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May 25, 2023

Ways & Means Republicans introduce tax increase on foreign companies to "combat" global tax deal

House Ways and Means Committee Chairman Jason Smith (R-MO), joined by every Republican on the Committee, May 25 introduced legislation aimed at discouraging countries from adopting a key component of Pillar Two, the Undertaxed Profits Rule (UTPR), focusing on the potential impact on US multinational corporations that have an effective tax rate of less than 15% within the meaning of Pillar Two on their US profits because they've availed themselves of US tax incentives. The legislation would increase taxes on the US businesses of companies headquartered in countries that enact the UTPR, but it would also apply in the context of other taxes imposed on US businesses if those taxes meet a set of criteria deeming them to be either extraterritorial or discriminatory in nature.

"As the exclusive trade and tax-writing committee in the House of Representatives, the Ways and Means Committee has a variety of tools that can be deployed to stop bad actors that try to harm American workers and businesses. We remain prepared to invoke additional tax and trade countermeasures, should these attempts to undermine our tax sovereignty continue," said Chairman Smith. "We urge our global trading partners to reject all unfair taxes aimed at Americans, and we encourage countries, the OECD, and multinational companies to work toward solutions that will protect American sovereign taxing rights and avoid escalating tax and trade countermeasures."

The bill's release comes as Chairman Smith and other Committee Republicans plan to embark on a congressional delegation trip next week to Europe, including Paris and Germany, to discuss the OECD global tax agreement. The timing of the trip, however, depends on progress on the debt limit deliberations ahead of a potential June 1 deadline.

Realistically, it is highly unlikely that this legislation will be enacted in this Congress as it would require bipartisan support and the support of the Biden administration. Still, Committee Republicans hope the introduction of the bill will encourage the OECD and the Inclusive Framework participants in Pillar Two to reconsider introduction of UTPRs in their own domestic legislation. A number of countries are in the process of enacting both the Income Inclusion Rule and the Qualified Domestic Minimum Top-up Tax for effect in 2024 but have put off enactment of the UTPR as many countries have agreed it shouldn't take effect until 2025 at the earliest. South Korea, however, has enacted the UTPR to take effect next year.

The "Defending American Jobs and Investment Act" would add Section 899 to the Internal Revenue Code to cause rates specified in particular Code sections (e.g., Section 871(a)) to accelerate by 5% until the additional rate reaches 20% (an annual increase) when a foreign country enacts one or more extraterritorial taxes or discriminatory taxes.

Under the new section, the Secretary will be required to submit a report 90 days after enactment and at least every 180 days thereafter. The report will identify the country, describe the tax, and the rate of tax being imposed by the foreign jurisdiction. Then, the Secretary "shall commence enhanced bilateral engagement" with each listed country to express concern, urge repeal, and advise of remedial actions.

Remedial actions can be (1) the +5% tax rate increase and/or (2) other remedies that may be executed including in procurement, treaty, and trade considerations. The +5% tax rate increase applies to the rates within specified Code sections (specified Code sections include Sections 871, 881, 882, 884, and 1441 et seq). The rates specified in those sections (generally 30% rates with an exception for the 14% rate in Section 1441) are increased at the +5% rate.

The new section defines extraterritorial and discriminatory. Extraterritorial looks for a tax imposed "by reason of such person being connected to such corporation through any chain of ownership, determined without regard to the ownership interests of any individual, and other than by reason of such corporation having a direct or indirect ownership interest in such person." Discriminatory has four alternative components, generally:

  • such tax applies to items of income that would not be considered to be from sources within the foreign country
  • such tax is imposed on a base other than net income and is not computed by permitting recovery of costs and expenses
  • such tax is exclusively or predominantly applicable, in practice or by its terms, to nonresident individuals and foreign corporations or partnerships
  • such tax is not treated as an income tax under the laws of such foreign country

Certain taxes such as withholding tax on interest, rent, dividends, value-added taxes, transactional-based tax, and others identified by the Secretary are excluded from the meaning of discriminatory.

Text of the bill is available here.


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