US rejects OECD global tax deal, raising policy questions

U.S global tax and trade policy may be significantly altered by a pair of executive orders the White House issued on Jan. 20, 2025. The first executive order repudiates the United States’ commitment to the Organisation of Economic Co-operation and Development (OECD) Pillar Two framework, directing the Treasury Department to assess foreign tax regimes for compliance with U.S. treaties and potential discriminatory effects on American businesses.

The second executive order authorizes the unprecedented use of section 891 of the Internal Revenue Code, as amended, which could double U.S. tax rates on income earned by foreign companies and individuals in the United States. This measure, intended as a retaliatory tool against countries with discriminatory tax laws, poses significant risks for foreign investment in the United States.  

These policy shifts have broad implications for both U.S. and foreign companies investing in the United States. Both U.S. and foreign companies should carefully evaluate these policy shifts and potential impacts on their tax strategies and financial operations.

Trump administration issues executive order rejecting OECD global tax deal commitments

The White House on Jan. 20, 2025, issued an executive order (“Global Tax Deal EO”) disavowing any U.S. commitments to the OECD Pillar Two framework unless expressly enacted by Congress.

The Global Tax Deal EO declares that the global tax deal—an agreement among nearly 140 countries, including the United States under the Biden administration, to support the OECD Pillar Two framework—has "no force or effect in the United States." The order also directs the Secretary of the Treasury to identify and recommend potential measures against foreign countries with tax rules that either fail to comply with U.S. tax treaties or disproportionately impact American businesses.

Potential impact on U.S. tax policy and IRS guidance

While the Global Tax Deal EO does not explicitly address existing IRS guidance related to the global tax deal, it raises questions about whether such guidance might be considered a "commitment" of the United States and therefore subject to repudiation. 

Moreover, the Global Tax Deal EO directs the Secretary of the Treasury to assess the compliance of U.S. tax treaty partners and consider protective measures for American businesses against extraterritorial or discriminatory tax rules.

U.S. and foreign multinational enterprises (MNEs) and their stakeholders should closely monitor these developments, which could have significant implications for cross-border tax planning and compliance strategies.

Background on the global tax deal and Base Erosion and Profit-Shifting (BEPS) framework

The global tax deal is the culmination of over a decade of negotiations led by the OECD and participating nations to address base erosion and profit shifting. A cornerstone of the agreement is a global minimum tax rate of 15%, designed to curb profit-shifting by allowing countries to impose a "top-up tax" on large multinational enterprises. This mechanism ensures that profits are taxed at least at the agreed minimum rate, even if the jurisdiction where those profits are generated does not otherwise impose such a tax.

Although the Global Tax Deal EO does not address specific provisions of the global tax deal, it criticizes the framework for granting countries extraterritorial jurisdiction over American businesses (e.g., through the top-up tax) and for potentially constraining U.S. tax policy. 

For instance, policies like research and development credits that enable U.S. businesses to achieve effective tax rates below 15% could be at odds with the global tax deal. The Global Tax Deal EO also raises concerns about the potential for retaliatory international tax regimes targeting U.S. companies.

Key provisions of the Global Tax Deal executive order

The Global Tax Deal EO outlines several directives aimed at clarifying the Trump administration's position on the global tax deal:

1. Repudiation of commitments: The Secretary of the Treasury and the U.S. Permanent Representative to the OECD are instructed to notify the OECD that any commitments made by prior administrations regarding the global tax deal are null and void unless Congress adopts the deal through legislation.

2. Evaluation of foreign tax practices: The Secretary of the Treasury is directed, in coordination with the U.S. Trade Representative, to investigate:

    a. Compliance of foreign countries with U.S. tax treaties.

    b. Tax rules that are extraterritorial or disproportionately affect American businesses.

This evaluation will likely include, but not limited to, global minimum tax measures and digital services taxes implemented by certain jurisdictions, including U.S. treaty partners.

3. Protective measures: Based on the findings, the Secretary of the Treasury is tasked with developing protective measures to address treaty noncompliance or adverse foreign tax rules. These recommendations are to be submitted to the president within 60 days.

Observations

Protective measures under section 891

Considerable discussion has arisen about the potential scope and impact of protective measures the administration may pursue. Notably, the second executive order (“America First Trade Policy EO”) mandates a series of reports and recommendations to be submitted to the president, encompassing a wide range of policy areas. It directs the Secretary of the Treasury, in consultation with the Secretary of Commerce and the U.S. Trade Representative, to conduct a thorough investigation into whether any foreign jurisdictions impose discriminatory or extraterritorial taxes on U.S. citizens or corporations under section 891.

Section 891 grants the president the authority to proclaim—following an investigation—that U.S. citizens or corporations are being subjected to discriminatory or extraterritorial taxes by a foreign country. If such a proclamation is made, specific U.S. tax rates (including individual and corporate income taxes, as well as withholding taxes on interest and dividends under sections 1, 3, 11, 801, 831, 852, 871 and 881) are automatically doubled for citizens and corporations of that foreign country, beginning in the year of the proclamation. However, the total tax imposed is generally capped at 80% of the taxpayer’s income (computed without regard to section 151).

The statute also provides for the reversal of these doubled rates if the president determines that the foreign country has amended its laws to eliminate the discriminatory or extraterritorial taxes.

Although the America First Trade Policy EO references only section 891, section 896 of the tax code also grants the president authority to act against "more burdensome taxes" imposed by foreign jurisdictions. Under section 896, the president may act if a foreign jurisdiction imposes higher effective tax rates on U.S. citizens or corporations than on its own nationals, residents, or entities “under similar circumstances.” This provision also requires that the foreign jurisdiction refuse U.S. requests to eliminate the differential treatment and that any action is in the public interest. 

Additionally, the president may, after seeking relief from such taxes and notifying Congress, reinstate the “force of attraction” rules that were in effect prior to 1967 for residents and corporations of that country. Under those pre-1967 rules, once a foreign person engaged in a U.S. trade or business, all their U.S. source income was taxed at the rates specified in sections 1 or 11. This approach contrasts with the current rules for effectively connected income. 

Section 891 offers little flexibility: Once a finding of discrimination is made, the doubling of tax rates for citizens and corporations of the foreign country is automatic.  However, its application is narrowly tailored, covering only business activities directly conducted in the United States by foreign persons through a U.S. trade or business or permanent establishment. It does not apply to business conducted through U.S. subsidiaries of foreign-headquartered companies. Additionally, the doubling of withholding rates has limited effect because exemptions (e.g., for portfolio interest) or treaty provisions reducing the rate to zero would render the doubled rate moot.

Although sections 891 and 896 have been part of the code since 1934 and 1966, respectively, they have never been invoked. Conventional wisdom suggests that these measures aim to strengthen the United States’ position in tax treaty negotiations. Without such provisions, countries whose residents benefit from discriminatory local tax laws would have little incentive to extend similar benefits to U.S. taxpayers through a treaty.   

In 2016, Professor Itai Grinberg of Georgetown University highlighted their importance in addressing U.S. concerns about the EU’s use of its state aid doctrine to extract taxes from U.S. companies.

In 2019, Senate Finance Committee Chair Chuck Grassley and Ranking Member Ron Wyden jointly urged then-Treasury Secretary Steven Mnuchin to consider section 891 to counter France’s digital services tax, which they described as “targeted, discriminatory taxation.”

Interaction with U.S. tax treaties

One significant concern is whether section 891 could conflict with U.S. tax treaty obligations, rendering it inapplicable.

U.S. tax treaties generally override domestic law by reducing taxes on foreign persons in exchange for reciprocal treatment of U.S. persons abroad. Most treaties also include nondiscrimination provisions. Under U.S. law, treaties and statutes have coequal status, and the later-in-time rule generally determines which prevails in the event of a conflict. 

Since all relevant tax treaties postdate section 891, they would likely preempt its application as long as the treaty with the relevant jurisdiction remains in force. This raises questions about the practical enforceability of section 891 in cases involving treaty partners.

Policy and legislative responses

Recognizing the potential legal and diplomatic implications of invoking section 891, the White House and Congress appear to be exploring alternative approaches. Applying section 891 to counteract discriminatory taxes, such as the OECD’s undertaxed profits rule (UTPR), could itself violate U.S. treaty obligations, undermining its effectiveness as a deterrent.

In light of these challenges, House Ways and Means Committee Chairman Jason Smith, R-Mo., reintroduced H.R. 591, the Defending American Jobs and Investment Act, on Jan. 21, 2025. This bill proposes an incremental approach, imposing a 5% additional tax on U.S. income earned by individuals or entities in foreign jurisdictions that adopt discriminatory or extraterritorial taxes. 

The additional tax would increase annually by 5% over four years, ultimately reaching 20% per year while the targeted tax remains in effect. The bill also denies treaty benefits for withholding taxes, effectively layering the additional tax on top of the standard 30% withholding rate under sections 1441 and 1442 (or 15% under section 1445 for dispositions of U.S. real property).

This legislation builds on H.R. 3665, introduced by Chairman Smith in 2023, but expands its scope to include denial of treaty benefits. If enacted, H.R. 591 would render section 891's application largely unnecessary.

Another legislative response is the Unfair Tax Prevention Act (H.R. 4695), introduced by Republican members of the Ways and Means Committee in July 2023. This bill targets foreign adoption of the UTPR and similar taxes by modifying the U.S. base erosion and anti-abuse tax (BEAT). Proposed changes include eliminating the 3% base erosion percentage floor and $500 million gross receipts threshold for foreign-owned entities subject to extraterritorial tax regimes, expanding the scope of base erosion payments, and accelerating BEAT rate increases.

Considerations for U.S. and foreign MNEs

The Global Tax Deal EO has significant implications, particularly for U.S.-headquartered MNEs operating in jurisdictions implementing BEPS measures. Uncertainty surrounds the status of existing IRS guidance, including Notice 2025-4, which references OECD BEPS principles. Additionally, it is unclear whether the administration intends for the Secretary of the Treasury to withdraw previously issued guidance, such as Notice 2023-80.

Notably, the Global Tax Deal EO does not address how previously issued guidance should be treated, nor does it clarify whether such guidance constitutes a U.S. commitment that might be disavowed. The effect of those components of OECD BEPS principles incorporated by reference in published guidance remains uncertain.

Notice 2023-80 confirmed that a qualified domestic minimum top-up tax (QDMTT) and a tax imposed under an income inclusion rule (IIR) could qualify as a creditable "foreign income tax" under Reg. section 1.901-2.  If the secretary withdraws this guidance, the QDMTT and IIR would no longer qualify as creditable foreign income taxes. 

This change could result in a significant burden for U.S. MNEs, as they would face the risk of double taxation—paying taxes in both the foreign jurisdiction and the United States. Similarly, the potential rescission of Notice 2025-4 could disrupt existing transfer pricing strategies by eliminating the simplified streamlined approach (SSA) used for pricing-controlled transactions involving baseline marketing and distribution activities. 

Notice 2025-4 incorporates the OECD’s Amount B framework, which provides a safe harbor for applying the arm’s-length principle to in-scope transactions and helps reduce disputes, compliance burdens, and administrative complexity.  Without this guidance, U.S. taxpayers may face greater uncertainty in pricing routine transactions, increased audit risks, and a loss of early reliance on a globally coordinated transfer pricing approach.    

For U.S. MNEs, the combined effect of these potential changes remain uncertain and could significantly increase compliance costs, especially in navigating inconsistent interpretations between jurisdictions.