By Anthony N. Verni, Attorney at Law, CPA
Series: International Tax Reform 2025 – Part 4 of 6
Tax treaties have long shaped how nations coordinate taxation, prevent double taxation, and share taxing rights. But with the rise of the Pillar Two global minimum tax rules and the United States’ withdrawal from the framework, treaty interpretation and creditability questions are more uncertain than ever. Modern planning around tax treaties and Pillar Two now requires navigating conflicting domestic rules, non-creditable top-up taxes, and rapidly multiplying digital services taxes (DSTs).
The Role of Tax Treaties in a Globalized World
Tax treaties have long served as the framework for cross-border certainty—allocating taxing rights, reducing double taxation, and encouraging trade. At their core, U.S. treaties prevent double taxation, define permanent establishment thresholds, provide nondiscrimination and MAP procedures, and limit withholding taxes on dividends, interest, and royalties.
OECD’s Two-Pillar Solution – A Brief Refresher
The OECD/G20 Inclusive Framework designed a two-part approach:
Pillar One reallocates taxing rights for large digitalized companies.
Pillar Two establishes a 15% global minimum effective tax rate using:
- Top-up taxes
- Income Inclusion Rule (IIR)
- Undertaxed Payments Rule (UTPR)
- Qualified Domestic Minimum Top-up Taxes (QDMTTs)
More than 50 jurisdictions have enacted Pillar Two, but the United States has not.
Practice Insight:
U.S. non-participation does not shield American groups. Their foreign subsidiaries are still subject to local Pillar Two top-up taxes, which may not be creditable under section 901.
The U.S. Steps Back – 2025 Policy Shift
In 2025, Congress formally withdrew support for the OECD global minimum tax framework. The OBBBA did not adopt a domestic minimum tax aligned with Pillar Two. Because the U.S. provides foreign tax credits only for income taxes in the U.S. sense, many QDMTTs and book-income-based top-up taxes may fail the §901 creditability tests.
This divergence is creating a fragmented global system, increasing exposure for U.S. multinationals.
The Emerging “Tax Fragmentation” Landscape
The international tax map is splitting into three camps
- Countries adopting full Pillar Two rules
- Countries modifying the rules to fit domestic policy
- Countries ignoring the framework entirely
At the same time, DSTs have proliferated—often outside treaty protections. Foreign jurisdictions are also treating top-up taxes inconsistently, with some classifying QDMTTs as covered taxes, while others explicitly exclude them. Understanding these differences is now a core part of risk management.
For reference, Verni Tax Law’s International Tax Services overview provides helpful context for cross-border compliance exposure. Check here.
Creditability Crisis Under §901
Under IRC §901, U.S. taxpayers may claim credits only for foreign levy and income taxes that are compulsory, imposed on net income, and based on realized gain or profit. Pillar Two top-up taxes often apply to book income or adjusted ETR rather than taxable income, meaning they may not be creditable without new legislation.
Practice Insight:
Attorneys should advise clients to treat QDMTTs and Pillar Two top-up taxes cautiously—consider claiming them as deductions under §164(a)(3), not credits, until guidance is issued.
Treaty Override vs. Treaty Interpretation
A. Treaty Override Risk: Under IRC §7852(d), Congress can override treaties through later statutes. Foreign jurisdictions implementing unilateral top-up taxes may likewise override treaty limitations on business profits or non-discrimination clauses.
B. Treaty Interpretation: Courts and competent authorities may interpret treaties in light of BEPS reports, even though the U.S. is not bound by Pillar Two.
The Rise of Unilateral Digital Taxes
Major economies such as France, Italy, India, and the U.K. continue to impose digital services taxes targeting U.S. tech companies. These gross-receipts-based levies are non-creditable under §901, resulting in potential double taxation and expanding MAP caseloads.
Practice Insight:
DSTs are often excluded from treaty coverage. If your client is subject to a DST, disclose a treaty-based return position under IRC §6114 using Form 8833 to preserve audit defensibility.
Mutual Agreement Procedure (MAP) Under Strain
MAP, governed by Article 25 of most U.S. treaties, allows competent authorities to resolve double-tax disputes. With Pillar Two and DST overlap, MAP caseloads have surged, and many disputes fall outside treaty scope. Taxpayers should file timely MAP requests, maintain contemporaneous documentation, and coordinate MAP with local appeals or arbitration.
Practical Steps for U.S. Multinationals
- Inventory treaty positions and identify affected jurisdictions adopting Pillar Two.
- Determine creditability of top-up taxes or DSTs under §§901 and 903.
- Evaluate restructuring: shift IP or holding companies to treaty jurisdictions with favorable MAP access.
- Monitor OECD Inclusive Framework updates for safe harbors.
- Update ASC 740 tax provision reporting.
Practice Insight:
Multinationals should anticipate non-symmetrical relief—the U.S. may not credit foreign minimum taxes even though other countries credit U.S. taxes. This asymmetry is now a core compliance issue.
Key Authorities and References
- U.S. Model Income Tax Convention (2016)
- IRC §§894, 7852(d), 6114
- Treas. Reg. §301.6114-1
- OECD Model Tax Convention & Commentary
- Pillar Two Model Rules (2021)
- IRS Treaty Interpretation Practice Units
- IRM 4.60.1 – International Treaty Guidance
The Future of Tax Diplomacy
The global system is shifting from harmonization to competition. Without U.S. participation in Pillar Two, multinational enterprises face overlapping regimes, double taxation risk, and increased MAP coordination demands.
Conclusion
The post-2025 era marks the end of universal treaty consensus. Attorneys must move from static treaty interpretation to dynamic management—monitoring how domestic laws reinterpret or override treaty obligations. In a fractured world, proactive treaty management is essential.
