In this episode of Tax Notes Talk, Tax Notes chief correspondent Stephanie Soong discusses how the Trump administration’s tax priorities have been shaping negotiations on the OECD’s two-pillar project.
Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: OECD update — pillars, tariffs, and the path forward.
When President Trump first took office back in January, he announced that the U.S. would be pulling out of the OECD’s international corporate tax reform deal. Since then, however, the U.S.’s position has changed a few times as the Trump administration defines its tax priorities.
Meanwhile, the EU has been working to find a solution to the U.S.’s concerns that could allow the two pillars to be implemented.
So what role will the U.S. play in ongoing negotiations, and how is the OECD continuing to develop its international tax framework? We’ll link to previous coverage in the show notes, but here to bring us up to date is Tax Notes chief correspondent Stephanie Soong. Stephanie, welcome back to the podcast.
Stephanie Soong: Thanks for having me again. Always a pleasure.
David D. Stewart: So why don’t you bring us up to speed on what’s happened since we last checked in on pillar 2. And just a note before we get started: We recorded this on May 7, prior to the announcement of a possible trade deal with the United Kingdom.
Stephanie Soong: Well, the OECD published another pillar 2 guidance package January 15, which included several items, including updated GLOBE information return and clarifications about how MNE [multinational enterprise]
groups are supposed to complete that return. There was guidance on the treatment of some kinds of deferred tax assets that existed before the OECD minimum tax applied. These are deferred tax assets arising from governmental arrangements or the introduction of a new corporate income tax.
The package also contained a central register of legislation with transitional qualified status, meaning measures that have undergone a fast-track process to ensure they’re consistent with the OECD’s global minimum tax rules during a transition period.
The OECD also published a multilateral competent authority agreement and commentary to facilitate the centralized filing and exchange of GLOBE information returns between tax administrations. But then came the president’s January 20 memorandum ordering the Treasury secretary and the U.S. trade representative to come up with proposals for “protection from discriminatory and extraterritorial tax measures.”
And a report was submitted to the White House in March, although the report has not been made public. I’ve tried to get this report and have not been able to get it, but once I do — if I do — I will report on it for sure.
So you mentioned that the U.S. pulled out of this deal. So the memorandum did say that “the secretary of the Treasury and the permanent representative of the United States to the OECD shall notify the OECD that any commitments made by the prior administration on behalf of the United States with respect to the global tax deal have no force or effect within the United States absent an act by Congress adopting the relevant provisions of the global tax deal.”
So many people interpreted this memorandum to mean that the Trump administration was withdrawing from the two pillar global tax reform plan. They may have thought that, but to me, it seemed that it was just reinforcing that there’s a new sheriff in town. There’s a new sheriff in town and what the previous sheriff did no longer applies, which is fair because it’s a new administration.
So anyway, shortly after that, on January 22, House Republicans reintroduced the Defending American Jobs and Investment Act, which is largely seen as an anti-pillar 2 bill. The bill would increase U.S. tax rates on foreign companies and investors if their companies impose extraterritorial measures on U.S. companies like the undertaxed profits rule.
David D. Stewart: So what’s happening with the other pillar going on right now? What’s happening with pillar 1?
Stephanie Soong: There hasn’t been much movement at the OECD on pillar 1, which if you’ll recall, consists of amount A, the taxing right, and the withdrawal and prevention of digital services taxes and other similar measures, and amount B, which is an optional simplified and streamlined transfer pricing approach to price baseline marketing and distribution transactions. And negotiations are continuing on a mandatory version of amount B.
There was a lot more discussion of DSTs in the context of trade rather than pillar 1. Over the past few months, the threat of trade wars between the U.S. and the rest of the world started looming large, particularly with the Trump administration’s plan to impose tariffs on countries with which the U.S. has trade deficits in goods.
As these trade tensions grew, there was some discussion in the Trump administration about digital services taxes as a potential trade barrier. And if you remember, the U.S. really hates DSTs and other kinds of measures like that, because in its view, these kinds of taxes unfairly target U.S. companies. Pillar 1 of the reforms was supposed to roll back those DSTs and similar measures.
During this time, there was some speculation that some countries were reconsidering their DSTs in response to potential tariff threats. There were rumors that the U.K. was considering amending or abolishing its DST as it tried to secure a carveout from the tariffs, but so far, the U.K. government has been vague on whether DST changes were even under consideration.
And the Italian prime minister met with Trump in April, and they said in a joint statement that they “agreed that a non-discriminatory environment in terms of digital services taxation is necessary to enable investments from cutting-edge tech companies.” It wasn’t clear whether this meant Italy was planning on eliminating its DST. In January Italy did eliminate the €5.5 million domestic revenue threshold for its DST regime, and that expanded the scope of the tax to all large companies with Italian revenue from the provision of digital services.
And meanwhile, in India, the government abolished their 6 percent equalization levy at the end of May. And at first, the Indian finance minister said abolishing the levy was meant to “address the uncertainty in international economic conditions,” which prompted speculation that India was responding to the tariff threats. But the finance minister reportedly said that the levy’s withdrawal was part of the process of rolling back the 2 percent equalization levy, which was abolished in 2024.
While some countries appear to reconsider their DSTs, lawmakers in some jurisdictions seem to move in favor of introducing DSTs — like in Australia, the Green party proposed a 3 percent DST in March. And there was also talk in April from the European Commission about an EU-wide retaliatory tax on U.S. digital advertising revenue. And the South Centre in Geneva also urged developing countries to adopt DSTs and put up a united front against external threats against those measures, which I took to mean as trade threats.
And on amount B, we saw some more countries, like Norway and Turkey, saying they won’t adopt the framework at the moment. And the co-chairs of the OECD inclusive framework published a statement in January that pretty much said that negotiations on pillar 1 centered mostly on trying to overcome differences between jurisdictions on the mandatory version of amount B.
David D. Stewart: So turning back to what we’re seeing out of the U.S. Since that memo in January, have we seen the U.S. actually leaving the OECD’s negotiating table?
Stephanie Soong: Interestingly enough, the OECD inclusive framework met in Cape Town, South Africa, in early April and produced a statement that pretty much confirmed that the talks were continuing on pillar 1 and pillar 2. Nothing changed from the January statement regarding pillar 1, but what was significant was that the United States was among the inclusive framework members that approved the statement, signifying the U.S. was still at the negotiating table.
Manal Corwin, OECD’s tax head, said at the Pacific Rim conference in mid-April that members were interested in finding a path forward with the United States that would address its concerns with pillar 2. And as I probably mentioned on this podcast, the U.S. GILTI [global intangible low-taxed income] regime partly inspired the pillar 2 income inclusion rule, but as far as key differences, one big one is that the GILTI rules apply on a blended worldwide basis, while the income inclusion rule applies on a jurisdictional basis.
David D. Stewart: Do we have a sense of what the U.S. wants to achieve in these negotiations?
Stephanie Soong: Well, a Treasury official said during a speech at the Pacific Rim conference that the U.S. priority is to find a politically acceptable and stable coexistence between the GILTI regime and the pillar 2 regime. And what coexistence means is yet to be determined. But there was an interesting moment after his speech when he clarified to us reporters that he did not say equivalence during his speech. So the U.S. apparently is not looking for equivalence between the GILTI regime and pillar 2.
We really don’t know yet what the U.S. wants or what it told the inclusive framework it wants, but my colleague Elodie Lamer was the first to report that the Polish EU Council presidency had set out options to help smooth things over with the United States.
David D. Stewart: What sort of options are they proposing?
Stephanie Soong: Well, they include revisiting the GLOBE rules on the treatment of tax credits because U.S. incentives like the R&D [research and development] credit aren’t considered qualified refundable tax credits, which could lead to a lower effective tax rate and a possible pillar 2 tax abroad for U.S. companies.
And another option is to limit the applicability of the UTPR — the undertaxed profits rule — possibly by extending the transitional undertaxed profits rule safe harbor or amending the pillar 2 directive to roll back the UTPR.
Then there’s the option of giving the U.S. GILTI regime equivalence to the IIR. But like I said before, the Treasury officials seemed to indicate that that was not what they were looking for. EU member states reportedly indicated their attachment to the UTPR’s integrity and considered any changes to the pillar 2 directive to be premature. But meanwhile, business stakeholders have been increasingly calling for pausing the application of the EU’s UTPR.
David D. Stewart: So what should we be looking for next in these negotiations between the OECD and the U.S. and other nations?
Stephanie Soong: So what I’m looking for myself is more information about the so-called path forward on pillar 2 with the United States and more updates on pillar 1, like the U.S. draft regs for amount B. Another thing I’m looking for is countries adopting pillar 2 rules and amending their existing pillar 2 rules. I’m looking out for whether countries are going to amend or abolish their existing DSTs or introduce new ones since they’ll be targeted by tariffs anyway. And as always, pillar 2 guidance from the OECD.
David D. Stewart: Well, it seems like there’s going to be plenty to keep an eye on. And Stephanie, thank you for bringing us up to speed on all of it.
Stephanie Soong: No problem. Thank you so much for having me on.
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