Edited by Alessandro Di Stefano, Dario Sencar, Giuseppe Falduto
In addition to the new tariffs announced by President Donald Trump on imports from Canada, Mexico, and China, Italian companies operating in the United States may face further challenges due to the escalating intensity of the trade and fiscal war. Among these challenges is the risk of an increase in tax rates on U.S.-source income (e.g., dividends, interest, and royalties) paid to entities located in countries with legislations considered extraterritorial or discriminatory towards the United States, which may include Italy.
But let’s take a step back.
America First Trade Policy
Upon taking office, President Trump signed two significant executive orders. The executive orders outline actions that President Trump could take or suggest to Congress in response to regulations from other countries with extraterritorial or discriminatory effects.
The first executive order, concerning the OECD’s Global Minimum Tax Pillar 2 (GMT(P2)), effectively nullifies the U.S. participation in the political agreement reached by over 130 countries in 2021. The second introduces a series of directives to implement the “America First Trade Policy,” making reference to a previously unused U.S. tax provision, specifically Section 891 of the Internal Revenue Code (IRC). If activated, this provision could adversely affect foreign multinational companies operating in the United States.
Section 891 IRC and Doubling of Tax Rates
Section 891 of the IRC allows for the doubling of tax rates on U.S.-source income generated by entities (companies and individuals) from countries whose regulations are found to be extraterritorial or discriminatory towards U.S. citizens or corporations. Such regulations could include digital services taxes (DST), such as the one introduced by Italy, and the UTPR outlined in GMT(P2).
According to the formulation of Section 891, if the president declares that any country has extraterritorial or discriminatory legislation concerning the United States, the doubling of tax rates applies for the entire fiscal year, regardless of when such a proclamation is made.
- For example, if on February 15, 2025, a U.S. subsidiary of an Italian group makes a payment of interest or dividends, benefiting from U.S. tax treatment based on the treaty between the United States and Italy, and subsequently, on March 31, President Trump declares that the foreign jurisdiction (e.g., Italy) has an extraterritorial or discriminatory tax regime, any payment made before the proclamation and subsequent payments within the same fiscal year risk being subject to a withholding tax of 60% (double the domestic withholding rate of 30%), irrespective of any changes made by the country (e.g., Italy) to eliminate extraterritorial or discriminatory provisions within the same fiscal year.
Furthermore, if Italy were to amend its laws to eliminate discrimination or extraterritoriality, the tax rates would revert to normal rates in the following fiscal year.
- Thus, in our example, if during 2025 Italy removed the withholding regime deemed discriminatory by the United States, the normal rates would only apply starting in 2026.
One might argue that Section 891 conflicts with tax treaties and therefore should not take effect concerning countries with which the United States has a double tax treaty. However, there remain questions concerning the application of the specific treaty, and arguments may be raised or actions taken to override the treaty itself (the so-called “treaty overriding”).
Next Steps and Recommendations
Considering the above, it is clear that there is a risk that payments made now by U.S. subsidiaries may be subjected to a withholding tax in the United States of 60%.
The U.S. Secretary of the Treasury is expected to present a specific report by April 1, 2025, containing the findings of an investigation into the tax regimes and countries considered discriminatory.
In the meantime, Italian companies with operations in the United States should carefully assess their operations, considering the impact of potential actions by U.S. authorities. It is advisable to seek greater clarity before proceeding with payments subject to U.S. taxation and to closely monitor the developments of President Trump’s executive orders.
Let’s Talk
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