For all the ways in which nations may contemplate retaliating against the U.S. for President Donald Trump‘s aggressive tariff threats — from potential 100% tariffs on Teslas to banning bottles of liquor made in red states — one of the more opaque methods of global economic war may occur far away from the world of customs agents and consumer prices, dipping a little deeper into the world of corporate tax and profits of multinational corporations. If tariffs are best thought of as a tax, international tax regimes may think of U.S. companies as a target in pushing back.
In the first week of the new Trump administration, amid the blitz of actions and executive orders, one which would have been easy to miss is a contentious issue related to tax policy and international competition. But for those who pay close attention, new global tax statutes came up to a greater degree than expected.
At issue is current tax guidance from the EU and OECD countries to seek tax payments from firms that operate in multiple jurisdictions, including the U.S., if those entities come in under a 15% net effective income tax rate paid.
At a recent PwC briefing for the press in Washington, D.C., top officials on its corporate tax team said the Trump administration and members of Congress are clearly focused on retaliatory approaches from any nation that attempts to collect certain new forms of a global minimum tax. In the EU, this tax approach is now the law of the land under what is known as Pillar Two of a larger OECD agreement that allows for the levying of additional taxes on firms operating at a below-15% tax rate, also referred to as the underfunded profits rule.
Five days before Trump’s inauguration, the OECD released a set of guidelines further moving forward with the Pillar Two legislation.
Pat Brown, Partner and PwC National Tax Office Co-Leader, said at the recent media briefing that the OECD guidance essentially doubled down on the “underfunded profits rule” tax approach.
White House war on overseas ‘discriminatory’ taxation
The Trump administration wasted no time in responding. It released a statement saying it will no longer be beholden to international organizations for national tax policy, which it described as unfair to American companies. Furthermore, the White House directed the Secretary of the Treasury to inform the OECD that Congress, and Congress alone, makes tax policy. The Treasury Secretary is also to consider the options available to the U.S. to the extent other countries are violating U.S. tax or imposing “discriminatory taxation” on U.S. companies.
Meanwhile, an executive order on trade policy specifically mandates the Secretary of the Treasury, Secretary of Commerce and US Trade Representative look at the potential application of Section 891, a provision of the Internal Revenue Code that dates back to the 1930s but has never been invoked, and authorizes the president to impose a doubling of the rate of tax on citizens or corporations in foreign countries that are imposing extraterritorial or discriminatory taxation measures on the United States.
Brown described it as “highly unusual” for there to be executive actions related to international tax in the very first week of an administration, and added that the actions taken by the Trump administration related to this issue were “unprecedented in my lifetime.”
Alan Cole, a senior economist at the Tax Foundation who studies the issues closely, said both sides could stand to take a more measured approach to the dueling tax views. “There is nothing so international and so ambitious in scope,” he said, as Pillar Two’s underfunded profits rule, and there was a big gap between the Biden administration and Congress on the issue, with Biden’s team more or less accepting the premise of the tax policy.
Trump, to say the least, has what Cole said can be described as an “unusual tone,” and in the context of other issues, from tariffs on the EU to territorial aggressions in Europe, namely Greenland, inflamed tensions can spill over into the world of corporate tax.
It’s not new though that this global tax policy is controversial with many members of Congress, both Republicans and Democrats, for years already in fact. A particular focus of ire for Congressional Republicans, a delegation of GOP members traveled to Paris and Berlin back in September 2023 to deliver the message that the policy unfairly targets U.S. business. They did not receive the welcome they wanted back then, and with the OECD reinforcing the guidance, the tensions are rising again.
As Cole explained it, from the U.S. point of view, the more that U.S.-based companies are taxed by other jurisdictions, the less money left over for U.S. shareholders and the Treasury to split. The dominant view in the Biden administration, Cole said, was to align with a policy of “clamping down on ‘profit shipping’ on a global perspective.”
That has now changed.
As PwC National Tax Office Co-Leader Rohit Kumar (who was a deputy chief of staff to Mitch McConnell in the Senate) said during the media briefing that the U.S. posture includes a clear message: “Get off my lawn.”
“‘Quit taxing my people. Quit taxing the companies.’ … If you want to do this amongst yourselves, fine. If the EU and the UK and Japan and Australia and South Korea want to invade each other’s tax base with the undertaxed profits rule and you’re okay with that, knock yourself out,” Kumar said.
While that is already within the publicly stated range of options for the U.S. government, tax experts also point out that given how aggressive Trump’s stance has been early in his second term about testing U.S. advantage in negotiations, his team could push for much greater changes: in effect, fight to defeat any global tax agreement that, even if excluding the U.S. for now, is agreed to by other nations and could be agreed to by future U.S. administrations.
Congressional GOP has long harbored tax grievances
Congress is moving in lockstep with Trump. House Ways and Means Chair Jason Smith reintroduced a bill in the first week of the Trump term that was first offered in May 2023 – originally crafted to send a message ahead of that GOP delegation trip overseas – and which Brown described as a “sort of retaliation bill.”
It would target other countries for retaliatory taxation if those countries introduced either extraterritorial taxes or discriminatory taxes. And it was clear to the PwC officials why Congress was using this language. It’s Pillar Two of the OECD agreement on the global minimum tax. “There is no other tax on Planet Earth that meets the definition of an extraterritorial tax in that bill,” Brown said.
That reintroduction came shortly after a Republican member of the Ways and Means Committee from Kansas, Ron Estes, published an Op-ed saying that with a new president coming into office, overseas regimes might want to pause their implementation of this tax policy.
“There is a consistent theme that is flowing through all of it,” Brown said, and that is a new focus from a GOP-led Congress and Trump administration on the topics of extraterritorial taxation and discriminatory taxation. And the new bill introduced by Smith had one significant change, according to Brown, making explicit that Congress can override tax treaties across the globe and can itself threaten to impose increased taxation on other countries.
The difference now is that Congress is backing up the president rather than standing apart from the executive branch position. “There’s more force behind it now because now there is the force of the president,” Cole said.
A much more complicated global grand bargain to strike
It’s not time to rush to extreme reactions, tax experts say, such as the U.S. leaving the OECD. Cole said there is plenty of daylight for U.S. and OECD agreement on tax policy in many other areas, and for each to give a little, “some realpolitik,” he said.
But there are “all these other wildcards,” Cole added, especially transatlantic policy.
The underfunded profits add up to billions of dollars, and that makes it reasonable to receive some attention, but Ukraine and NATO are “much bigger numbers,” Cole said.
With the U.S. tax rate already down to 21%, the math on the underfunded profits could work out to a “few hundred million a year, on average,” a bill the largest multinational companies could afford to pay, but that would pale in comparison to negotiations over funding the Russia-Ukraine war — “hundreds of billions, or trillions,” Cole said.
On the other hand, if the EU is being hit with billions in tariffs, then a view in Europe could develop that poor treatment from the U.S. requires being fastidious about Pillar Two rules. Or as Cole put it, the reaction to U.S. policy is “provoking stubbornness in other countries.”
“It might be more enticing to other regimes, but it’s a provocation aimed at the U.S. if they tried to levy it,” Cole said. “Holding assets hostage in another country seems crazy to do, but maybe it doesn’t seem as crazy to large European countries because they are well into the great experiment in reducing national sovereignty. The EU is in uncharted territory of its own here,” he added.
Major market players seem increasingly worried, from the largest automakers like Ford describing the “chaos” to be caused by tariffs, to billionaire hedge fund managers warning Trump’s “bombastic” trade talk can result in “degradation of the current terms of engagement as amongst the leading Western countries when it comes to terms and trade,” as Citadel CEO Ken Griffin, a major Republican donor and Trump voter, put it Tuesday at the UBS Financial Services Conference in Key Biscayne, Florida.
To date, the EU has referred to “proportionate countermeasures” of retaliation to U.S. tariffs, without details.
Brown said that in the least the rapid-fire events suggest “very strongly” that the U.S. is headed into a series of discussions with partners where it will say there is potentially a new provision in the Internal Revenue Code, backed up by a report from the Secretary of the Treasury, and Section 891, and, “We’re going to need to see some change in here, and let’s have a conversation.”
There are many complicated questions to sort out within the tax discussion, including whether the OECD project could undermine President Trump’s proposal to offer corporations lower taxation for domestic manufacturing, because the OECD project authorizes other countries to impose tax on U.S. companies if they earn “low-taxed” income in the U.S.
In an even more extreme scenario, foreign executives based in the U.S. could also potentially be hit, with the concept of retaliation applying to individuals living and working in the U.S. but who are citizens of another country. “We don’t know,” Brown said. “But there’s obviously some level of concern from companies who ask, ‘Hey, my CEO or my CFO is a citizen of a foreign country who happens to live and work in the United States. Do I need to go tell my CEO that his tax rate will be double as a result of the president authorizing Section 891?’ Right now, we don’t know.”
In the end, the global tax skirmish could “ride along” with the bigger issues — and as part of Trump’s saber rattling — and ultimately he and a foreign leader make a deal, do the photo up, and are best friends again. “Maybe it goes through that cycle,” Cole said, “and Pillar Two rides along. It’s either a provocation. Or olive branch.”
And right now, it’s all guesswork based on fairly unusual circumstances. But from another perspective, international tax policy has been in a trade war through multiple administrations. Cole pointed to digital services taxes in Canada and the EU which tax technology companies deriving revenue from within their borders.
“This is one more way the corporate income tax world is bleeding into the trade world,” Cole said. “The most cynical reading of Pillar Two is it’s a way to export money. And people do that all the time. There is no principled distinction between cross-border tax policy and trade policy. They are constantly in interaction with each other,” he said.
But normally, any provocations on the tax side are only part of a “tit-for-tat to get rid of barriers to cross-border trade,” Cole said. And there is always the risk that “tit-for-tat behavior is debatable at best,” and can escalate.
Brown said the flurry of tax issues is clearly setting up what will be a protracted discussion, or to use a word Trump probably prefers, negotiation.