Donald Trump’s withdrawal from the Organisation for Economic Co-operation and Development’s (OECD) Global Anti-Base Erosion (GloBE) Model Rules’ minimum 15% multinational tax rate will set up potential financial and political battles with countries enforcing the agreement. The new US president abandoned ex-President Biden’s support for what he called the ‘OECD Global Tax Deal’ on his inauguration day (20 January) with an executive order.
It argued the agreement ‘not only allows extraterritorial jurisdiction over American income, but also limits our nation’s ability to enact tax policies that serve the interests of American businesses and workers’.
The basic rate of US corporation tax is currently 21% – well above the OECD GloBE floor – but Trump promised to cut federal American corporation tax to 15% during his campaign. That matches the GloBE minimum, but what annoys Trump and his Republican supporters is the potential for US-owned multinationals to be charged extra taxes in GloBE-supporting countries.
‘Day one executive orders addressing tax issues are highly unusual’
That would happen where a multinational’s ultimate parent is based in a non-GloBE country and its overall tax payments are below 15%. The system allows GloBE jurisdictions to calculate what a multinational should pay to meet the minimum rate and charge it extra tax locally.
The executive order tells the US treasury secretary to check if any jurisdiction taking such actions has, as a result, breached a tax treaty with the US or has tax rules ‘that are extraterritorial or disproportionately affect American companies’. If Washington concludes that is the case, Trump will be given ‘a list of options for protective measures or other actions that the United States should adopt or take in response to such non-compliance or tax rules,’ said the executive order.
Doubling warning
A comment from PwC says: ‘Day one executive orders addressing tax issues are highly unusual and illustrate the significance the Trump administration attaches to controlling the US’ ability to set the tax policy it deems best, as well as its unwillingness to support what it believes are the imposition of extraterritorial taxes or taxes discriminating against US companies.’
PwC warns overseas companies and citizens paying tax in the US that their American taxation may double should Trump consider US taxpayers are being taxed unfairly in a foreign jurisdiction. The global network is highlighting Trump’s potential use of section 891 of the US tax code, a 90-year-old rule that gives the president the power to double taxes paid by any taxpayers from a country deemed to be imposing ‘discriminatory or extraterritorial taxes’ on US citizens and corporations.
Trump’s executive order could see Washington invoke the law over other tax policies it deems unfair
University of Melbourne, Australia, legal researcher Miranda Stewart, comments that, theoretically, a tax rate of up to 80% could be levied by the Internal Revenue Service (IRS) on taxpayers from countries complying with GloBE. Calling section 891 ‘an extraordinary provision’, Stewart stresses that Trump’s executive order also goes beyond GloBE and could see Washington invoke the law over other tax policies it deems unfair on US corporations.
Digital giants, such as Google, Meta and X Corp, might cry foul over tax policies such as Australia’s demand that they pay a levy if they do not compensate Australian news publishers for reusing their content, for example.
Tax policy probes
Another concern is that Trump’s executive order says the United States Trade Representative (USTR) would be involved in any overseas tax policy probes. This ‘also suggests that section 301 trade actions may be contemplated’, says KPMG. This refers to powers under the 1974 Trade Act, which allow the USTR to investigate alleged violations by foreign countries of trade agreements with the US or who undertake ‘unjustifiable’ or ‘unreasonable’ acts that burden US commerce.
Will the Trump administration punish such a major and diverse bloc of countries?
Trump has used this section widely, justifying tariffs against China, for example, also preserved by Biden, and now increased by Trump with an additional 10% universal tariff, again using section 301, this time over allegations that China has helped supply illegal opiates to the American public.
Pillar 2
There are 52 countries who have already implemented Pillar Two GloBE Rules who risk US action over the OECD rules, says BDO. Other countries are preparing legislation, such as Hong Kong, Qatar and South Africa, for example. The US has not passed laws backing Pillar Two.
So the question is, will the Trump administration punish such a major and diverse bloc of countries for making US multinationals pay minimum tax rates?
‘We will keep working with the US and all countries to support international cooperation’
A bill being presented to the House of Representatives by its Ways and Means Committee chairman Jason Smith would give the administration fresh legislative authorisation to move ahead beyond section 891. A proposed Defending American Jobs and Investment Act would require the US Treasury to identify extraterritorial and supposedly discriminatory taxes in foreign countries on US businesses. Tax rates on US income of investors and corporations in those foreign countries will rise 5% each year for four years, with the resulting 20% increase remaining while these contested foreign taxes remain.
Meanwhile, OECD secretary-general Mathias Cormann says his body ‘will keep working with the US and all countries at the table to support international cooperation that promotes certainty, avoids double taxation, and protects tax bases’.
Global leaders step up
Of course, a key problem for GloBE supporters is that with Republicans in charge of the House of Representatives, Senate and the US presidency, US backing for the OECD system will not happen again for four years – minimum.
How the rest of the world responds remains to be seen. Hamdy Yahia, tax partner in Andersen’s Egypt office, says the US’ GloBE action ‘introduces significant uncertainty into the international tax landscape’, risking economic isolation for the US, straining international relations and reducing the global tax base.
Looking ahead, the global tax reform agenda either falls or ‘other jurisdictions step up to lead the global tax reform agenda’, he says. ‘Will this mark the beginning of a fragmented global tax order, or will it inspire a new wave of collaboration and transformation?’
