Key Takeaways
- The U.S. has said it wants to achieve "co-existence" with the Pillar Two 15% global minimum tax.
- According to a top Treasury official, this would mean U.S. companies are never subject to Pillar Two.
- Other countries may balk at the demand, but the U.S. is willing to negotiate at the OECD, the official said.
- A massive tax bill moving through Congress would include a provision to retaliate against the OECD.
- Norway explores a new tax haven list.
Any married couple will tell you, part of staying together long-term is knowing when to get out of each other's way.
What’s true in love isn’t necessarily true in international taxes. The whole point of a global system is so that national tax authorities can interact, whether through tax treaties or universal standards set by the Organization for Economic Cooperation and Development.
But this will be a crucial step for United States to stay in harmony with the OECD’s Pillar Two 15% global minimum tax, a top U.S. Treasury Department official said May 9.
“Our system is stable,” said Rebecca Burch, Treasury’s deputy assistant secretary for international tax affairs, during an American Bar Association tax conference in Washington, D.C. “It is my belief that the way to stabilize Pillar Two is to delink it from the U.S. system, to have a side-by-side system.”
From the first day of his presidency, Donald Trump has made clear through executive proclamations that the U.S. is no longer participating in the Pillar Two project—even though the U.S. was a major driver of it during the Biden Administration. Decrying the agreement as “discriminatory” and “extraterritorial,” Trump ordered Treasury to investigate retaliatory measures against countries which use Pillar Two laws to tax American companies. That would include the “income inclusion rule”—a top-down tax which countries would impose on their own corporate taxpayers if they have subsidiaries which pay below the 15% global minimum tax—or the “undertaxed profits rule,” the secondary rule which allows countries to tax the local subsidiaries of foreign multinational entities if they have any income that is taxed at less than 15% elsewhere in the world. Those rules, working in concert, would ensure that companies pay 15% on all income, no matter where it’s earned in the world.
The UTPR in particular has been a concern for Republican Pillar Two critics, who claim it will target U.S. companies, since the U.S. hasn’t enacted Pillar Two and has a minimum tax—the tax on global intangible low-taxed income—that is only applied at 10.5%.
But despite the early proclamation—and Republican legislation moving through Congress which would enact further retaliatory measures—Treasury officials have more recently indicated that they wouldn’t be opposed to “co-existing” with Pillar Two, so long as they reach an understanding of when it would apply. So far, it’s been a little murky what “coexistence” really means.
In language that wasn’t inflammatory—but was forceful, emphatic and unequivocal—Burch made clear: co-existence means no overlap between U.S. taxation and Pillar Two. Ever.
“The question is, does the U.S. tax the income or monitor the income?” Burch said. “If the answer is yes, there is no IIR. There is no UTPR.”
This means not only that U.S. companies shouldn't be taxed under Pillar Two, but that the income of foreign-parented multinational corporations that might be subject to U.S. tax should be kept out as well. And solutions which would only work most of the time—like extending a safe harbor which currently covers the U.S.—were “not enough,” Burch said.
“That does not create a side-by-side system,” she said. “And it does not respect the sovereignty of the United States.”
And, perhaps the biggest demand of all, Burch said that as Pillar Two shouldn’t apply to U.S. companies at all, they shouldn’t have to comply with its voluminous reporting requirements which non-U.S. companies are already fulfilling and which many tax officers have said will likely be costlier than the taxes themselves.
While much of the discussion about the U.S. and Pillar Two has focused on the differences between the two systems, Burch said this was the wrong prism to view the dynamic. The right question, she said, is whether U.S. anti-abuse rules like GILTI are “robust” enough to address base erosion and tax avoidance, the original goal of Pillar Two. Since they are, she contended, there’s no need for Pillar Two to apply.
That’s the “U.S. position,” Burch said, and she suggested it would be unwavering. No doubt many other countries will view it as high-handed and difficult to accommodate, and it may be that these differences will spark another round of retaliations and trade wars, on top of all of the others that Trump has triggered in his first few months in office.
But, given the administration’s often-antagonistic stance with global institutions, it wasn’t a given that the U.S. would participate in further OECD discussions at all. Another message that Burch highlighted during the ABA conference is that the U.S. was not walking away.
“We are here,” she said. “We are committed to a multilateral forum to solve this problem.”
Noteworthy Items This Week
House GOP Vision for International Tax? Stay the Course – Dylan Curry, Tax Notes ($):
Tariffs And Tax Breaks Offer Risky Lifeline To US Film Industry – Dylan Moroses, Law360 Tax Authority ($):
"It's not just the tax value; it's literally the cost of production in a foreign country," he said.
And Johnson noted that like other industries in the crosshairs of Trump's tariffs, the film industry would need years to reshore production capabilities.
Norway Floats Plan for Non-Cooperative Tax Jurisdictions List – Jan Stojaspal, Bloomberg Tax ($):
The list compiled by the non-EU country would be aligned, “to the greatest possible extent,” with the EU’s list of non-cooperative tax jurisdictions, according to the finance ministry.
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: Mr. Q
Debut Year: 1943
Debut Publication: Green Hornet Comics #11
Origin Story: An FBI agent relegated to a desk job, he donned an outfit and decided to start fighting America's enemies outside the law.
Superpowers: Extensively trained in the latest crime-fighting technology, he can seemingly appear and disappear at will with the use of smoke bombs, and performs other seemingly superhuman feats.
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.