A new U.S. tax proposal is making waves in international business circles—and for good reason. Tucked into the high-profile “One Big, Beautiful Bill” is a provision targeting what some U.S. lawmakers consider “unfair” foreign tax regimes. At the heart of this proposal is a direct challenge to a key piece of the Organization for Economic Co-operation and Development’s (OECD’s) global minimum tax framework, and the ripple effects could impact multinational companies, trade negotiations, and compliance strategy alike.

Over the past few years, nearly 140 countries have signed on to the OECD’s two-pillar global tax framework. Pillar Two, the more widely adopted element, establishes a 15 percent minimum tax rate on multinational enterprises (MNEs) in each country where they operate. This is enforced through a layered system that includes the Undertaxed Profits Rule (UTPR), Income Inclusion Rule (IIR) and Qualifying Domestic Minimum Top-Up Tax (QDMTT).

Under former President Joe Biden, the Treasury Department worked to conform the tax code to Pillar Two, rather than signing onto the OECD Pillars which included guidance on how global minimum tax interacts with GILTI. GILTI (global low-taxed income) along with FDII (foreign-derived intangible income) and BEAT (base erosion anti-abuse tax) are deductions that were introduced by the Tax Cuts and Jobs Act (TCJA) and overhauled the U.S. international tax laws in 2017. Some U.S. MNEs could see an increase in the effective annual tax rate (EATR) of 6.5 percent because the “use of new foreign tax credits” against “residual GILTI liability” will not be allowed.