House Republicans introduce bill responding to Pillar Two and unilateral taxes

In brief

House Ways and Means Committee Chairman Jason Smith (R-MO) and all Ways and Means Republicans on May 25, 2023 introduced the Defending American Jobs and Investment Act. The proposed legislation would increase income tax and withholding tax rates, initially by 5 percentage points, increasing up to 20 percentage points on certain foreign citizens, foreign corporations, and foreign partnerships of any foreign country that is listed in a report on the extraterritorial taxes and discriminatory taxes of foreign countries (‘Report’) submitted by the Secretary of the Treasury (‘Secretary’) to certain Congressional committees. 

"This bill sends a clear warning to any nation tempted to exploit the success of our workers and businesses for its own gain," said Chairman Smith, adding that Ways and Means Republicans are prepared to consider additional tax and trade countermeasures. "We urge our global trading partners to reject all unfair taxes aimed at Americans, and we encourage countries, the OECD, and multinational companies to work toward solutions that will protect American sovereign taxing rights and avoid escalating tax and trade countermeasures."

The increases in income tax and withholding tax rates would take effect the day after the 180-day period beginning on the date the first Report is submitted which lists a foreign country. 

The legislation also includes other remedies against a listed foreign country with extraterritorial taxes and discriminatory taxes. As described further below, such remedies could include limitations on Federal Government procurement, as well as limitations with respect to bilateral tax treaties or trade agreements. 

The takeaway: The bill appears to take aim at the Organisation for Economic Co-operation and Development (OECD) two-pillar solution and at countries that introduce digital service taxes (DSTs), with the extraterritorial tax focusing on the undertaxed profits rule (UTPR) and the discriminatory tax focusing on DSTs. While Democratic party control of the Senate may prevent Congressional approval of this proposal in the near term, the bill nevertheless provides further indication of the dissatisfaction among Congressional Republicans with the current OECD process and some of its policy direction. Companies should continue to monitor these developments while also ensuring their organizations are preparing for Pillar Two implementation by multiple countries starting in 2024.