On 20 January 2025, the Trump administration issued an executive order relating to Pillar II. It comes as no surprise that the new administration, as part of its broader trade policy, is withdrawing US support for the Global Tax Deal's Pillar II. More interestingly, the Secretary of Treasury has been tasked with proposing protective measures against countries that do not comply with US tax treaties or that have, or are likely to have, perceived extraterritorial taxes that affect US companies. These seem to include countries that would apply the UTPR (Undertaxed Profits Rule) to profits of US group companies. While the way the new administration announced the order and measures seems to be highly political, the compatibility of the (extraterritorial) UTPR with tax treaties has been questioned before.
The scope of any protective measures will likely depend on broader trade discussions. The US is not expected to accept application of the UTPR to profits of US group companies, but what else it may reject is uncertain. Will application of the UTPR to non-US subsidiaries of US group companies, or of the IIR (Income Inclusion Rule) for US subsidiaries, be acceptable? The new administration's protective measures are expected to contain answers to these questions.
As to the protective measures themselves, section 891 of the US Tax Code as well as a statement by the United States House Committee on Ways and Means give some indications. In general terms, the protective measures could consist of an increase in US tax rates – for example, up to 20% or double the applicable tax rate, for the US income of investors and corporations that are a resident in countries which have extraterritorial taxes that affect US companies. Such an increase in US tax rates would put pressure on countries to not implement the UTPR (or at least, not when it comes to undertaxed US source profits).
Considering that the UTPR functions as the backstop of the Global Tax Deal's Pillar II, non-implementation would put its effectiveness as a whole at risk and could result in other countries no longer participating in the Global Tax Deal either. For now, given the uncertainty resulting from the new executive order regarding the application of the UTPR, businesses should remain flexible. This will allow them to respond to developments in the coming months relating to the global implementation of Pillar II.
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