The Issues Facing the U.S.
The primary ‘America first’ policy initiative for tariffs and a more competitive international tax policy emanates from the proposition that: 1) an unbalanced global trade system has hollowed U.S. manufacturing, and 2) current global international tax initiatives seek to achieve the same from the U.S. technology industry.
An Unbalanced Global Trade System
The incoming administration asserts that current trade rules allow and even incentivize the flow of capital away from where it is most needed and most productive. The incoming administration believes current U.S. trade policy fails to recognize that other countries’ industrial policy acts as a form of trade policy, whereby current trade rules perpetuate a system characterized by large, persistent trade imbalances. Taking advantage of the free flow of capital, surplus countries have subsidized their manufacturing industries but passed on the costs of these subsidies to deficit countries like the U.S.
Surplus countries’ industrial policies have had important implications for U.S. manufacturing, unemployment and debt. Those countries, which subsidize their production via industrial and trade policy, are, in essence, acquiring American assets to balance their surplus. As a result, the U.S. runs trade deficits. Because surplus countries have subsidized their manufacturing at the expense of domestic consumption, the U.S. manufacturing industry has been forced to indirectly subsidize American consumption.
The impact is a decline in American manufacturing and a shift of global manufacturing from deficit countries like the U.S. to surplus countries (e.g., China, India, Germany) over the past five decades. This trade imbalance has depressed U.S. savings rates through a combination of higher underemployment, higher household debt and an ever-growing fiscal deficit.
Harmful Global International Tax Initiatives
The Organization for Economic Co-operation and Development’s (OECD) two-pillar solution is seen as harmful to the U.S. technology industry. Under Pillar One, the U.S. has been at the heart of the debate surrounding the Amount A rules, which would give market jurisdictions the right to share in the profits of multinationals irrespective of where they are headquartered. Both of these rules, and the domestic digital services taxes (DSTs) they were intended to supersede, have been viewed in Washington as an attack on U.S. tech firms, and resistance is likely to harden under the new administration.
Pillar Two is the global minimum tax, which aims to impose a 15% global minimum tax on large multinationals. An income inclusion rule (IRR) is now in force in the U.K., Canada and most EU member states, with legislation providing for an undertaxed profits rule (UTPR) from 2025.
Proposed Solutions
As discussions on President-elect Trump’s trade policy and tax reform continue and more guidance emerges, potential policies under the incoming administration and a Republican-majority Congress could include international tax provisions and tariff reforms, which may significantly impact both domestic and international trade.
Tariffs and Global Trade Imbalances
It is presumed tariffs will be used to combat the global trade imbalances of surplus countries who force the U.S. manufacturing industry to subsidize foreign industries. What is unknown is whether tariffs are a foregone conclusion or merely a tool. With President-elect Trump’s nomination of Scott Bessent for Treasury Secretary, many are betting on the latter.
Tariffs and the OECD Pillars
The impact of tariffs may be felt most in the context of the OECD’s two-pillar solution to taxing the digital economy.
It has proved difficult to achieve consensus on the Pillar One Amount A rules even outside of the U.S., and the mechanics of their implementation — which require agreement from territories housing a majority of affected groups — mean that opposition from the White House could be terminal. The obvious response is for governments elsewhere to turn again to DSTs, but they will need to weigh the potential for additional revenue against the real risk of retaliatory U.S. tariffs.
The prospect of new tariffs may also have an impact in the context of Pillar Two, which aims to impose a 15% global minimum tax on large multinationals. An IRR is now in force in the U.K., Canada, and most EU member states, with legislation providing for an undertaxed profits rule (UTPR) from 2025 being enacted for most of that population. There remains a long list of jurisdictions that have not yet implemented these rules, and the deferred introduction of the UTPR, in particular, presents an opportunity for President-elect Trump’s administration to apply pressure on countries that may be considering introducing local Pillar Two rules.
If countries see a link between whether they apply the Pillar Two rules and the U.S. attitude to new tariffs, they may now think twice about adopting them or even consider repealing them. The fact that China and India have already opted to sit on the sidelines does not help their cause.
Potential New International Tax Legislation and the OECD Pillars
In 2023, all Republicans of the House Ways and Means introduced the Defending American Jobs and Investment Act. The proposed legislation would increase income tax and withholding tax rates, initially by five percentage points, increasing up to 20 percentage points on certain foreign citizens, foreign corporations, and foreign partnerships of any foreign country that is listed in a report on the extraterritorial taxes and discriminatory taxes of foreign countries submitted by the Secretary of the Treasury to certain Congressional committees. The bill took aim at the OECD’s two-pillar solution and at countries that introduce DSTs, with the extraterritorial tax focusing on the UTPR and the discriminatory tax focusing on DSTs. It is anticipated an updated version of this proposed legislation will be advanced.
Future of Current International Tax Provisions
The Global Intangible Low-Taxed Income (GILTI) regime is expected to stay, though its rates might be subject to change. Additionally, the Foreign-Derived Intangible Income (FDII) provision could be leveraged to incentivize domestic production and exports, aligning with President-elect Trump's focus on bolstering U.S. manufacturing — a stance that contrasts with President Biden's previous approach to export subsidies:
- GILTI: GILTI, codified under Section 951A, imposes a tax on income derived from intangible assets held by U.S. multinationals in low-tax jurisdictions. Currently, companies can claim a 50% deduction on GILTI, resulting in a 10.5% effective rate, which is scheduled to increase to 13.125% after 2025. Many anticipate the increase to be repealed and the current rate extended, or a lesser increase than currently planned.
- FDII: Similarly, FDII, under Section 250, provides a deduction on income from U.S.-owned intangible assets used abroad, effectively reducing the tax rate to 13.125%, with an increase to 16.406% slated for post-2025. Trump's administration may propose to repeal or lower the increase to 15%, intending to stimulate U.S. exports and the development of intangible assets by making it more financially attractive for companies to hold and use such assets domestically.
- Base Erosion and Anti-Abuse Tax (BEAT): BEAT, under Section 59A, serves as an alternative minimum tax targeting profit shifting through deductible payments made to foreign affiliates. The BEAT rate is set to rise from 10% to 12.5% after 2025. President-elect Trump has expressed an interest in maintaining this increased rate to combat base erosion practices effectively, potentially influencing multinational tax strategies and reducing the incentive for profit shifting.
- Corporate Alternative Minimum Tax (CAMT): The CAMT imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of large corporations whose three-year average annual AFSI exceeds $1 billion (applicable corporations). The CAMT was seen as the U.S. response to the OECD’s Pillar Two minimum tax, and many predict that the new administration and congress will seek to repeal the CAMT.
Reflections on U.S. International Tax and OECD Pillars
It is anticipated that the new administration will likely make progress more difficult for the two OECD pillars. The impact of this is compounded by the complexity and international reach of U.S. domestic tax policy, from the GILTI and BEAT regimes introduced by the Tax Cuts and Jobs Act of 2017 (TCJA), which are expected to remain in place. Further, the potential elimination of the U.S. CAMT introduced under Biden as an alternative to Pillar Two may reduce the prospect of greater alignment between U.S. regimes and their alternatives in the EU and elsewhere (including the U.S. choosing to implement Pillar Two).
Your Guide Forward
Considering the proposed international tax and tariff changes under the Trump administration, businesses and policymakers face a complex landscape requiring careful navigation. Cherry Bekaert’s International Tax Services professionals are committed to closely monitoring upcoming legislation and regulatory changes to help guide domestic and international businesses through this evolving tax environment. Whether it's managing penalty regimes on international forms, addressing court and transfer pricing cases or establishing compliance within a new regulatory framework, Cherry Bekaert is here to support your business in adapting to the challenges and opportunities ahead.
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Disclaimer:
This content focuses on presidential tax proposal plans and is intended to provide general information about the potential tax legislation that may be implemented by the future government. The information provided in this content piece is not intended to serve as legal or tax advice and should not be relied upon as such. The prospective potential legislation mentioned in this content piece is subject to change, and there is no guarantee that any proposed legislation will be enacted into law. Any action taken based on the information provided in this content piece is at their own risk, and Cherry Bekaert shall not be held liable for any such action taken.
