On 20 January 2025, the Trump administration issued an executive order relating to Pillar II (link). It is no surprise that the new administration, as part of the broader trade policy, withdraws the support of the US for the Global Tax Deal's Pillar II. More interesting, the Secretary of Treasury is tasked with proposing protective measures against countries that do not comply with US tax treaties or have in place, or are likely to have in place, 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 strongly political, the compatibility of the (extraterritorial) UTPR with tax treaties has been questioned before.

The scope of any protective measures will likely be dependent on broader trade discussions. It is considered likely that the US will not accept application of the UTPR to profits of US group companies. The question arises as to what else may not be acceptable. Will application of the UTPR to non-US subsidiaries of US group companies be acceptable? Will application of the IIR (Income Inclusion Rule) in respect of US subsidiaries be acceptable? It is expected that the protective measures will contain answers to these questions.

As regards the protective measures themselves, section 891 of the US code as well as a statement of the United States House Committee on Ways and Means (link) may provide indications. In general terms, it would seem that the protective measures could consist of an increase in US tax rates, for example up to 20% or a doubling of the applicable tax rate, for US income of investors and corporations resident in countries that have extraterritorial taxes that affect US companies. Such an increase in US tax rates would put pressure on countries to not implement the UTPR (in any event not with respect 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, consequently, may result in non-participation of other countries in the Global Tax Deal as well. Given the uncertainty resulting from the executive order regarding the application of the UTPR, businesses should remain flexible for the time being in order to be able to respond to developments in the coming months relating to the global implementation of Pillar II.