Attempts to stop some of the world’s biggest companies shifting profits across borders to avoid paying tax are “in peril” following Donald Trump’s definitive win in US presidential elections, experts said.
A global deal inked at the Paris-based OECD in 2021 and partly introduced by several countries — including EU member states, the UK, Norway, Australia, South Korea, Japan and Canada — earlier this year was expected to raise the tax take from the world’s biggest multinationals by up to $192bn a year.
But experts say a crucial pillar that prevented large companies paying less than a minimum effective tax rate of 15 per cent on their corporate profits worldwide would be undermined by Trump’s second term.
“Pillar two is in peril,” said Wei Cui, a tax law professor at the University of British Columbia.
The structure of the OECD deal means it could affect US multinationals even though Washington has not signed it into law, despite being party to the agreement.
Under pillar two, if corporate profits were taxed below 15 per cent in the country where the multinational was headquartered, signatories could charge a top-up levy, known as the undertaxed profits rule (UTPR).
But experts believe that countries will now be unlikely to apply the rule to US companies for fear that a Trump-led administration would retaliate against them — including through steep tariffs on their US exports.
Rasmus Corlin Christensen, an international tax researcher at Copenhagen Business School, said he thought “punitive tariffs” seemed the most likely option “given the preferred policies of the incoming administration”.
On the campaign trail, Trump said he would impose 60 per cent tariffs on all Chinese goods and across-the-board levies of 10 to 20 per cent on the rest of the world. Many of his advisers say that he wants to use these tariff threats to carve out better deals for US companies globally.
“There would be criticism and potential retaliation against jurisdictions enforcing UTPRs [from the new US administration],” said Daniel Bunn, chief executive of the Tax Foundation, a US think-tank.
“People are going to be more hesitant to apply the UTPR because Trump is in power,” said Cui.
An OECD spokesperson said they would “continue working with all countries to ensure a fair, rules-based international tax system”.
The US championed the OECD plan under the Biden administration but failed to pass it in Congress, partly because of Republican resistance.
Republican Congressman Jason Smith last year described the deal as “Biden’s global tax surrender”. He also attacked the reforms for “killing American jobs, surrendering sovereignty over our tax code and handing a competitive advantage to the Chinese Communist party”.
Last year, Smith drafted a bill to increase the tax rate on profits of companies headquartered in jurisdictions with “extraterritorial and discriminatory taxes” against US multinationals.
The bill was never legislated, however.
Bunn said tariffs and the draft Republican bill would likely be “part of the discussion”, when it came to potential retaliatory measures by the US.
Both Bunn and Cui said Canada was likely to be in the US’s sights.
Along with the OECD deal, the US’s northern neighbour has also implemented a digital services tax, which levies 3 per cent on revenue exceeding C$20mn ($14.4mn) and will affect several US tech companies.
“I think they will be targets for retaliation just like other jurisdictions,” Bunn said. “Canada is one of the US’s largest trading partners. I think it would be very bad for there to be escalation . . . both in terms of trade wars and tax.”
The EU, which as a jurisdiction has seen the most countries implement the global minimum tax, was the other “most obvious target” of US retaliation, according to Corlin Christensen.
“The UTPR is a significant part of what makes the global minimum tax effective, so it would be a significant problem if it were to be weakened,” he added.
The first pillar of the OECD reform, which countries were already struggling to finalise, is also unlikely to progress with Trump at the helm, according to analysts.
The pillar seeks to make big tech groups and other multinationals pay more tax in the place in which they do business. However, that would require the US to agree to other countries gaining taxing rights over their companies.
“The question about pillar one for some time has been: when do you declare it dead, and I think maybe [November 6] is the death declaration,” said one person with knowledge of the international negotiations.
One of the risks for multinational businesses was that if pillar one were to fail, “that might lead to a flood of digital services taxes” as countries introduced levies on tech companies unilaterally, said Will Morris, global tax policy leader at PwC.
But countries taking this path could also draw retaliation from the new US administration, said analysts.
The previous Trump administration instigated investigations into 11 nations that had either imposed digital services taxes or were planning to do so.
The then US trade representatives served section 301 notices — a procedure used by administrations to slap tariffs on imports — on all 11 countries.
“Anyone who takes DSTs forward unilaterally must expect countermeasures from the US,” Alex Cobham, chief executive of Tax Justice Network, a global campaigning group, said. “The idea it might show some restraint should not be taken very seriously.”
Some jurisdictions might be willing to take the risk. On Thursday, EU officials did not rule out going it alone and imposing big levies on US tech groups if pillar one failed.
Wopke Hoekstra, the official in charge of EU tax policy in the incoming European Commission, said: “It cannot be that we are not going to tax these [tech] companies because we cannot come to a global agreement.”
He added: “The preference is to do it globally. If that is not possible, I will have to convene with EU finance ministers and find a second-best solution.”
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