20th January 2025. Immediately after assuming the office of the US presidency, Mr. Donald Trump, issues a flurry of executive orders and executive notes. One such note is captioned the "America First Trade Policy." Outlined therein are a slew of actions to be taken by the Secretary of the State, the Secretary of Treasury, the Secretary of Defence, the Secretary of commerce and others. One of such proposed action relevant for our discussion was:
"(j) The Secretary of the Treasury, in consultation with the Secretary of Commerce and the United States Trade Representative, shall investigate whether any foreign country subjects United States citizens or corporations to discriminatory or extraterritorial taxes pursuant to section 891 of title 26, United States Code."
Section 891 of the US tax code is titled-Doubling of rates of tax on citizens and corporations of certain foreign countries.
The section as it exists today, states as follows: –
"Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country; but the tax at such doubled rate shall be considered as imposed by such sections as the case may be. In no case shall this section operate to increase the taxes imposed by such sections (computed without regard to this section) to an amount in excess of 80 percent of the taxable income of the taxpayer (computed without regard to the deductions allowable under section 151 and under part VIII of subchapter B). Whenever the President finds that the laws of any foreign country with respect to which the President has made a proclamation under the preceding provisions of this section have been modified so that discriminatory and extraterritorial taxes applicable to citizens and corporations of the United States have been removed, he shall so proclaim, and the provisions of this section providing for doubled rates of tax shall not apply to any citizen or corporation of such foreign country with respect to any taxable year beginning after such proclamation is made."
Thus currently, in order to activate this section, the President has to make a proclamation that a US citizen or a US corporation is being subjected to discriminatory or extraterritorial taxes by a foreign country and thereafter the normal rate of tax of any taxpayer of the discriminating country will be the double of the normal rate subject to an overall limit. However, the moment the so- called discriminatory tax is removed by the alleged discriminating country concerned, the normal tax rate will come back.
This provision that is in the statute book for long and has never been invoked in any case till date, has an interesting history and goes back to the 1930s when the US government under the Democratic president Franklin Roosevelt introduced the provision as a retaliatory measure to be taken by the US to pressurise France to ratify a tax treaty.
Michell B. Carrol then the chief tax treaty negotiator for the USA mentions its origin and links it to the signing of the first France-USA tax treaty in the following words:
"In the 1920's France began to subject American corporations with subsidiaries in France to a double tax on dividends, that is, first by withholding at source from dividends paid by the French subsidiary to the American parent, and then by direct assessment against the parent when the income was redistributed in the United States. There was no basis in our law for prevailing upon the French Government to forego this form of double taxation. Hence, the efforts of a group of officials sent to France in May, I93O, to persuade the French Government to give up the second tax on a unilateral basis were fruitless. It was necessary to enter into negotiations for a bilateral treaty with France in which the French administration might find some reciprocal concessions under our law. These negotiations continued through the summer and an agreement was reached on all but a few points. After a long interval, the treaty was concluded on the basis of the American proposals, and was signed on April 27, 1932. It was promptly ratified by the United States, but France did not ratify it until after Congress had enacted Section 103, I.R.C. This section, in substance, authorizes the President to double the rate of American tax (but subject to a maximum rate of 80 percent) in the case of the-citizens and corporations of a foreign country which subjects American citizens and corporations to discriminatory or extraterritorial taxes. This provision envisaged particularly the second application of the French tax on dividends distributed by the American parent of a French subsidiary, because it was extraterritorial-being levied on income distributed in the United States by an American corporation, and discriminatory- inasmuch as French law specifically precluded the double taxation of dividends distributed by a French company out of income received in the same year in the form of dividends from a French subsidiary."
[Source: Tax Inducements to Foreign Trade- Mitchell B. Carrol.]
Speaking in favour of the Bill, in early 1934, Kentucky Democratic Representative, Fred Vinson, who subsequently became Treasury Secretary and later the Chief Justice of the Supreme Court and the only person to have served in all the three branches of the Government in the USA, is stated to have said:
"My friends, there are nations throughout this world who are not particularly friendly to Uncle Sam in a business way, and when they get an opportunity to dig into the pocketbook of his citizens, whether individual or corporate, they have not hesitated so to do. There is one country, France, that is not satisfied with taxing the income of American individuals and American corporations as they tax their own citizens: they are not satisfied with getting a tax upon the income that is actually derived in their own country; but when the American parent company of that subsidiary declares dividends, they place a corporate tax upon these dividends, derived from whatever source."
According to a Tax Foundation article, Rep. Vinson went on to describe what eventually became Section 891 and concluded, "This power can be used to protect American business from present discrimination and will probably help restrain foreign countries from further discriminatory levies."
This new provision of law was enacted as part of the Revenue Act of 1934 on May 10, 1934. France ratified the tax treaty nearly a year later, in April of 1935.1
Recent scholarship however suggests that the French action was in fact prompted by the prospect of tax avoidance by the American Companies even back then. Reuven Avi-Yonah in his essay on Retaliatory Taxation points out that the French tax was neither extraterritorial in that the same imposed tax on a French subsidiary or PE based on a comparison of the assets in France to total assets, which was perfectly legitimate method of formulary apportionment, in line with what the States in the USA were already doing. He also posits that the French tax was not discriminatory either since it applied to subsidiaries of all foreign companies whether American or not. He also mentions that the arm's length standard was adopted in this treaty for the first time.2
This brief study of the past is fascinating in as much as it shows the concerns of the European countries relating to tax avoidance and base erosion by the US MNCs even then whereas the American concern was to maintain its exceptionalism and not allowing anyone else to tax the extra profits of its multinationals. The same concerns more or less are getting played out again in the context of the BEPS project that was started by the Europeans and although supported for a brief while by the Biden Administration, is likely to fail due principally to the American resistance.
In that context, we note another executive order signed by Mr Trump on the very first day of his Presidency, i.e. 20th January 2025: titled- The Organization for Economic Co-operation and Development (OECD) Global Tax Deal (Global Tax Deal).
By this order, he directed the Treasury Secretary, the US trade representative, and the Permanent Representative of the USA to the OECD to 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 the Congress adopting the relevant provisions of the Global Tax Deal. The Secretary of the Treasury and the United States Trade Representative were directed to take all additional necessary steps within their authority to otherwise implement the findings of the memorandum.
"The Secretary of the Treasury in consultation with the United States Trade Representative shall investigate whether any foreign countries are not in compliance with any tax treaty with the United States or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies, and develop and present to the President, through the Assistant to the President for Economic Policy, a list of options for protective measures or other actions that the United States should adopt or take in response to such non-compliance or tax rules. The Secretary of the Treasury shall deliver findings and recommendations to the President, through the Assistant to the President for Economic Policy, within 60 days." 3
We also note another executive order more or less in the same vein but emphasising more on American sovereignty in tax matters issued about a month later, this time titled- – Defending American Companies and Innovators From Oversea Extortion and Unfair Fines and Penalties, issued on the 21st February 2025, denouncing the Biden Administration and taking the USA out of the any global consensus on digital taxation including Pillars one and Two.
According to this Memorandum- "The OECD Global Tax Deal supported under the prior administration not only allows extraterritorial jurisdiction over American income but also limits our Nation's ability to enact tax policies that serve the interests of American businesses and workers. Because of the Global Tax Deal and other discriminatory foreign tax practices, American companies may face retaliatory international tax regimes if the United States does not comply with foreign tax policy objectives. This memorandum recaptures our Nation's sovereignty and economic competitiveness by clarifying that the Global Tax Deal has no force or effect in the United States.
Section 1. Applicability of the Global Tax Deal.
"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 the Congress adopting the relevant provisions of the Global Tax Deal. The Secretary of the Treasury and the United States Trade Representative shall take all additional necessary steps within their authority to otherwise implement the findings of this memorandum. (….)" 4
Recall that the minimum rate under Pillar 2 was fixed by the OECD at 15% in the wake of a G-7 conference when Ms Janet Yellen pulled out that number from nowhere and OECD also went full steam and designed incomprehensible and complex rules such that it did not require a consensus amongst all the participating countries and the OECD bras announced with much fanfare the Pillar 2 rules as its great achievement out of a decade long exercise. The USA was not to be part of the deal. However, the application of the GloBE rules could affect the profits of the American companies. A number of European Countries in particular- France, Germany, Ireland, the UK, and countries like Australia, Canada, Japan South Korea, Singapore, Switzerland having already adopted the Pillar 2 rules, it will be interesting to watch the reaction of these countries in the face of Mr. Trump's denouncement of the much vaunted rules and the promise of retaliatory measures against countries that implement the rules that in any manner affect the American companies.
That brings us then to the actual proposal of the retaliatory tax or the ‘revenge tax' as it is being popularly called as a part of the One Big Beautiful Bill that has been passed by the House of Representatives on the 22nd May, 2025 and is now under the consideration of the Senate. The House proposal does not rely on section 891 as we have seen earlier but proposes a new and elaborate section 899. It is, in fact, section 112029 of the One, Big Beautiful Bill titled Enforcement of Remedies Against Unfair Foreign Taxes that introduces a new section 899 in the Internal Revenue Code. The provisions proposed by the House in this section runs into several pages.5
Very briefly, the House proposal is directed against countries imposing digital service taxes or similar such taxes and is also the negation of the OECD effort at reaching a consensus by denouncing the undertaxed Profits rule (UTPR).
The Undertaxed Profits Rule (UTPR) is now an essential component of the OECD's Pillar 2 global minimum tax framework, designed to ensure that large multinational enterprises with annual revenues above €750 million pay a minimum effective tax rate of 15% in every jurisdiction where they operate. If a group entity in a low-tax jurisdiction pays less than this minimum rate and the Income Inclusion Rule does not apply mainly because the parent entity is in a jurisdiction that has not implemented the IIR, the UTPR allows other countries where the MNE operates to top up the tax by denying deductions or requiring equivalent adjustments. This is to ensure the effective implementation of the proposal. But this is also the proverbial red rag to the bull (the USA)
The provisions of the House proposed Bill in respect of the revenge tax will apply only to taxpayers from the discriminatory foreign countries defined as a country that has any of the following four unfair foreign taxes, namely;
1. An undertaxed profits rule (UTPR)
2. A digital services tax (DST)
3. A diverted profits tax
4. An extraterritorial discriminatory tax
However, the tax does not apply to any US person nor to any CFC owned 50% or more by a US person.6
In terms of the House Bill proposal, in case of the existence of the so-called discriminatory tax, the normal tax rate will increase by 5% each year with a cap of 20% of the statutory rate. The proposal is apparently aimed at putting pressure on foreign governments to repeal such alleged discretionary measures and applies to the discriminatory government and its residents on their investments in the USA. It has already been clarified that applicable persons would not include American citizens, residents or US owned foreign corporations. If passed, the House version of the provision will come into effect from 2026.
It has been reported that the House version of the revenge tax has alarmed Wall Street analysts who apparently warned that it would create further disincentive to foreign investment in the USA already affected by the chaos surrounding the reciprocal tariff provisions.7
The House version of the Bill is now under consideration of the Senate. On the 17th of June, 2025, the Senate Finance Committee has released its version of the Bill. As was expected, the Senate Committee made some changes although retaining the main aspects of the House version.8
The Senate committee's version retains section 899 but provides for a new coordination rule with section 891 which is proposed to be amended and specifically includes reference to the definitions of the terms "extraterritorial tax" and "discriminatory tax" as given in section 899.
Under this version, section 899 would not apply during any period when the increase in the specified rate is already in force under section 891. The per year increase in the rate under the proposed section 899 in the House version was up to 20 percentage points increasing 5 percentage points every year and applies to both "extraterritorial tax" or "discriminatory tax."
The Senate Committee version is similar to the House bill, except that the increase is 5 percentage points per year and going up to a maximum of 15 percentage points and applies to "Extraterritorial tax" is defined to include UTPR. "Discriminatory taxes" are defined to include DSTs and as may be prescribed by the Treasury Secretary.9
These are then only some of the salient points of the revenge tax provisions of the Big. Beautiful Bill. But these are still early days. The Senate Committee version will have to be discussed in the Senate and voted upon and we do not know what the ultimate product will turn out to be. There are other Provisions such as GILTI and BEAT that are not discussed here and may also pose problems besides many other components involving personal taxation and other corporate tax provisions.
As we have noted earlier, a number of countries, particularly the ones belonging to the EU have embraced the Pillar 2 proposals and many others have or are contemplating adopting the digital services tax in the absence of a consensus at the OECD level regarding its two-pillar solution. It will therefore be interesting to see how the battle on this front pans out. We may also note that US allies, the UK and Australia also have the diverted profits tax, first adopted by the UK and aimed at multinationals that avoid creating a taxable presence despite maintaining substantial economic activity in the UK.
India not having implemented the Pillar 2 and having unilaterally abolished the equalisation levy should be able to heave a sigh of relief at least till such time that some crazy character finds some Indian tax provision affecting American companies otherwise discriminatory or extraterritorial.
1 (The History of U.S.-France Tax Troubles in One Section of the Tax Code August 22, 2019 By: Daniel Bunn)
https://taxfoundation.org/blog/us-france-tax-troubles/#:~:text=Vinson went on to describe,countries from further discriminatorylevies
2 Avi-Yonah, Reuven S., Retaliatory Taxation (March 04, 2025). U of Michigan Law & Econ Research Paper No. 24-051, Available at SSRN: https://ssrn.com/abstract=5164343 or http://dx.doi.org/10.2139/ssrn.5164343
3 https://www.whitehouse.gov/presidential-actions/2025/01/the-organization-for-economic-co-operation-and-development-oecd-global-tax-deal-global-tax-deal/
4 https://www.whitehouse.gov/presidential-actions/2025/02/defending-american-companies-and-innovators-from-overseas-extortion-and-unfair-fines-and-penalties/
5 https://www.congress.gov/bill/119th-congress/house-bill/1/text.
6 https://taxlawcenter.org/files/Revenge-taxes-risks-and-uncertainties-06022025-2.pdf
7 https://www.ndtvprofit.com/economy-finance/whats-new-in-the-senate-version-of-trumps-tax-and-spending-bill
8 https://www.finance.senate.gov/imo/media/doc/finance_committee_legislative_text_title_vii.pdf
9 https://taxnews.ey.com/news/2025-1275-summary-of-select-senate-reconciliation-bill-tax-provisions |
