Trump's America First Trade Policy and Section 891: Potential Double Taxation for US Expats
The America First Trade Policy Memorandum on Transnational Subsidies
On January 20, 2025, President Trump issued a memorandum outlining the "America First Trade Policy." This directive instructs various federal agencies to:
- Investigate the causes of the U.S.'s trade deficits and recommend corrective measures, potentially including global supplemental tariffs.
- Assess the feasibility of establishing an External Revenue Service to collect tariffs and other trade-related revenues.
- Review and identify unfair trade practices by other countries and suggest appropriate actions to address them.
- Evaluate the impact of existing trade agreements, such as the United States-Mexico-Canada Agreement (USMCA), on American stakeholders and consider the U.S.'s continued participation.
This is all relatively in line with his rhetoric during the campaign and since taking office. While much of the directive focuses on familiar themes like trade deficits and tariffs, a single paragraph carries significant implications for international taxation:
(j) The Secretary of the Treasury, in consultation with the Secretary of Commerce and the United States Trade Representative, shall investigate whether any foreign country subjects United States citizens or corporations to discriminatory or extraterritorial taxes pursuant to section 891 of title 26, United States Code.
This is a small sentence that gives a very broad power to the President and the Treasury as a whole.
The directive also emphasizes the need to review and recommend modifications to export control measures, particularly concerning certain national security technologies, to maintain technological advantages while addressing strategic threats from geopolitical rivals.
Background on Trump's America First Trade Policy
The America First Trade Policy, introduced by President Trump, aims to prioritize American interests in international trade. This policy is designed to address trade deficits, combat unfair trade practices, and promote investment and productivity within the United States. By focusing on these areas, the policy seeks to benefit American workers, manufacturers, farmers, ranchers, entrepreneurs, and businesses.
At its core, the America First Trade Policy is based on the belief that the United States has been disadvantaged by unfair trade practices from other countries. We've all heard about tariffs being used as a tool in this trade war, and establishing an External Revenue Service to oversee the collection of tariffs and other trade-related revenues.
Most coverage doesn't dig in beyond this headlining strategy, today we're going to look at some of the additional strategies that are starting to surface. Which brings us back to Section 891 and the incredible impact it might have on expats and international businesses.
Understanding Section 891: A Dormant But Powerful Tool
Enacted in 1934 and codified in the Internal Revenue Code of 1954, Section 891 was designed to protect U.S. economic interests by deterring foreign nations from imposing unjust tax burdens on American entities. Despite its presence in the tax code for decades, there is no record of Section 891 being invoked by any President to date.
The provision states:
"Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country"
Essentially, this provision grants the President the authority to double the tax rates on citizens and corporations of foreign countries that impose discriminatory or extraterritorial taxes on U.S. citizens or corporations.
Along with this, it's important to note that The Organization for Economic Cooperation and Development (OECD) plays a significant role in international tax negotiations, and recent executive orders have nullified U.S. commitments to the OECD's Global Tax Deal.
Practical Implications: The Impact of Trade Policy on US Expats
The America First Trade Policy has significant implications for US expats, who may find themselves affected by changes in trade agreements and tariffs. For US expats working for American companies abroad, these changes could impact their employer’s ability to operate in certain countries, potentially affecting job security and business operations.
US expats who own businesses abroad might also feel the effects of new tariffs, which could increase the cost of importing goods into the United States. This could lead to higher operational costs and reduced profitability for their businesses. Additionally, US expats who invest in foreign companies may face challenges if changes in trade agreements affect those companies’ ability to operate in specific markets.
To understand the potential impact, consider these scenarios:
Scenario 1: US Expat in High-Tax Country
A dual US/UK citizen living and working in London. Under the current tax regime, this individual will pay tax in the UK and also report his income to the US. Since the US tax rate on his wages is lower than the UK (37% vs 40%), he would receive a full foreign tax credit in the US and effectively only pay tax in the UK.
- Current UK tax rate: 40%
- Current US tax rate: 37%
- Foreign tax credit wipes out the US tax.
If Sec. 891 were invoked, his US tax rate would be 74% (37x2) and therefore would pay the UK 40% plus an additional 34% back to the US.
- Under Section 891: US rate would double to 74%
- Net effect: Pay 40% to UK plus additional 34% to US
Scenario 2: Foreign Nationals living/working in the US
This same scenario could play out with a citizen of a deemed “discriminatory” country living in the US. For example, a Chinese or Canadian citizen in the US would have a double tax rate. Their country might not tax their activities here, so the impact isn't quite the same as it is for US expats - but this would be a brutal tax rate.
For corporations, the impact would be equally severe:
- Standard US corporate tax rate: 21%
- Under Section 891: Rate doubles to 42%
- Effect: Significantly higher tax burden for affected foreign corporations
Key Questions and Uncertainties
Several critical questions remain unanswered:
- How would existing tax treaties interact with Section 891?
- What constitutes "discriminatory" taxation?
- How would this affect foreign tax credit calculations?
- What implications exist for international business planning?
Analysis and Outlook
This is a very powerful tool which gives the US significant leverage in the international trade negotiations - but it would cause a lot of hardship to the affected individuals and companies.
There would still be a lot of questions as to how this would play out practically. For example, how would an existing tax treaty affect this double taxation which it was installed to specifically prevent?
This is a provision that the President has in his toolbox but is not currently being implemented. My personal opinion is that this will be used as a bargaining tool in future trade negotiations but is unlikely to be actually implemented. But at the end of the day, a bargaining tool is only as good as your willingness to use it. So it is worth keeping an eye on this as trade negotiations take place under the new administration.