USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
9.4 Competitive Tax Policy Objectives The US government’s main goal is to prevent other countries from taxing what it views as “its” tax base through the BEPS initiative (see 9.2 Government Policy and Objectives Approach ). In this respect, the USA is already balancing its competitive policy objectives against the pressures that BEPS will bring in its wake, so as to ensure that US interests, and more specifically its tax base, are appropriately safe - guarded. Under the Trump administration and follow - ing the OECD’s Side-by-Side Package, it remains to be seen how likely the USA is to continue engaging with the international community to help address tax avoidance and ensure coherence of international tax rules (see 9.3 International Tax). 9.5 The Competitive Tax System While the US tax system provides many benefits for companies operating in its borders (as discussed throughout this chapter), a major drawback to the US system is its overall complexity. Specifically, the cur - rent tax law was not enacted all at once but is a result of numerous provisions added or subtracted in multi - ple tax bills. Often, Congress designs legislation under self-imposed constraints, such as short-term revenue goals or effects on the distribution of tax burdens among income groups. For example, the hybridity of the US international system may be seen as more vul - nerable, given its complexity. Such complexity in itself can be viewed as a deterrent to cross-border invest - ment. Another element of this complexity is the myriad laws that separately apply at the state and local level, which may or may not conform to federal provisions. 9.6 Hybrid Instruments and BEPS Implementation The 2017 tax reform introduced two “anti-hybrid” rules that generally deny US tax deductions in certain situations involving entities and payments of interest, royalties or dividends, if such entities or payments are treated differently under US and foreign tax laws and such different treatment results in double taxation (see 2.5 Deduction of Interest ). The amendments made to the Code were a direct response to Action 2 of the OECD BEPS Project designed to address hybrid and branch mismatch arrangements.
to notify the OECD that any commitments related to BEPS (among other things) have no force or effect, another Trump Executive Order which provides for potential retaliatory measures against countries and their citizens that impose “discriminatory” or “extra - territorial” taxes on US citizens or corporations, and the recent deal of the USA with the G7 to exempt US companies from certain aspects of Pillar Two. Additionally, early drafts of the One Big Beautiful Bill Act included a provision (referred to as “Section 899”) that required an increase in tax rates, removal of cer - tain tax exemptions, and other retaliatory measures on countries (and such countries’ residents) that have “extraterritorial” or “discriminatory” taxes. Section 899 was understood to target taxes such as Pillar Two’s undertaxed profits rule, digital services taxes (DSTs), and other similar taxes. This retaliatory provision was not included in the final One Big Beautiful Bill Act in response to the deal with the G7, but Section 899 or a similar provision could be enacted in future legislation depending on the implementation of the G7 deal and the OECD’s Side-by-Side Package. The implementation of Pillar Two taxes and the Side- by-Side Package abroad could have a significant impact on US-based multinational companies. 9.3 International Tax Owing to substantial activity by US multinationals and the overall strength of the US economy, international tax has a high public profile in the USA. This is evi - denced by President Trump’s Executive Orders, which renege on commitments to the OECD and provide for the potential use of a Code provision, never used before, to support any retaliatory tax, which could include the doubling of certain tax rates, the proposal of Section 899, the recent deal of the USA with the G7 regarding Pillar Two, and the OECD’s Side-by-Side Package. Additionally, given the stance of the current Trump administration regarding tariffs, it is possible that inter - national tax will remain at the forefront of US political and economic consciousness, and the structuring of cross-border transactions could be of further import as both US and non-US companies navigate this new landscape.
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