House Ways and Means Committee Chairman Jason Smith (R-MO) and committee Republicans released legislation on May 25, 2023, in response to the Pillar Two global minimum tax negotiated by the Organisation for Economic Co-operation and Development (OECD). The Defending American Jobs and Investment Act (H.R. 3665) was introduced in advance of a trip to Paris by a delegation to be led by Chairman Smith to discuss congressional concerns about the Pillar Two regime and its effects on U.S. companies and the U.S. fisc.
The legislation is aimed primarily at the Pillar Two undertaxed profits rule (UTPR), which allows a foreign nation to impose a tax on subsidiaries of a U.S. multinational located in that country. Chairman Smith is expected to stress to OECD and European officials that extraterritorial taxes like the UTPR pose a threat to the stability of the global tax system. The delegation will likely emphasize that the OECD and its participating countries must work to avoid extraterritorial and discriminatory tax rules that escalate tax and trade tensions and stand to undermine cross-border investment and economic growth.
While the proposal is not likely to be enacted in the near term, it highlights the inequities in the Pillar Two global minimum tax regime as it affects the United States. The bill also provides one approach for Congress to assert its constitutional prerogatives in a global tax debate where concerns continue to be voiced that the United States and its multinational companies do not fare well under the Pillar Two agreement.
The bill would require the Treasury Department to identify and regularly update a list of countries imposing extraterritorial and discriminatory taxes and create new enforcement remedies under the Internal Revenue Code (“Code”) to protect against such adverse tax regimes.
Country Report – New Code section 899 would require the Treasury Department to submit a report to Congress within 90 days of enactment identifying each foreign country that has one or more extraterritorial taxes or discriminatory taxes as well as any country that repeals such a previously enacted tax. Updated reports would be required every 180 days thereafter. For any country listed in the report, the Treasury Secretary would be required to commence enhanced bilateral engagement to resolve the extraterritorial and discriminatory taxes and avoid the remedial actions required under the bill.
Remedial Actions – For each country listed in the Treasury Department report, the legislation would increase the U.S. tax rates applicable to individuals and businesses of such country. The bill defines an extraterritorial tax to include a UTPR designed to meet the Pillar Two model rules.
Applicable Persons – The increased tax rate would apply to any:
- citizen of such country who has effectively connected income in the United States;
- corporation created or organized in such country (other than a 10% owned subsidiary of a U.S. parent company); and
- foreign partnership relating to such country to be provided under Treasury Department rules.
Specified Taxes – The increased rates under the remedial measures would apply to the following U.S. income tax provisions:
- Tax on income of nonresident alien individuals (Code section 871);
- Tax on income of foreign corporations not connected with a United States business (Code section 881);
- Branch profits tax (Code section 884);
- Withholding taxes on nonresident aliens and foreign corporations (Code sections 1441 and 1442); and
- Dispositions of United States real property interests under the Foreign Investment in Real Property Tax Act (FIRPTA, Code sections 897 and 1445).
Increased Tax Rate – The bill would escalate the tax rate over a four-year period, with the regular U.S. rate for the applicable tax increased by:
- 5 percentage points in the first year the country is listed in the report;
- 10 percentage points for the second year;
- 15 percentage points for the third year; and
- 20 percentage points for the fourth year and later.
As a result, the regular U.S. corporate tax rate applicable to a U.S. subsidiary of a foreign corporation would increase from 21% to 26% and as much as 41% if the home country of such corporation implements an extraterritorial or discriminatory tax, like a UTPR, and fails to repeal it.
Relief for Permanent Repeal – In the event that a country with listed extraterritorial and discriminatory taxes permanently repeals all such taxes, the Treasury Secretary is required to include the country’s action in the next report to Congress. In such case, the increased tax rates would be eliminated, and the remedial rates would be disregarded for the prior years. In effect, this would allow foreign individuals and companies of the remediated country to seek a refund of the increased taxes paid in the years prior to the repeal.
Other Remedies – The legislation also provides the executive branch with additional tools to encourage countries to eliminate extraterritorial and discriminatory taxes, including:
- Presidential authority to prohibit government contracting or procurement of goods or services from offending countries;
- Requirement for the Treasury Secretary to take extraterritorial and discriminatory taxes into consideration with respect to initiating new or updating existing tax treaties with any offending country; and
- Requirement for the U.S. Trade Representative and Commerce Secretary to take extraterritorial and discriminatory taxes into consideration with respect to initiating new free trade agreements or executive agreements with any offending country.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING GOP LEGISLATION IN RESPONSE TO PILLAR TWO INTERNATIONAL TAX LAW. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.