TAX TAKE: New Bill Aimed at Getting Payback from Countries Adopting Pillar Two Rules and Extraterritorial Taxes
House Ways and Means Committee Chairman Jason Smith (R-MO) recently unveiled his plans to retaliate against countries that impose discriminatory and extraterritorial taxes, a move that has injected some heat into the discussion around the pending imposition of the Organisation for Economic Cooperation and Development's (OECD) famed Pillar 2 proposal's global minimum tax.
The Defending American Jobs and Investment Act (H.R. 3665) includes new section 899, which introduces graduated rates of additional taxation (up to 20 percent) on companies with operations in countries identified by the Department of the Treasury as having extraterritorial or discriminatory taxes levied on U.S. firms. Importantly, while the headlines have focused on Chairman Smith and other Republicans who oppose the idea of other countries imposing an undertaxed profits rule (UTPR) on U.S.-based multinationals, the bill's reach is wider and amplifies some of the policy goals with respect to "novel extraterritorial taxes" outlined in the preamble to the 2022 final foreign tax credit regulations. The legislation is ostensibly meant to encompass the UTPR, "digital services taxes" (in all their forms), and perhaps even Germany's section 49 extraterritorial withholding tax.
The legislation continues the trend of interagency cooperation regarding taxation (see the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act's cross-pollination between Treasury and the Department of Commerce) by referencing the potential involvement of the U.S. Trade Representative (USTR), the Secretary of Commerce, and the President (the latter with regard to imposing procurement restrictions against goods from listed countries). In addition, the text directs Treasury to consider whether a country has any extraterritorial or discriminatory taxes before entering into a bilateral tax treaty.
While it is clear the bill is not destined for imminent serious consideration beyond the Ways & Means Committee, it may play a bigger role as we head into election season. Should Republicans regain control of the Senate and maintain control of the House, its consideration is assured and its prospects for passage will improve. Taxpayers subject to any of the variety of extraterritorial and discriminatory measures targeted by the legislation are well-advised to analyze its provisions and consider the impact such rules might have on the global tax policy dialogue. #TaxTake
Upcoming Speaking Engagements and Events
Loren will present "Pillar Two and Potential U.S. Response," a panel discussion at the 2023 Texas Federal Tax Institute Annual Conference on June 7.
On June 20, Loren will present, "U.S. Tax Update - Global Trends with Local Impacts," at the TP Minds International 2023 Conference in London.
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