Tax News & Views International Weekly: Will Side-By-Side Survive a Change in DC?

The 2026 midterm elections are just over two months away. Unsurprisingly, international taxes have not been a premiere topic, as candidates debate the cost of living, the war in Iran, and other hot-button issues.

But, should there be a shift in power in Washington following November 3, international tax is one of many areas that could be affected. While it’s generally been an under-the-radar subject that often avoids political polarization, in recent years there’s been more focus on international tax structures.

This raises the question—if Democrats are in power, either in Congress or (eventually) the White House, will they back out of the side-by-side agreement the Trump administration struck with the Organization for Economic Cooperation and Development, over the Pillar Two 15% global minimum tax?

On the surface, one might think so. The agreement allows U.S. companies to generally avoid taxation under the regime, even though the U.S. tax system is not in compliance with the new OECD standards. It allows the tax code to be less strict on the international subsidiaries of U.S. companies than Democrats, and many critics on the left, have advocated for years.

There are many reasons to think that the side-by-side agreement could persist for a long time, however. Potentially as long as Pillar Two itself.

For starters, the side-by-side agreement allows the U.S. to participate in Pillar Two, rather than leaving it outright or driving a stake through the heart of the agreement. Pillar Two, although it had its roots in the first Trump administration, was a key achievement of President Joe Biden and has been strongly supported by Democrats in Congress. By making that agreement more palpable to Republicans, it could ultimately make it more politically stable.

Should Democrats move to make the U.S. international tax system stricter—for instance, by making the Net CFC Tested Income tax apply at a country-by-country basis, similar to Pillar Two—that could still be done within the side-by-side agreement. While the agreement has been criticized for limiting Congressional authority over the U.S. tax code, this is one direction where there is some flexibility.

Some agreement like the side-by-side deal was probably always going to be part of Pillar Two. It was never likely that Congress would agree to enact all of the OECD recommendations—even though many other countries did. Through all of the stages of negotiations, there was an expectation that the U.S. would receive some type of exemption, recognizing that it took the first step and enacted its own minimum tax before the global agreement. While Democrats would have preferred one that looked different than what the Trump administration achieved, their differences may not be enough to justify throwing it out.

Noteworthy Items This Week

Canada’s Transfer Pricing Tweaks of Doubtful Value, Tax Pros Say – James Munson, Bloomberg Tax ($):

A proposal to simplify Canadian transfer pricing documentation for small companies and transactions wouldn’t broaden compliance or offer easier reporting burdens, tax practitioners said.

Many smaller businesses in Canada don’t check to make sure their cross-border affiliate transactions are in line with transfer pricing laws. The simplified documentation rules, released for public consultation until Sept. 4, aim to entice more of them to document the transactions to beef up the government’s ability to curb tax avoidance.

Under the draft rules’ current design, however, many companies would still find the expense of compiling the documents too high and would decide to keep not verifying their transactions, Peter Kurjanowicz, national transfer pricing leader at Doane Grant Thornton, said in an interview.

U.N. Digital Tax Plans Divide Businesses, Developing Countries – Sarah Paez, Tax Notes ($):

The fast-track instrument “would provide a streamlined, multilateral mechanism to amend bilateral treaties consistently with the Protocol, rather than requiring individual treaty-by-treaty bilateral renegotiation,” the South Centre wrote. “This preserves State consent while enabling faster and more consistent implementation.”

The National Foreign Trade Council (NFTC), a group representing hundreds of U.S.-based businesses, wrote in August 26 comments that the proposal for the protocol to “supersede or modify outcomes under existing bilateral tax treaties without sufficiently precise coordination rules” is its “most serious structural concern.”

Citing the unfinished nature of the draft protocol, the NFTC said it is not yet possible to see its eventual effect on the treaty network. The group opposed the draft’s prohibition of reservations on the grounds that it takes away countries’ ability to mitigate treaty effects.

DAC6 Carveout for Pillar 2 Firms Faces 2031 Delay – Elodie Lamer and Sophie Petitjean, Tax Notes ($):

The European Commission should assess the suitability of the Pillar 2 carveout from reporting on cross-border arrangements under the sixth directive on administrative cooperation (DAC) before it takes effect, the Irish EU Council presidency said.

In its proposed DAC recast, the commission initially envisioned that member states would apply the DAC6 carveout (second subparagraph of article 3(19)) starting in 2028. The first compromise proposal on the DAC recast prepared for the September 4 meeting of member states, seen by Tax Notes, would push this application to 2031 and creates uncertainty around its entry into force.

“By 31 December 2029, the Commission shall submit a report to the Council evaluating the suitability of the second subparagraph of Article 3(19),” the compromise proposal says. If the commission concludes that the application of the carveout is “not suitable,” it may propose to amend or repeal that subparagraph.

Foreign Tax Credit Offset Barred Under Canadian, French Treaties – James Matheson and Perry Cooper, Bloomberg Tax ($):

US treaties with Canada and France didn’t create foreign tax credits that can be applied against a taxpayer’s US net investment income tax, the Federal Circuit ruled in a pair of opinions Monday.

The Internal Revenue Code and the two treaties unambiguously preclude offsetting the NIIT by a foreign tax credit for income taxes paid in Canada and France, Judge Leonard P. Stark wrote for the US Court of Appeals for the Federal Circuit.

Therefore, the estate of Paul Bruyea and Matthew and Katherine Christensen aren’t eligible for a tax credit against the 3.8% NIIT imposed under IRC Section 1411, the court said, reversing two US Court of Federal Claims opinions..

Start Of EU Tax Simplification Talks Will Cover Anti-Avoidance – Eleanor Butler, Law360 Tax Authority ($):

Early discussions among European Union countries on tax simplification will begin Thursday with a focus on the anti-tax avoidance directive, according to a steering note seen Tuesday by Law360.

Countries at the Council of the European Union will consider changes to the directive proposed by the European Commission in June as part of the corporate tax simplification omnibus. The executive's omnibus proposal intends to modify multiple tax laws in one legal act, although it needs the support of all member states to pass. The overarching aim of the package is to make it easier for companies to grow and invest in the EU.

Member states will next meet Oct. 5 for more discussion after Thursday's meeting, according to the steering note.
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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: Phantom Lady

Debut Year:1941

Debut Publication: Police Comics #1

Origin Story: A daughter of a U.S. senator and socialite, she secretly battles crime in costume.

Superpowers: No superpowers, but she's a fearsome fighter with an invisibility ray.

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