G7 Pillar 2 Statement: Getting Something for Nothing

As the tax reform package within the One Big Beautiful Bill Act (OBBBA) continues to make its way through Congress (passed by the Senate and under consideration by the House), one proposed provision, a retaliatory tax imposed on foreign taxpayers from jurisdictions that impose “unfair foreign taxes” (section 899), has had a worldwide impact. The provision, which was previously discussed in our earlier alerts here and here, would have led to a decrease in foreign investment into the US according to the Joint Committee on Taxation. In addition, many foreign countries were concerned about potentially far-reaching effects on the global minimum tax rules (Pillar 2) as developed by the Organization for Economic Co-operation and Development (OECD)/Inclusive Framework. Fearing the potential implications of section 899, the G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the US) came to an “understanding” that if the US removes section 899 from the proposed legislation, the G7 would collaborate to seek a “side-by-side” system under which US-parented groups would be exempt from certain aspects of Pillar 2. While significant uncertainty remains regarding the implications of the G7 understanding, in light of the OBBBA developments and the potential implications for taxpayers, we thought it was important to issue this alert in which we discuss the G7 statement along with alternative measures the US could still use to retaliate against countries’ unfair foreign taxes.

Section 899 Threat

For countries that impose “unfair foreign taxes,” drafts of the OBBBA (by the House and the Senate) would have increased taxes on residents and on entities controlled by such residents; increased the corresponding withholding obligations of US persons; and imposed an enhanced base erosion and anti-abuse tax (the super BEAT) on certain corporations associated with these countries. For this purpose, “unfair foreign taxes” would have included those imposed under the undertaxed profits rule (UTPR) of Pillar 2 and digital services taxes, with a broad grant of authority to Treasury to identify other taxes. However, the proposal drew substantial criticism and market concern, as well as questions whether it could be enacted as part of a reconciliation bill. As a quid pro quo for the G7 understanding (discussed below), section 899, which includes the super BEAT, has been removed in the version of the OBBBA passed by the Senate yesterday, which is now being considered by the House.

A&M Insight: The removal of section 899 from the OBBBA by the Senate is a reason for taxpayer celebration. However, the OBBBA has not been enacted yet, and these provisions could be reincluded at any stage of the legislative process, although that seems unlikely given the initial positive reaction to the G7 understanding from various interested parties. Furthermore, once a legislative proposal has been introduced, such as section 899, it could always be taken off the shelf and added into a different bill at any point.

G7 Understanding

Several members of the G7 have issued statements reflecting a consensus among the group to collaborate in an effort for the OECD to adopt a “side-by-side” system, which presumably would fully exempt US-parented groups from Pillar 2’s UTPR and the income inclusion rule (IRR). This agreement is based on the premise that the US arguably imposes minimum tax rules similar to Pillar 2 and is motivated by the desire to avoid the potentially significant consequences of section 899.

A&M Insight: The “understanding” is not a formal enforceable agreement and it is limited to a commitment by the G7, as opposed to a broader group, such as the G20, the EU, or the Inclusive Framework (over 145 countries). Therefore, it does not necessarily guarantee the adoption of a side-by-side system by the OECD. Additionally, the understanding apparently is only applicable to US-parented groups, which would mean US subsidiaries, including those in a sandwich structure with a foreign parent owning a US subsidiary, which in turn owns a foreign subsidiary, would not be covered by the side-by-side system.

Other US Levers

Section 899 only represents one lever that the US could use to potentially address “unfair” taxes. Additionally, the administration could still use section 891, which doubles the applicable US tax rate in certain circumstances, and increase tariffs to combat perceived unfair foreign taxes.

• Section 891: If a foreign country imposes discriminatory or extraterritorial taxes on US citizens or corporations, section 891 allows the President to double the tax rate on that country’s citizens and corporations. As part of President Trump’s “America First Trade Policy” released in January, Treasury was directed to determine which foreign countries’ tax regimes would fall within the scope of section 891. The provision can be useful for engaging with countries to address specific tax regimes, such as digital services taxes.
• Tariff Increases: Tariffs have been a vital aspect of the Trump administration’s early policies to ensure the US remains competitive and not subject to discriminatory practices by our trading partners. After implementing initial tariffs on goods from Canada, Mexico, and China, and on particular products (e.g., steel, aluminum, automobiles, and auto parts), the President announced reciprocal tariffs in April with a 10 percent minimum on imports from all countries, with some exceptions, and higher additional tariffs of up to 50 percent for those countries with large trade deficits. The administration generally delayed the implementation of the higher reciprocal tariffs until July 9th, allowing time for negotiations, including the extent to which some countries might provide relief from certain taxes (e.g., digital services taxes).

A&M Insight: Although both section 891 and tariffs have potential legal frailties and could be subject to challenge, they could provide the administration with interim mechanisms to address unfair foreign taxes if the G7 understanding does not lead to a more fulsome agreement. However, neither are perfect remedies. For example, section 891 does not cover certain taxes, such as withholding taxes that may be subject to treaty provisions or other exceptions. In addition, section 891 has never been invoked by a President, creating challenges and potentially unforeseen implications. While tariffs are a well-established mechanism for effecting change, the recent retaliatory tariffs remain subject to legal challenges and adverse market reactions.

A&M Tax Says

While the exact rationale for initially including section 899 in the OBBBA remains unclear, it was effective in encouraging foreign countries to exempt US taxpayers from certain taxes without Congress adopting the proposal. Although the provision appears to be dormant for now, it could be reintroduced in subsequent legislation for any reason, including if the G7 understanding does not provide the desired relief for US corporations. However, due to restrictions on reconciliation bills, if the OBBBA is enacted without section 899, the next opportunity to reintroduce the provision via a reconciliation bill would be during the next fiscal year beginning October 1, 2025. It is critical for taxpayers and their advisors to closely monitor the developments of the international tax regime and A&M Tax experts are available to help you navigate these uncertain times.