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.
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