Trump executive orders signal a new U.S. frontier for cross-border tax
The volley of Executive Orders (“EO”) issued by President Trump’s Whitehouse in the first 10 days of office includes a number of tax related directives that lay a foundation for a profound change in the way the United States will negotiate with the rest of the world on cross-border tax issues. With so much attention placed on the EOs covering immigration and various socio-cultural issues, it is easy to miss the groundwork these directives are building for a punitive and unilateral U.S. approach to bilateral and multilateral international tax initiatives, including the global tax deal that has been the focus of attention for the Organization for Economic Co-operation and Development (OECD) for many years. Certain of these tax related directives are buried within EOs that are not overtly about taxation. Taken together, the potential impact of these various tax directives could be profound. Moreover, with a majority Republican Congress aligned with the Whitehouse on tax related issues, there will be little to impede the course chosen by this Administration, and implemented by its Treasury and IRS, to reshape the U.S. approach to international taxation to a more protectionist stance. In this Alert we will summarize the primary initiatives reflected in the tax relevant EOs.
The Global Tax Deal EO.
On January 20, 2025 an EO was issued entitled the “The Organization for Economic Co-operation and Development (OECD) Global Tax Deal (Global Tax Deal)” (the “Global Tax Deal EO”), The Global Tax Deal EO withdraws the United States from the negotiations and agreements encompassed in the OECD Pillar 1 and Pillar 2 agreements (the “Pillar Agreements”) which resulted from the long term “Base Erosion and Profit Shifting” (“BEPS”) project spearheaded by the OECD and adopted to varying degrees by over 140 OECD member countries. The United States never actually signed on to any aspect of the Pillar Agreements, and its participation has long been the subject of political differences between Republicans and Democrats. However, the previous administration did propose various domestic legislation that would have aligned the United States with certain important aspects of the Pillar Agreements. The Global Tax Deal EO nonetheless clarifies and confirms that any prior commitments made by the previous administration on behalf of the United States with respect to the Global Tax Deal will have no force or effect within the United States absent an act by Congress to adopt the Global Tax Deal. While this Global Tax Deal EO spells out a position from the Whitehouse and Congress that was already known and anticipated, it may yet impact the resolve of other OECD member countries going forward to commit to the Pillar Agreements. The EO certainly throws into sharp relief for the world, and especially European Union countries, including France, that any movement forward on the Pillar Agreements or any other global cross-border tax initiative will not involve the United States for at least the foreseeable future.
Beyond clarifying that the United States will not participate in the Global Tax Deal, the Global Tax Deal EO also directs the Secretary of the Treasury to specifically review whether any U.S. tax treaty counterparty may be non-compliant with its obligations under a U.S. tax treaty, or if any country has any tax rules in place that are extraterritorial and which may disproportionately impact U.S. companies. The Global Tax Deal EO provides that Treasury Secretary must present the President by mid-March with a list of protective measures or other actions the United States could adopt as a countermeasure to any such extraterritorial or disproportionate taxes. Taken together with certain of the tax related directives discussed below, this provision signals a new era where the United States may aggressively pursue through punitive tax policy any country that is seen as over-stepping to impact U.S. companies in favor of the home country fisc.
America First Trade Policy EO
As a complement to the Global Tax Deal EO, particularly the directive to the Treasury Secretary to identify countries with tax rules deemed harmful to U.S. interests, the “America First Trade Policy” EO issued on January 20, 2025, flags in a somewhat buried Section 2(j) that Section 891 of the U.S. Tax Code provides an existing legislative basis and procedure for the United States to take certain punitive tax actions against any foreign countries found to subject U.S. citizens or corporations to extraterritorial or disproportionate taxation. Section 891, which has been in place since 1934, permits the President, at his sole discretion after an investigation finding tax discrimination by another country vis a vis the United States, and without Congressional involvement let alone approval, to double the tax rate on citizens and corporations of any such foreign country found to be engaging in discriminatory taxation of U.S. interests. The scope of the taxes covered include income tax and withholding tax.
This law has never been applied and there are no implementing regulations. (Notably, the law originated at the time of a taxation dispute with France in 1934 which was ultimately resolved, possibly in large part due to the threat to France of triggering the newly introduced Section 891).[1] Given the broad drafting of Section 891, its application would be largely left to the President’s interpretation. Taken together with the directive to the Treasury Secretary under the Global Tax Deal EO, it seems clear that among the intended U.S. countermeasures on the table for any country found to be violating a U.S. tax treaty or otherwise discriminating against U.S. taxpayers, is direct double taxation of U.S. source income earned by citizens and companies from the offending country.
Defending American Jobs and Investment Act
As reinforcement for the principles embodied by the EOs discussed above, on January 22, 2025, Republicans in the House resurrected legislation originally proposed in 2023, the Defending American Jobs and Investment Act (H.R. 591) (the “Proposed Act”). The language of the Proposed Act, which appears to align somewhat with the Section 891 framework except under Congressional authority, would increase the tax rate applied to the U.S. source income of citizens and corporations from foreign countries deemed to be engaged in discriminatory taxation of U.S. interests by increasing the applicable U.S. tax rate by 5% each year for four years. The U.S. tax rate would remain elevated by 20% so long as the offending foreign tax framework remains in place.
The original legislation was introduced in reaction to the Pillar Agreements as a specific U.S. countermeasure to the undertaxed profits rule, a key feature of Pillar 2 allowing other countries to effectively assess a “top-up” tax on under-taxed U.S. companies (with “undertaxed” defined by reference to the 15% minimum global tax adopted by the Pillar Agreements). However, based on the text of the original legislation (noting text of the reintroduced Proposed Act has yet to be released), its provisions could apply equally to any foreign tax deemed discriminatory, whether under Pillar 2 or separately under a digital services tax or diverted profits tax rule. In the press release for the Proposed Act, the House Ways and Means Committee Chair stated that it will ensure the President as “every tool at his disposal to push back against any foreign country that seeks to undermine America’s economic vitality or unfairly target our workers and businesses.” Furthermore, the newly appointed Treasury Secretary, Scott Bessent, recently stated at a Senate Finance hearing on January 16, 2025, that any country implementing Pillar 2 will find it a “grave mistake” because “taxation of U.S. companies is a sovereign issue over which only Congress has authority.” Consequently, the U.S. position regarding the Pillar Agreements and any perceived extra-territorial taxation is clear.
Tariffs
Since the new administration’s launch on January 20, tariffs have been a central focus of discussion for U.S. leverage with respect to illegal immigration and the drug trade, though tariffs have not as yet been cited as a specific consequence for tax policies enacted by other countries. That being said, tariffs were threatened by this President’s prior administration as a reaction to the digital services taxes proposed by, e.g., France and Canada. On February 1, 2025, the administration implemented tariffs on imports from China (10%), Canada (25%, except energy resources at 10%), and Mexico (25%), under authority of the International Emergency Economic Powers Act to counteract “the extraordinary threat posed by illegal aliens and drugs.” On February 3, 2025, after the leaders of Canada and Mexico announced moves to ramp up security at their border in response to Trump’s demand to crack down on immigration and drug smuggling, Trump agreed to delay the tariffs on imports from Canada and Mexico for 30 days to see if an economic deal can be structured. Although negotiations seem to be back on the table, there is no good reason to believe that tariffs will not equally be among the tools used to advance the administration’s protection of the U.S. tax base against the EU. It would seem likely that the administration will view tariffs in combination with punitive tax countermeasures as a powerful means of deterring other countries from even considering potentially extraterritorial or discriminatory tax measures.
Impact on France
The domestic implementation by France of the Pillar Agreements, including the undertaxed profits rule of Pillar 2, along with the French digital services tax, recently proposed to increase from 3% to 5%, is likely to put France on the retaliation radar of the current U.S. administration. While previous U.S. governments, including the first iteration of the current administration, may have sat at the negotiating table to work things out, all signs now point to minimal to no appetite by the United States for such bilateral discussions. The United States already previously found France’s 3% digital services tax “unreasonable or discriminatory” and therefore actionable under Section 301 of the Trade Act of 1974. This history makes it all but certain that any U.S. investigation of a French 5% digital services tax would lead to the same result. Moreover, many tax professionals believe there is sufficient basis for the United States to assert that implementation of the under-tax profits rule of Pillar 2, in particular, violates established principles of U.S. tax treaties with respect to treaty partner taxation of a nonresident’s income not sourced or connected to activity in the treaty partner country. Consequently, there are multiple avenues for the United States to find France’s current tax framework to be discriminatory toward U.S. interests. While a repeat of the 2020 threat of 25% U.S. tariffs on $1.3 billion of French goods may be predictable, the addition under these EOs of the potential for targeted retaliatory U.S. tax increases on the U.S. income of French citizens and corporations would open a new and more combative front by the United States.
[1] House Ways and Means Committee, Revenue Act of 1934, Feb. 12, 1934, H.Rept.73-704, at 26 (stating that the provision was introduced to prevent foreign countries from levying discriminatory taxes against American citizens and corporations).
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