A Look at President Trump's America First Trade Policy Executive Order and International Tax
Countering Discriminatory Tax Practices Against U.S. Citizens and Corporations
Highlights
- On his first day in office, among the numerous Executive Orders (EO) released, President Donald Trump announced the America First Trade Policy EO designed to prioritize American interests in international trade and tax and, in another EO, a change in policy regarding the Organization for Economic Cooperation and Development (OECD) Global Tax Deal.
- The aforementioned EOs address tax policy matters and highlight concerns that certain global tax policies of foreign countries and the OECD are extraterritorial and discriminatory and are disadvantageous to the United States and American companies.
- This Holland & Knight alert examines the Trump Administration's shift in international tax policy aimed at improving the America First standing on international tax.
In its first week, the new Trump Administration signaled that U.S. trade and tax policy will take a new direction in 2025 from that of the Biden Administration.
First, on Jan. 20, 2025, President Donald Trump announced his America First Trade Policy in an Executive Order (EO)1 aimed at prioritizing American interests in international trade. The new policy also addresses tax policy matters and the concern that certain global tax policies have placed American companies at a disadvantage. In the America First Trade Policy, the president directed the U.S. Department of the Treasury Secretary, in consultation with the U.S. Commerce Department Secretary and U.S. Trade Representative (USTR), to investigate whether any foreign country subjected U.S. citizens or foreign corporations to discriminatory or extraterritorial taxes pursuant to Section 891 of the Internal Revenue Code (Code),2 discussed below and deliver to the president the results of that investigation in a report by April 1, 2025.
Second, on Jan. 20, 2025, President Trump announced in yet another EO3 that the Organization for Economic Co-operation and Development (OECD) Global Tax Deal (i.e., Pillar 1 and Pillar 2), which had been supported by the prior administration and the first Trump Administration, "has no force or effect in the U.S." The president directed the Treasury Secretary and permanent representative of the U.S. to the OECD to "notify the OECD that any commitments made by the prior administration on behalf of the U.S. with respect to the Global Tax Deal have no force or effect within the U.S. absent an act by the Congress adopting the relevant provisions of the Global Tax Deal." The president also directed the Treasury Secretary, in consultation with the USTR, to investigate "whether any foreign countries are not in compliance with any tax treaty with the U.S. or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies" and develop and present a list of options to the president through the Assistant to the President for Economic Policy for protective measures or other actions that the U.S. should adopt or take within 60 days.
Third, on Jan. 21, 2025, referencing the president's EOs, Rep. Jason Smith (R-Mo.), chairman of the House Ways and Means Committee and all Committee Republicans, reintroduced the Defending American Jobs and Investment Act (H.R. 591), discussed below.
Fourth, on Jan. 23, 2025, President Trump, in addressing the Davos World Economic Forum by video, detailed other components of his America First Trade Policy to incentivize activity in the U.S., with the goal of boosting domestic manufacturing and protecting American jobs – e.g., through 1) lowering the corporate tax rate (currently at 21 percent) to 15 percent for corporations that make products in the U.S. and 2) the imposition of disincentives (through tariffs) for those that choose not to do so. In that regard, President Trump said:
"If you don't make your product in America, which is your prerogative, then very simply you will have to pay a tariff – differing amounts but a tariff – which will direct hundreds of billions of dollars and even trillion of dollars into our Treasury to strengthen our economy and pay down our debt."4
Tax Discrimination Against U.S. Taxpayers
A major area of concern of the American First Trade Policy is the perception that foreign countries are enacting tax legislation that is extraterritorial and discriminates against U.S. businesses. Examples of extraterritorial, discriminatory taxes are:
- Digital Services Taxes (DSTs). DSTs are taxes on gross revenues derived from a variety of digital services – e.g., the sale of advertising space, provision of digital intermediary services (such as the operation of online marketplaces) and sale of data collected from users. DSTs are perceived as unfairly targeting U.S. tech giants.
The OECD's Pillar One addresses the tax consequences when a large multinational enterprise (MNE) derives value from customers in a country in which it does not have a physical presence. The Pillar One rules would revise the current permanent establishment rules and establish new nexus and profits allocation rules by broadening the ability of countries to tax commercial activities occurring within a border of a country, irrespective of a company's physical presence in the market jurisdiction. Another Pillar One objective is to improve tax certainty through effective dispute prevention and resolution mechanisms.
DSTs have been the subject of pushback by the Biden Administration and both Trump Administrations. In fall 2024, the Biden Administration took the first step toward opening an official dispute with Canada, asking Canadian authorities to justify its DSTs in light of Canada's obligations under the U.S.-Mexico-Canada Free Trade Agreement (USMCA) – specifically, rules designed to prevent discrimination against U.S. firms. In addition to pursuing action under the USMCA, the Biden Administration retained the option of pursuing action under Section 301 of the 1974 Trade Act,5 the approach adopted by the first Trump Administration against earlier DSTs (predominantly in Europe). In addition, the first Trump Administration also had threatened tariffs.
- Global Minimum Corporate Tax (or Pillar Two). This initiative seeks to reduce profit shifting to low-tax jurisdictions and provide a more coordinated approach to ensure that large MNEs pay a 15 percent minimum tax irrespective of where headquartered or the jurisdictions in which they operate. Pillar Two seeks to achieve that result through two mechanisms: first, the Subject to Tax Rule (STTR), which would apply when an intragroup payment is subject to a nominal tax rate in a payee jurisdiction below that of the minimum tax rate, and second, through the Global Anti-Base Erosion (GloBE) Rules, which would impose a 15 percent minimum effective tax rate on income in each jurisdiction in which a MNE (with revenues of least 750 million euros per year) operates. A "top-up" tax would arise only if the MNE group pays an insufficient amount of income taxes at the jurisdiction level.
The most objectionable element of the GloBE Rules is the undertaxed profits rule (UTPR). That rule allows a country to increase taxes on a business if that business is part of a MNE group that pays less that the proposed global minimum tax of 15 percent in another jurisdiction (i.e., a "top up" tax). The UTPR is intended to operate as a backstop to the overall GloBE rules in situations where there is a shortfall in payment of the 15 percent minimum tax.
The UTPR has been viewed by Congressional Republicans as an extraterritorial enforcement mechanism for a tax base that the U.S. has not adopted (the U.S. calculates corporate tax differently than the Pillar Two rules).6 The Tax Foundation characterized the UTPR as follows: "Pillar Two relies on an extraterritorial enforcement mechanism [that] threatens to allow foreign countries to tax U.S. companies on U.S. income, and further, to effectively negate tax policies passed by Congress."7
Other potentially discriminatory practices by foreign countries include:
- Section 49 of the German tax code, which imposes a withholding tax on royalty payments for patents and trademarks registered in Germany
- The United Kingdom's Diverted Profits Tax, which is designed to counteract contrived arrangements used by MNEs that result in the erosion of the U.K. tax base (i.e., 1) by counteracting arrangements by which foreign companies exploit the permanent establishment rules and 2) to prevent companies from creating tax advantages by using transactions that result in the erosion of the UK tax base)
- The Australian Multinational Anti-Avoidance Law, which is designed to prevent the diversion of profits offshore through contrived arrangements, and the change to withholding taxes on royalties paid to foreign residents
Potential U.S. Responses to Tax Discrimination
In response to perceived tax discrimination, the Trump Administration and congressional Republicans are considering various retaliatory measures.
- Tariffs. A tariff is a tax imposed on one country on goods imported from another country. A tariff produces a source of revenue for the government and is a form of regulation of foreign trade and policy that imposes a tax on foreign products to encourage or safeguard domestic industry. Though tariffs are often described as a tax on foreign businesses that places an economic burden on foreign exporters, the costs are often borne by consumers in the country that is imposing the tariff. Tariffs directly increase the cost of domestic sales by artificially increasing the price on imports.8
- Section 891 of the Code.9 Section 891 of the Code generally doubles the rates of tax on citizens and corporations of certain foreign countries (subject to certain limitations10) whenever the president finds that, under the laws of a foreign country, citizens or corporations of the U.S. are subjected to discriminatory or extraterritorial taxes. If triggered, Section 891 doubles the 1) tax rate on income effectively connected with a U.S. trade or business of individuals, corporations, insurance companies and regulated investment companies, and 2) the 30 percent rate of tax on foreign individuals and foreign corporations for income not effectively connected with a U.S. trade or business. Section 891 of the Code has been viewed principally as a negotiating tool,11 the aim of which is to pressure foreign countries to reconsider their tax policies or face economic consequences.12
- Defending American Jobs and Investment Act. R. 591, introduced by Chairman Smith and co-sponsored by all Republicans on the House Ways and Means Committee, would create a new section of the Code (Section 899) that penalizes certain taxpayers for the conduct of foreign countries.
Under this proposed bill:
- The Treasury Department would be required to deliver a report every 180 days to Congress identifying extraterritorial taxes and discriminatory taxes enacted by foreign countries against U.S. businesses.13
- After the identification of discriminatory or extraterritorial taxes, U.S. income of investors and corporations in those foreign countries (defined as an "Applicable Person") would be subject to 1) full statutory tax rates and 2) an increase by five percentage points each year for four years, after which the full statutory tax rates would remain elevated by 20 percentage points while the unfair taxes are in effect.
- The mechanism for increasing tax rates described above would cease to apply after a foreign country repeals its extraterritorial and discriminatory taxes (or the application of such taxes to U.S. businesses otherwise terminates).
- This mechanism for increasing tax rates is a tool of the U.S. government that would remain dormant as long as foreign countries avoid any unfair taxes on U.S. businesses and workers.
Key aspects of the bill are summarized below.
Definitions
An "Applicable Person" is:
- any individual (other than a citizen or resident of the U.S.) who is a citizen of a foreign country listed in a report
- any foreign corporation (other than a foreign corporation with respect to which any domestic corporation is a U.S. 10 percent or more shareholder)
- any foreign partnership, except to the extent provided by the Treasury Secretary and taking into account if the foreign partnership is engaged in a U.S. trade or business
An "extraterritorial tax" means:
- Any tax imposed by a foreign country on a corporation, determined by reference to any income or profits received by any person by reason of such person being connected to such corporation through any chain of ownership and other than by reason of such corporation having a direct or indirect ownership interest in such person.
- The term "tax" includes any increase in tax whether effectuated by an increase in the rate or base of a tax by a denial of deductions or credits or otherwise.
A "discriminatory tax" is defined as meeting one of the following four definitions:
- The tax applies to items of income that would not be considered to be from sources within the foreign country under U.S. income tax rules if the sourcing rule were applied by treating the foreign country as though it was the U.S.
- E.g., the Australian royalty resourcing rule (deeming intellectual property (IP) arising in Australia from licensing U.S. IP) would be discriminatory under this definition.
- The tax is imposed on a base other than net income and does not permit a recovery of costs and expenses.
- A DST could meet this definition.
- The tax is exclusively or predominantly applicable in practice or by its terms to nonresident individuals or foreign corporations or partnerships by treating the foreign country as though it were the U.S. due to specified factors or restrictions, and similarly situated foreign corporations and partnerships that supply comparable goods are services are excluded from the tax.
- A DST could meet this definition, as could Pillar 1 Amount A.
- The tax is not treated as an income tax under the laws of the foreign country or is viewed as outside the scope of a double tax treaty.
- g., the U.K. diverted profits tax or the German Section 49 tax on IP could meet this definition.
Under the bill, the following taxes are not extraterritorial or discriminatory:
- withholding taxes
- value-added tax (VAT), goods and services tax, sales tax or similar tax on consumption
- a tax imposed on a per-unit or per-transaction basis rather than on an ad valorem basis
- a tax on real or personal property or
- any other similar tax identified by the Treasury Secretary
Once identified as discriminatory or extraterritorial, the bill triggers the following response actions to such taxes:
For non-Foreign Investment in Real Property Tax Act (FIRPTA) withholding taxes: First, reduced treaty-based withholding tax rates would be eliminated, so the starting point would be the 30 percent rate. Second, the 30 percent statutory withholding tax rate would increase by five percentage points per year up to 20 percent during the period the offending tax is in place for a maximum withholding rate of 50 percent. The increased withholding tax rate would not apply to cross border payments to a foreign corporation where a U.S. corporation owns 10 percent or more of such foreign corporation (i.e., an exception to an Applicable Person).
The rate of FIRPTA withholding tax, currently 15 percent, would increase five percentage points per year up to 20 percent during the period the offending tax is in place. The rates of tax described in Section 1445(e) relating to dispositions or distributions described in Section 1445(e) would increase five percentage points per year up to an additional 20 percent during the period the offending tax is in place. For purposes of Section 1445, treaty-based withholding rates would be eliminated.
Tax on income of a foreign corporation effectively connected with a U.S. trade or business, currently imposed at the statutory rate of 21 percent, would increase five percentage points per year up to an additional 20 percent during the period the offending tax is in place.
Tax on income of a foreign corporation from U.S. sources not connected with a U.S. trade or business, currently taxable at a 30 percent rate, would increases five percentage points per year up to an additional 20 percent during the period the offending tax is in place.
The 30 percent branch profits tax would increase five percentage points per year up to an additional 20 percent during the period the offending tax is in place.
The tax on nonresident aliens,14 both for income not connected with a trade or business (currently imposed at a 30 percent rate) and for income not effectively connected with a U.S. trade or business, would increase five percentage points per year up to an additional 20 percent during the period the offending tax is in place.15
The proposed bill would also require the Treasury Secretary to take any extraterritorial or discriminatory taxes into account when assessing whether to enter into or update a bilateral tax treaty with any country that has adopted such taxes.
The bill would not increase the tax for:
- a U.S. corporation owned by a foreign-parented group (since such person is not an Applicable Person)
- an individual who is a resident alien for U.S. income tax purposes (since such person is not an Applicable Person)
- various types of income that currently are not subject to U.S. federal income taxation under the Code seemingly would not be impacted under the bill, to include 1) capital or other gain arising from non-effectively connected, non-real estate related transactions derived by a foreign corporation or a nonresident individual (who is not physically present in the U.S. for 183 days or more in the taxable year), 2) various types of non-effectively connected interest and original issue discount,16 3) international transportation income exempt from taxation under Section 883, and 4) income described in Sections 892 and 893
Illustrative Example
Assume the U.S. has a bilateral income tax treaty with Country X (a foreign country) that inter alia eliminates the income tax on interest payments made from the U.S. to Country X down to zero percent. Further, assume Congress passes the Defending American Jobs and Investment Act, and President Trump signs H.R. 591 into law on Jan. 31, 2025. Prior to the three-month deadline under H.R. 591, the Treasury Secretary submits a report to Congress on Feb. 15, 2025, that identifies certain discriminatory tax laws in Country X.
Parent Corp. is a Country X corporation that has a U.S. subsidiary (U.S. Sub). U.S. Sub enters into a cross border intercompany loan facility with Parent Corp. and borrows capital needed to fund its operations. Pursuant to the loan facility, U.S. Sub is required to make periodic payments of principal and interest to Parent Corp. The first interest payment is made by U.S. Sub on Aug. 31, 2025 (i.e., more than 180 days from the time the Treasury Secretary submitted its report to Congress identifying Country X as having discriminatory taxes). As of Aug. 31, 2025, Country X has neither repealed its discriminatory taxes nor terminated its application to U.S. companies or U.S. individuals.
Assume that under the U.S. tax treaty with Country X such interest payments made by U.S. Sub to Parent Corp. would be reduced from the U.S. statutory 30 percent withholding tax rate down to zero percent. Here, because Country X has been identified as a country that has discriminatory taxes, the subject tax treaty would be inapplicable and the interest payments (as described) in the first year would be subject to:
- a 30 percent tax rate (under Section 881 of the Code) plus
- the applicable number of percentage points – e.g., 5 percent (under Section 899(c)(1)(A)(i) and (c)(1)(A)(ii)(II))
In other words, the U.S. withholding tax rate on the subject interest payment would go from zero percent to 35 percent.17
Conclusion
The America First trade policy and issue of tax discrimination against the U.S. highlight the complexities and challenges of navigating international trade and tax in a globalized economy.
The tax policies and trade barriers implemented under the America First policy will have mixed impacts on U.S. companies. Though some industries will benefit from the protectionist measures, others will face increased costs and retaliatory tariffs from trading partners. The long-term effects of these policies on the U.S. economy and its position in global trade and tax will continue to remain a topic of debate.
The main question is whether foreign countries will change their legislation in response to H.R. 591 and potential tariffs.
Though the America First Trade Policy is intended to protect American interests and promote domestic growth, it also will raise concerns about the potential for trade wars and strained relations with key allies. As the global trade and tax landscape continues to evolve, the lessons learned from this era will undoubtedly shape future trade and tax policies and negotiations.
So, buckle up!
Notes
1 The White House: America First Trade Policy.
2 If the president finds that discriminatory taxation exits, Section 891 of the Code permits the president to double certain U.S. tax rates by citizens and corporations of such foreign countries, subject to certain limitations.
3 The White House: The Organization for Economic Cooperation and Development (OECD) Global Tax Deal (Global Tax Deal).
4 Remarks by President Trump at the World Economic Forum (Jan. 23, 2025).
5 P.L. 93-618, as amended (Jan. 3, 1975).
6 To date, the UTPR has been adopted by Australia, Canada, European Union countries, Japan, New Zealand, Norway, South Korea, Turkey and the U.K.
7 Alan Cole and Cody Kallen, "Risks to the U.S. Tax Base from Pillar 2," Tax Foundation (Aug. 30, 2023).
8 Tax Foundation: TaxEDU, Tariff.
9 Section 891 of the Code, originally enacted in 1934, which applies both to extraterritorial taxes and discriminatory taxes, can be initiated solely by the president (without the need for congressional approval) and has never been invoked. [See Joseph J. Thorndike, "Tax History: Threats, Leverage, and the early Success of Reprisal Taxes, Tax Notes, March 21, 2016]. Section 891 of the Code has not been subject to extensive regulatory consideration except for a regulation issued in 1962 that merely restates the statute. [See T.D. 6610, 27 FR 8723 (Aug. 31, 1962)].
10 Taxes imposed under the doubled rate are not permitted to exceed 80 percent of the taxable income of the taxpayer, determined without regard to certain deductions.
11 Id.
12 An interesting aspect of the potential application of Section 891 of the Code is its interaction with bilateral income tax treaties, particularly in certain instances (such as with respect to dividends, interest or royalties) where the treaty reduces the rate of the U.S. withholding tax to a rate less than 30 percent or, in certain cases, zero.
13 The first report would be due three months after the date of enactment of H.R. 591.
14 An individual is a nonresident alien is he or she is not 1) a lawful permanent resident – a "green card" holder" or 2) has not satisfied or come within the "substantial presence test."
15 Also, there is a special rule for Section 897 gains.
16 To include bank deposit interest, portfolio interest, original issue discount on certain short-term obligations, amounts paid as part of the purchase price of an obligation sold between interest payment dates, original issue discount paid on the sale of an obligation other than a redemption.
17 And to the extent Country X were not to repeal or terminate the application of the discriminatory taxes to U.S. companies and/or individuals, the withholding tax rate would increase by five percentage points per year until it reaches 20 percent, for a total withholding rate of 50 percent (i.e., 30 percent statutory rate plus 20 percent rate increase under H.R. 591).
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