The Trump administration recently issued an executive order addressing the global minimum tax agreement, known as Pillar Two. This agreement, spearheaded by the Organisation for Economic Co-operation and Development (OECD), aims to ensure multinational corporations pay at least 15% in income tax globally. Trump’s order emphasizes that commitments made by the Biden administration are non-binding unless Congress legislates them, and hints at potential retaliation against extraterritorial taxes.
To fully grasp the implications of this order, here are five key elements you need to know:
1. US Tax Code Misalignment with OECD Standards
While the US tax code exceeds the 15% minimum rate set by Pillar Two—thanks to a 21% domestic rate and an effective 16.4% tax on international income starting in 2026—compliance isn’t just about rates. Differences in how “tax” and “income” are defined by the OECD and US law create significant disparities. For example:
- The US allows for a “blended” calculation of international income, where low-tax and high-tax earnings are mixed.
- The OECD, by contrast, prefers a stricter country-by-country approach, which isolates low-tax jurisdictions for “top-up” taxes.
Changing these provisions would require Congress to act, as these are enshrined in existing legislation.
2. US Taxes Are Already Stricter Than Pillar Two’s Standards
Despite calls for alignment, the US tax regime is arguably more onerous than what Pillar Two requires:
- Domestically, corporate taxes far exceed the 15% minimum.
- Internationally, the US global intangible low-taxed income (GILTI) regime imposes strict rules, including limits on expense deductions and unfavorable carryforward policies.
Critics argue that while the OECD’s country-by-country method might better target low-tax jurisdictions, adopting it would introduce significant complexity and exacerbate existing flaws in GILTI.
3. Congress Has Not Passed Supporting Legislation
The executive order underscores a fundamental truth: the US hasn’t legislated to align with Pillar Two. Although the Biden administration championed the OECD agreement, Congress has yet to address key issues, such as:
- Transitioning GILTI to a country-by-country system.
- Resolving discrepancies in how R&D expenses are treated under US law versus OECD standards.
Even proposals like the Build Back Better plan, which initially included provisions to align with Pillar Two, were ultimately watered down before passage.
4. Pillar Two Presents Challenges for the US
The agreement poses two significant challenges for the US:
- Reduced Revenue: Increased foreign taxes on US corporations would lower their taxable income in the US, reducing revenues for the Treasury due to foreign tax credits.
- Erosion of Fiscal Sovereignty: Full compliance would require the US to cede control over certain domestic tax policies to international standards, raising concerns about the loss of autonomy.
5. The US May Retaliate Against Extraterritorial Taxes
One of the most controversial aspects of Pillar Two is the undertaxed profits rule (UTPR), which allows countries to tax corporations with sub-15% tax rates in other jurisdictions—even if the taxed company isn’t domiciled there.
- The US government has signaled it may retaliate if UTPR is applied to US companies, particularly those investing heavily in R&D.
- The order also suggests possible retaliation against digital services taxes (DSTs), which disproportionately target American tech firms.
Congress has long authorized the president to act against discriminatory foreign taxes, meaning retaliatory measures could be swift.
What’s Next for the US and Pillar Two?
While the executive order leaves the door open for Congress to make minor concessions toward Pillar Two compliance, full alignment seems unlikely. The US already exceeds the agreement’s minimum requirements in spirit, if not in technical detail. A balanced approach—offering token adjustments while avoiding escalated retaliations—might prevent unnecessary conflicts over an agreement the US broadly adheres to.