Foreign Trade Barriers

Apr 1, 2025

2025 National Trade Estimate Report

Insight: Highlights and Geopolitical Pressures

On March 31, 2025, the U.S. Trade Representative released the 2025 National Trade Estimate Report on Foreign Trade Barriers (the “Report”), in which it evaluated 60 foreign countries. The largest trading partners with the United States.

The Report highlighted practices that the United States deems to be discriminatory towards U.S. companies or that create a competitive disadvantage. Among these are barriers to:

U.S. investments in the foreign country,
Insufficient policies and actions to protect intellectual property rights,
Cumbersome policies, process, delays, and lack of transparency in obtaining regulatory approvals for various industries, including agriculture, biotechnology, renewable energy, wine, pharma, e-commerce, professional services, among others,
Corruption and lack of transparency in procurement practices and selection process,
Custom and other trade barriers
Tariffs,
Discriminatory taxes, at the forefront of which are Digital Services Tax (DST), Value-Added Tax (VAT), the OECD initiative under Pillar One and Pillar Two.

The top three trading partners with the United States are Canada, Mexico, and China. The Report describes at length its findings for each of these countries and highlights what continues to barriers to fair international trade.

Digital Services Tax

The unilateral implementation of DSTs by several countries has led to geopolitical tensions, particularly with the United States, as these taxes often disproportionately affect U.S.-based tech giants. The U.S. has responded by investigating and threatening retaliatory tariffs, arguing that DSTs unfairly target American companies. For more details, please see our insights on DST.

Value-Added Tax

VAT affects trade costs and practices in various countries, creating challenges for international trade.

OECD – Two Pillar Approach

The OECD and G20 have been working on a coordinated international approach through the Base Erosion and Profit Shifting (BEPS) project. The OECD's two-pillar solution aims to:

Pillar One: Reallocate taxing rights to market jurisdictions, allowing countries to tax a portion of the residual profits of MNEs.
Pillar Two: Establish a global minimum tax to prevent profit shifting to low-tax jurisdictions.

In July 2023, the OECD/G20 Inclusive Framework released a statement on this two-pillar solution, aiming to prevent the proliferation of DSTs and enhance international tax stability.

As of today, many countries have adopted Pillar Two measures, with adoption to taxing extraterritorial profits via an under-taxed profits (UTPR) regime being deferred. However, the United States, through an executive order issued on January 20, 2025, affirmatively directed Treasury to inform that OECD that any commitments made by the Biden Administration regarding Pillar One and Pillar Two are non-binding without congressional approval.

Challenges and Future Outlook

The success of these international efforts depends on the willingness of countries to compromise and align their tax policies with proposed international standards.

Available measures at U.S. disposal: Section 891

IRC Section 891 allows the President to double U.S. taxes on corporations and citizens of foreign countries that target American companies with discriminatory taxes. The code section was enacted in 1934 and remains unused. President Trump, through an executive order issued on February 21, 2025, mandated its agencies to consider it as a tool in evaluating retaliatory measures against practices by foreign countries that impose undue burdens on American companies.

Other Potential Measures

On 21 January 2025, members of the Ways and Means Committee of the US House of Representatives introduced H.R. 591, the ‘Defending American Jobs and Investment Act,’ to add IRC Section 899 to the US tax code.

If enacted, IRC Section 899 would increase taxes on the US income of foreign individuals and entities from a jurisdiction with an extraterritorial or discriminatory tax, such as an Under-Taxed Profit Regime (UTPR) in the Pillar Two rules or digital services tax, in increments of 5% each year for four years.

After four years, the cumulative 20% additional tax will apply each year the targeted tax remains in effect.

Furthermore, the proposal includes language that would override the treaty, effectively deny treaty benefits to individuals and entities located in a foreign jurisdiction imposing extraterritorial or discriminatory taxes.

A unified approach remains a challenge

The OECD's two-pillar approach represents a significant step towards achieving a global consensus, However, challenges remain due to differing national interests and the complexity of the issues involved as we are seeing with the United States protecting U.S. companies, its territorial jurisdiction and taxing rights, without surrendering it to other jurisdictions as may be one of the potential effects of U.S. companies subject to the UTPR regime under Pillar Two.

Furthermore, the numerous foreign barriers to international trade for U.S. companies will continue to give rise to geopolitical tensions until cooperation is achieved.

It remains to be seen what measures the United States will introduce in response to the Report's findings. We await announcement by the Trump Administration as early as April 2, 2025.

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Disclaimer:

The contents of this insight are intended for general information only. illumina CPA Group, Inc. is not, by means of this communication, rendering professional advice or services. Before making any decisions or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.