January 20, 2025—Inauguration Day—ushered in a flurry of much-needed executive actions. While many received widespread attention, one overlooked but consequential action was President Donald Trump's complete repudiation of the prior administration's approach to the Organization for Economic Co-operation and Development (OECD)—which allowed an international body to set U.S. tax policy, and even to impose taxes on American citizens and companies.
Alongside delegates from the Biden administration, the OECD devised a two-pillar global tax plan. Pillar One dictates where companies that operate in different countries must pay their taxes. More egregiously, Pillar Two goes so far as to dictate what those taxes should be.
President Trump's executive order states succinctly that "any commitments made by the prior administration on behalf of the United States with respect to the [OECD's] Global Tax Deal have no force or effect within the United States." My colleagues and I on the Committee on Ways and Means—the oldest and principal tax-writing committee in the U.S. House—unequivocally support this action and are working hand-in-glove with President Trump while he renegotiates this ill-fated proposal to an acceptable conclusion.
The executive action also directed the secretary of the treasury and the United States trade representative to investigate and provide a memo to the president within 60 days detailing whether foreign countries are violating tax treaties with the U.S., attempting to impose extraterritorial taxation, or designing tax rules that unfairly target U.S. companies. The executive action also instructed them to list potential remedies and corrective actions. Treasury Secretary Scott Bessent delivered this report to the president on Friday, March 21, and I applaud him for it. The report sends a strong message that the U.S. is not going to cede our tax authority or our tax revenue.
Regarding OECD's Pillar Two, it is clear that the so-called Undertaxed Profit Rule—an extraterritorial tax that targets U.S. companies and their subsidiaries—is completely unacceptable. Equally offensive are the Global Anti-Base Erosion rules, which treat our nonrefundable business credits unfavorably.
Additionally, the ever-changing rules and backroom guidance promulgated by obscure international bureaucrats are of concern. For example, Integrity Rule 9.1 would retroactively modify the OECD's previously published guidance on Pillar Two's transition rules, resulting in significant tax burdens on companies, with 90 percent of additional taxes imposed falling on U.S. businesses. Further, the soon-to-be-released Related Benefits Rule would subject changes to tax policy, grants, or incentives to a nebulous OECD "peer review process," which would further limit the ability of the U.S. to set its own tax policy—something that clearly violates the Constitution.
While the issues with Pillar Two are the most obvious, there are many other examples of extraterritorial or discriminatory taxes that may fall under President Trump's executive action. Digital Services Taxes are uniquely offensive—these are gross revenue taxes that overwhelmingly target U.S. multinational companies. While Pillar One attempted to solve this issue, the wider scope and disadvantageous treatment of certain U.S.-specific business structures are deficiencies that should be addressed. Section 49 of the German tax code and the Multinational Anti-Avoidance Law in Australia, while somewhat different in execution, both may violate bilateral tax treaties with the U.S. by changing withholding rates on royalty payments. Similarly, the United Kingdom's Diverted Profits Tax is extraterritorial in nature and mostly targets large U.S. companies.
As far as remedies are concerned, the U.S. has several already at our disposal, and congressional Republicans are considering a few more.
Tariffs could certainly be used to counter these taxes, as the first Trump administration proved through its Section 301 investigations. The America First Trade Policy Executive Action, which President Trump issued on Inauguration Day, referenced Section 891 of the tax code, which would double U.S. tax rates on foreign entities and individuals if "citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes." Ways and Means Chairman Jason Smith (R-Mo.) has introduced H.R. 591, the Defending American Jobs and Investment Act, which would likewise increase the tax rates on individuals and companies by up to 20 percentage points in foreign jurisdictions that have discriminatory or extraterritorial taxes. I have also reintroduced the Unfair Tax Prevention Act, which would significantly increase foreign entities' Base Erosion and Anti-abuse Tax exposure if they are domiciled in a jurisdiction that has adopted extraterritorial or discriminatory taxes.