Overview
On his first day in office, President Trump issued two executive orders with potentially significant tax ramifications for US and non-US headquartered multinational companies. The orders raise the prospect of the United States implementing retaliatory measures in response to concerns that countries are enacting extraterritorial and discriminatory taxes aimed at US companies. The order also indicates a shift in the US approach with respect to recent OECD tax efforts, though it remains to be seen whether the shift is only one of tone or also tactics and substance.
Background
The United States has long been a key participant in the OECD's work to shape international tax policy. In recent years, the OECD has been focused on measures to address "base erosion and profit shifting" (BEPS) by multinational corporations to reduce tax. One aspect of the OECD work addresses taxation of the digital economy, including rules that would essentially re-allocate a portion of the profits of the largest and most profitable multinationals from where they are currently treated as earning income to where they sell products and services, in an effort to avoid the proliferation of digital services taxes (DSTs). Another aspect of the OECD work is the development of a 15% global minimum tax. Although the United States has a 21% corporate income tax and the first Trump Administration enacted a form of a global minimum tax (the "global intangible low-taxed income" or GILTI regime), the OECD minimum tax rules do not treat the US system as a qualifying regime. In addition, certain elements of the calculation (such as with respect to research and development credits) make it more likely for US multinationals to be treated as low-taxed. As a result, when transitional rules end, other countries could end up collecting tax on profits of US multinationals that are considered undertaxed.
The Trump Orders
The first executive order, The Organization for Economic Co-operation and Development (OECD) Global Tax Deal, states that no commitments made by the prior administration have any force or effect within the United States absent an act by Congress, and that Treasury shall notify the OECD accordingly. The order also instructs the Treasury to investigate whether any foreign countries are failing to comply with tax treaties with the United States or have tax rules in place (or are likely to implement rules) that are extraterritorial or disproportionately impact US companies. The order further instructs the Treasury Secretary to develop, within 60 days, a list of options for protective measures or other actions that the United States should take in response.
The second order, the America First Trade Policy, mainly addresses trade and economic policy issues. It also instructs the Treasury Secretary to investigate whether any foreign country subjects US citizens or corporations to discriminatory or extraterritorial taxes pursuant to Internal Revenue Code section 891, discussed below.
US concerns about aspects of the OECD work are not new. During the first Trump administration, the US Trade Representative explored the use of tariffs in response to digital services taxes. Members of Congress have expressed concerns about the potential effects of the global minimum tax, especially the undertaxed profits rule, on US companies. And US Treasury negotiators have sought changes to other aspects of the global minimum tax rules that could have negative consequences on US companies, such as revisions to the treatment of research and development credits. It was also understood by Treasury, the OECD, and other countries that the major aspects of both Pillar One and Pillar Two would need to be enacted by Congress. But the orders are a definite change in tone from recent years. It remains to be seen whether the executive order signals a potential disengagement by the United States in the OECD discussions or instead is intended to provide the United States with additional leverage in the discussions.
Potential Presidential Retaliatory Measures
Section 891 allows the president to double the tax rates on citizens and corporations of a foreign country if that country is found (by the president) to impose "discriminatory or extraterritorial" taxes on US citizens or corporations (subject to certain limitations). If the president subsequently determines that the relevant foreign country laws have been modified to remove the taxes, the additional taxes will no longer be imposed.
No president has applied section 891, which was enacted in 1934.1 In a floor statement, Representative Vinson of Kentucky stated that the provision was proposed "in an effort to secure fair treatment for American industry abroad…there are nations through this world who are not particularly friendly to Uncle Sam in a business way, and when they get an opportunity to dig into the pocketbook of his citizens, whether individual or corporate, they have not hesitated so to do."2 Lawmakers specifically expressed concern that France was seeking to tax dividends from US parent companies that owned French subsidiaries (even after France had already imposed a withholding tax on dividends paid by the French subsidiary to the US parent as well as tax on the income of the French subsidiary). Proponents of the provision argued that the it would "probably help restrain foreign countries from further discriminatory levies,"3 and it appears that the provision ultimately led to France approving a treaty with the United States that had stalled for several years.4
The legislative history provides some indication of what Congress considered "discriminatory" and "extraterritorial" taxation:
The term "discriminatory taxes" is intended to mean those taxes of a foreign country which are so framed, imposed, and enforced as to result in a special tax burden upon American concerns, greater than those imposed on the enterprises of that country or of the most-favored nation. The term "extraterritorial taxes" is intended to mean those taxes which so flagrantly violate accepted rules and concepts of law with respect to the amount of income or other subject matter held to be properly within the taxing jurisdiction of the country as to amount to laying taxes beyond the territorial limitations of the country and upon income or property without its borders. An example of a discriminatory tax is one which operates to lay on American concerns higher taxes than that imposed on national enterprises of the taxing country, or on enterprises of a third country. An example of an extraterritorial tax would be a tax upon an American concern in respect of the income or property of any phase of its activities which is clearly beyond the proper taxing jurisdiction of the country imposing the tax.5
There are a number of questions about how section 891 might apply. For example, how does section 891 interact with US tax treaties subsequently enacted? Is discrimination determined by considering discriminatory intent and/or discriminatory effect?
Although not mentioned in the Trump orders, another tax provision—section 896, enacted in 1966—authorizes the president to retaliate against "more burdensome" or discretionary taxes imposed by another country.6
Legislative Developments: The Defending American Jobs and Investment Act
On January 22, 2025, House Ways and Means Committee Chairman Jason Smith (MO-08), along with all 25 Ways and Means Committee Republicans, introduced the Defending American Jobs and Investment Act (H.R. 591). A similar bill was introduced in the last Congress when there was no real threat of President Biden exercising section 891. Although the text of the bill is not available at the timing of this writing, a press release indicates that it would require the Treasury Department to identify extraterritorial and discriminatory taxes enacted by foreign countries that target US businesses. Once identified, US tax rates on income earned by corporations and investors from those countries will increase by 5 percentage points annually for four years. After this period, the tax rates will remain at that higher level by 20 percentage points for as long as the foreign taxes remain in effect. If a foreign country repeals the relevant tax, the reciprocal tax will no longer apply.
Looking Forward
President Trump instructed Treasury to deliver its report on discriminatory and extraterritorial taxes and potential responsive measures in 60 days. Companies should consider providing input to Treasury now and should examine the potential effect of the measures ultimately identified.
The Trump executive orders, along with another executive order (Regulatory Freeze Pending Review) requiring approval of new regulations by a person appointed by the president and review of recently issued rules, also raise questions about US regulatory guidance implementing policies consistent with OECD work. In Notice 2025-4, Treasury and the IRS announced their intent to propose regulations that provide a new method for pricing certain controlled transactions involving baseline marketing and distribution activities, effectively implementing Pillar One "Amount B." The notice allows the method to be applied as a safe harbor at least until the proposed regulations are issued. Another recent guidance project influenced by OECD work is the recently finalized disregarded payment loss rules that target deduction/no inclusion situations arising from disregarded payments. These regulations have been criticized as invalid and may be re-examined by the new administration.
1 Revenue Act of 1934, Sec. 103, Pub. L. No. 73-216, 48 Stat. 703.
2 78 Cong. Rec. 2607 (1934) (statement of Representative Vinson).
3 78 Cong. Rec. 2607 (1934) (statement of Representative Vinson).
4 Mitchell B. Carroll, Tax Inducements to Foreign Trade, 11 Law and Contemporary Problems 760-775 (Fall 1946).
5 78 Cong. Rec. 9319 (1934) (statement of Sen. Walsh).
6 Foreign Investors Tax Act of 1966, Pub. L. No. 89-809, Sec. 105, 80 Stat. 1563-65.
