area of consensus. It's hard to say. European countries have defended their DSTs as temporary measures until a broader solution can be found--which was supposed to be the OECD's Pillar One multilateral treaty. But since that seems to be stuck in place, and there hasn't been any alternative suggested, it could be hard to avoid a standoff.

 

 

Other Noteworthy Items This Week 

 

 

Critics Offer Ways to Revamp IRS Cloud-Income Sourcing Rules – Michael Rapoport, Bloomberg Tax ($):

 

GE Aerospace Sees $100 Million Global Minimum Tax Bill This Year – Caleb Harshberger, Bloomberg Tax ($):

U.S. Multilateral Tax Goals Will Be Victims in Global Trade War – Ryan Finley, Tax Notes ($):

The “reciprocal” tariff regime is also striking for its seemingly unprovoked economic attack on erstwhile U.S. allies. Lashing out at Canada with punitive trade measures stands out as particularly disturbing. As the only two countries to believe that fistfighting should remain an accepted (if penalized) part of professional ice hockey, the United States and Canada have been natural strategic allies and economic partners for well over a century.

 

 

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: The Wizard

Debut Year:1939

Debut Publication: Top-Notch Comics #1

Origin Story: A dapper masked crimefighter in a tuxedo and cape, he comes from a long line of vigilantes who have protected America since its founding.

Superpowers: With technologies accumulated through his bloodline as well as his own inventions, he has powers ranging from super-strength and being bullet-proof, to hypnosis.

 

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.