Tax News & Views International Weekly: Tax Changes and the OECD Deal

When the “side-by-side” agreement between the U.S. and the Organization for Economic Cooperation and Development was announced, it was hailed as a victory for national tax sovereignty. Thanks to the broad exemption, U.S. companies could operate in the world free from the threat of punitive taxes due to the U.S. tax code’s noncompliance with the OECD’s Pillar Two global minimum tax rules.

Some noted, however, that there was a contradiction in the messaging. The OECD granted the U.S. a side-by-side exemption, because its current laws met the new conditions to be a “qualified SBS regime.” (Perhaps not coincidentally, the requirements closely match the current U.S. system.) It respects the decisions Congress has made—but what if Congress decides in the future to change the tax code again?

There’s a risk, however small, that changes to the tax code could run afoul of the OECD standards, void the exemption (at least in the eyes of some participants), and subject U.S. companies to Pillar Two taxes. And as the possibility of a major tax bill in 2026 rises, there’s an outside chance that lawmakers could soon face this dilemma.

Much of the discussion on this has focused on the possibility of repealing the 15% corporate alternative minimum tax, enacted by the Inflation Reduction Act in 2022. This apparently satisfies the OECD’s requirement that a SBS regime have a domestic minimum tax, based on financial accounting data. While many Republicans would surely like to see the CAMT go, the huge potential cost of repealing it wholesale likely puts it out of reach.

In theory, Congress could also make changes to the U.S. global minimum tax, the tax on net CFC tested income or NCTI, that might make it no longer qualify. Or it could reduce the corporate tax rate below the 20% that the OECD guidelines require for a SBS regime.

The OECD guidance is vague on how a SBS designation might be rescinded–it only mandates that such regimes report when they have made “material changes” to their tax laws. (So far, the U.S. is the only SBS regime, although there is a process for other countries to apply.) The OECD is scheduled to do a “stocktake” of the overall system in 2029, which might be when changes would be taken into account.

While it may seem like a remote possibility, it’s something that lawmakers may have to take into account the next time they decide to make serious changes to the tax code–whether they agree with Pillar Two or not.

Noteworthy Items This Week

New Tariffs Could Double the Price of Brand-Name Drug Imports – Chandra Wallace, Tax Notes ($):

Importers of many patented pharmaceutical products and their ingredients will be subject to a 100 percent tariff beginning July 31 for the world’s largest pharmaceutical companies and starting September 29 for the rest, according to the pharmaceutical proclamation. Exceptions built into the proclamation may allow companies to mitigate the tariffs’ impact.

“The impact of these tariffs will be very extensive in dollar terms” given the value of the brand-name drugs and the 100 percent rate, according to Chris Young of KPMG LLP. However, that impact “will be nuanced for each company and even within a company’s product portfolio” because of the different product categories, agreements, and exemptions in the proclamation, he said.

Support for OECD Digital Tax Deal Waning, French Official Says – Ryan Hogg, Bloomberg Tax ($):

Rebecca Burch, deputy assistant secretary for international tax affairs at the Treasury Department, said in March the US intended to “listen” to countries’ concerns on taxing rights while asking them to “challenge the assumptions” of the Pillar One proposal.

Martel echoed Burch’s comments Wednesday, saying states wished to “take a step back” and conduct a review of the available options before concluding whether Pillar One was still suitable.

Pillar One is part of a larger global tax agreement in 2021 that included Pillar Two, which aims to charge multinationals a minimum 15% income tax in every jurisdiction where they book income. Pillar Two was finalized in January.

Tax Pros Wonder About Outlook as IRS Pricing Agreements Slow – Caleb Harshberger, Bloomberg Tax ($):

The diminished number of advance pricing agreements the IRS completed last year has tax practitioners wondering what the agency will do to get more APAs done with fewer resources.

The agency’s Advance Pricing and Mutual Agreement Program reported this week that it signed just 110 APAs last year, down from 142 the year before, while new applications ticked up to 178.

Among the culprits were personnel cuts and departures at APMA, which brought staffing levels down to 108, from 126 the year before.

Int'l Tax In March: Tariff Refunds Coming Amid New Disputes – Molly Moses, Law360 Tax Authority ($):

Tariffs dominated the headlines in March, with the process for refunding those illegally imposed under the International Emergency Economic Powers Act being set up — and customers demanding their cut from businesses.

Fallout from the U.S. Supreme Court's rejection of the IEEPA tariffs continued last month as U.S. Customs and Border Protection faced the monumental task of paying back the $166 billion it wrongly collected. Businesses that eventually receive those refunds may need to pass on a portion of the amount to customers, who have filed claims against Costco and other retailers. At the same time, new tariffs that President Donald Trump's administration has imposed under Section 122 of the Trade Act of 1974 are coming under attack.

Trying to Make Sense of the U.S. Strategy at the United Nations – Mindy Herzfeld, Tax Notes ($):

Through both Democratic and Republican administrations, the United States has steadily retreated from participation in U.N. tax matters. The highest-profile withdrawal came at negotiations last year over the proposed U.N. Multilateral Convention on International Tax Cooperation. The disinclination to remain at the table was not completely unjustified, given that the outcomes were preordained in favor of the largest voting blocs — namely the Africa Group and the G77. (Prior analysis: Tax Notes Int’l, Sept. 9, 2024, p. 1647.) But it raises the question of how an increasingly expansive U.N. discussion of tax matters — conducted both via the development of the multilateral convention and through the U.N. Tax Committee of Experts — will affect U.S. companies and taxpayers when the United States can no longer exert influence on the outcomes.

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: Lightning Girl

Debut Year: 1942

Debut Publication: Lightning Comics Vol. 3, #1

Origin Story: After Lash Lightning (profiled back in January) transferred his electricity-based powers to her, she joined him to fight against the Axis and evil.

Superpowers: Like Lash, she can fly and generate electricity at will--but her powers eventually need recharging.

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: Tax Changes and the OECD Deal

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