OECD Global Tax Deal Executive Order

On his first day in office, President Donald Trump issued an EO that turns up the heat on the Organization for Economic Cooperation and Development’s (OECD’s) global tax deal. The EO sets forth the Trump administration’s position that the global tax deal represents an attempt to limit the United States’ national sovereignty and clarifies that the deal has no force or effect in the United States.

Background

The global tax deal is a multilateral initiative coordinated by the OECD. In October 2021, the initiative was finalized and has been agreed to by nearly 140 countries, including the United States. The deal was developed on a two-pillar framework. Pillar 1 aimed to allow consumer economies to tax goods and services consumed within their economies but produced or provided from outside the affected economy. Pillar 2 established the groundwork for a 15% minimum tax for all subscribing countries, thereby forestalling the race to lower tax rates in an attempt to attract international business investment.

At the same time, several countries began adopting digital services taxes (DSTs) that targeted profits generated by digital activities consumed by customers within their borders. The digital economy does not align neatly with traditional concepts of tax nexus. Many DST critics perceive DSTs to be aimed at the intellectual property of large U.S. tech companies. Trump’s first administration and former President Joe Biden’s administration both viewed DSTs as problematic. The framework for Pillar 1 required that subscribers not enact a DST, but many subscribing nations either retained a preexisting DST (for example, France) or proceeded to enact a new DST (for example, Canada) while Pillar 1 still was being developed. In the short time since Trump issued the EO, France announced that it intends to retain its DST.

Over 60 countries, including European Union members, have finalized or are in the process of legislation to implement Pillar 2. However, the U.S. adoption of the deal faced an uphill battle from the beginning. Legislation to implement the deal requires agreement in a sharply divided Congress. The concerns with Pillar 2, particularly the top-up tax calculated pursuant to the undertaxed profits rule (UTPR), are bipartisan. Republicans see the UTPR as interfering with the United States’ sovereign right to tax its citizens and businesses. The Biden administration issued Notice 2023-80, which essentially denies a foreign tax credit for a top-up tax computed pursuant to the OECD’s Pillar 2 income inclusion rule and reserves treatment of UTPRs for future guidance.

What the EO means

The EO does two things. First, it provides a strongly worded status report about the global tax deal from the perspective of the United States, namely that the deal has no force or effect in the United States absent an act by Congress regardless of any commitments made by the prior administration. Second, the EO calls for an investigation into whether any foreign countries are not in compliance with applicable U.S. tax treaties or have adopted tax rules that disproportionately affect American companies and directs that the investigation be followed up with a report of curative options and recommendations.

The EO’s significance does not lie so much in its text but in the context and events surrounding its issuance. The fact that the EO was issued on Trump’s first day in office, the tone of the EO, and the express warning that Trump is considering retaliatory action, when taken in aggregate, are evidence of the administration’s strong stance on the issue. Additional context is provided in another executive order issued the same day that addresses international trade issues. That executive order directs various agencies to initiate investigations and make recommendations regarding trade policy, including a directive to investigate whether any foreign country imposes discriminatory or extraterritorial taxes on U.S. citizens or corporations pursuant to Section 891. Section 891 is a provision that allows the president to double the U.S. tax rates applicable to citizens and corporations of countries with discriminatory or extraterritorial taxes. Passed in 1934, Section 891 has never been invoked, but it is noteworthy because it grants the president the authority to act unilaterally without congressional action.

Crowe observation

Given that taxes under the deal have been adopted by a wide variety of countries throughout the globe, are not directed at any single country, and are applied to taxpayers in all countries that meet an annual revenue threshold, questions have arisen regarding whether top-up taxes could trigger action under Section 891.

Looking ahead

Negotiations around the global tax deal are bound to be fraught with growing intensity as the United States seeks changes to the features of the deal it finds most problematic while the OECD and adopting members attempt to retain those same features with U.S. support. The president’s day-one EO is a strong indication that adoption of the deal is unlikely over the next four years. Given the current administration’s stance and operational profile, its opposition to the global tax deal is expected to grow increasingly confrontational with the OECD and adopting countries. The administration is likely to adopt unique and creative approaches to attempt to address its concerns proactively within the executive branch while seeking support from Congress.

As a result of these developments, multinationals should not plan on the current administration adopting the global tax deal and should watch for retaliatory measures like tariffs, possible rate changes on certain foreign taxpayers, possible Federal Trade Commission disallowances for top-up taxes, and taxes related to transfer pricing under the deal. Companies should consult with their tax advisers to evaluate their current structure and international tax positions in light of these latest developments.