House Republicans on the Ways and Means Committee have proposed legislation that would impose retaliatory taxes on taxpayers from countries that implement aspects of the two-pillar inclusive framework for international tax rules from the Organisation for Economic Co-operation and Development (OECD).
The OECD has been working toward a global transformation of international tax rules under a two-pillar framework. Pillar 1 of the plan deals with the allocation of taxing rights based on sales into a country while Pillar 2 seeks to impose a 15% minimum tax (see our prior story for the latest on Pillar 2). Republicans have been vocally critical about the role of the Biden Administration in brokering the deal and are strongly opposed to implementation.
The proposed legislation would impose a series of income tax and withholding taxes on foreign citizens, corporations, and partnerships of countries that impose either an “exterritorial tax” or “discriminatory tax.” The definition of extraterritorial taxes appears geared toward the undertaxed payment rule under Pillar 2. The definition of “discriminatory tax” targets taxes that do not meet U.S. sourcing standards and are not based on net income. It appears aimed at Pillar 1 tax and other digital services taxes but could be broad enough to capture other types of taxes.
Foreign individuals, corporations, and certain partnerships from a country imposing one of these taxes would be subject to increased rates on many income and withholding taxes. The rate increase would start and five percentage points for the first year after Treasury designates an applicable country and would increase by five percentage points each year until reaching 20 percentage points.
The legislation would create significant technical issues and could be very difficult to administer. It appears at this point to be largely a messaging exercise. House Ways and Means staff have acknowledged that the goal is not actually to collect the taxes but to encourage foreign governments not to implement certain Pillar 1 or 2 taxes. The legislation has little chance of enactment with Democrats in charge of the White House and Senate, but it is an important indication of the depth of opposition to implementing Pillar 2 among Republicans. As implementation moves forward abroad, it will place increasing pressure on the U.S. to act, and the 2024 election may be important for determining the outcome.
Contact:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.