The new U.S. administration pulled out of a landmark 2021 OECD international tax agreement and ordered the Treasury and the United States Trade Representative to investigate whether other countries impose extra-territorial or discriminatory taxes on U.S. companies, which could open the door to trade retaliation and punitive tax measures targeting foreign companies and individuals located in the United States as well as lead to broader conflict over the taxation of U.S. tech companies. On January 20, the new U.S. administration notified the OECD that any commitments made by the Biden administration will have no force within the United States. Under the OECD agreement, 140 countries committed to imposing a global minimum tax on large multi-national companies (MNCs). The administration also directed the Treasury and the United States Trade Representative to investigate the tax policies of other countries in view of extraterritoriality and discrimination and to present the president with a list of options of how to respond within 60 days. The Treasury and the USTR are to publish its findings within 60 days. If they find countries to be discriminating U.S. companies, the administration will be able to put raise taxes on them or take retaliatory trade measures.
> The 2021 OECD-sponsored international tax agreement comprises 140 countries and aims among other things to limit inter-jurisdictional tax competition and the erosion of national tax bases by limiting the ability of multi-national companies (MNCs) to shift profits to low tax jurisdictions.
> The agreement consists of two pillars. Pillar 1, applying to about 100 of the world’s largest MNCs, aims to reallocate a share of MNC-related taxes between jurisdictions. Pillar 1 negotiation have proven contentious and have not been finalized. The Joint Committee on Taxation estimates that if Pillar 1 were implemented the US would lose $ 1.5 billion in revenue per year and that 70% of reallocated taxes would come from US MNCs. Pillar 2 establishes a global minimum tax of 15 percent. The minimum tax allows for the imposition of top-up taxes in case the tax of the jurisdiction where the MNC is headquartered has a corporate tax of less than 15 percent. The o implementation of Pillar 2 was estimated to raise more than $ 200 billion in additional revenue.
> Existing domestic legislation (Section 891 of the Internal Revenue Code) allows the Trump administration to double taxes on companies and citizens of countries that are found to impose discriminatory taxes on companies. The legislation has never been invoked, no regulation pertaining to it has been promulgated, and it is not clear how the provision would apply in practice.
If Treasury finds a country to be imposing discriminatory or extra-territorial taxes on U.S. persons, the executive will be able to double the tax rates for affected foreign companies and individuals without requiring congressional approval, and the Treasury and USTR may find provisions pertaining to the 15% global minimum tax as well as national digital services to discriminate against U.S companies. The OECD agreement was meant to resolve the conflict national digital services taxes. The conflict is a straightforward distributional conflict between the United States and other countries. The failure to finalize the tax agreement, especially Pillar 1, will also lead countries to introduce digital services taxes, which are strongly opposed by the U.S. But failure of Pillar 1 may lead more countries to introduce digital services taxes and lead to increased tensions with United States. Faced with the prospect of much higher U.S. taxes, most countries may find the costs of U.S. unfriendly measures outweigh the benefit of maintaining “discriminatory” taxes, including global minimum and digital services taxes. Smaller countries will find it difficult not to make substantial compromises. Even larger economies, like the EU, have already signaled their willingness to start talks with Washington. There may be room for compromise given that current US corporate tax regime in terms of rates is not way out of line with the 15 percent minimum tax, even if a different U.S. approach to the treatment of R&D and the grouping of international income into a blended rate might force U.S. MNCs to pay a top-up levy under the so-called undertaxed profit rule.
> In December 2022, the European Union unanimously moved forward to implement this country- by-country minimum tax by issuing a Council Directive (Pillar 2). Most EU countries with 12 or more MNCs enacted the Pillar 2 related income inclusion provision in 2024 and the undertaxed profit rule in 2025. Smaller EU countries were allowed to defer their implementation by up to 6 years.
> In 2019 and 2020, USTRA Section 301 investigations found that digital taxes imposed by Austria, France, India, Italy, Spain and Turkey and US were discriminatory, but both the Trump and Biden administration suspended retaliatory trade measures following their commitment to remove the taxes following the successful conclusion of Pillar 1 negotiations.
> Another 140 countries agreed to a moratorium of new digital services taxes. This agreement has now lapsed. Relatedly, the WTO moratorium on customs duty on electronic transmissions was extended in March 2024 for another two years.
The investigation into the discriminatory tax treatment of U.S. companies overseas will further increase economic uncertainty and has the potential to lead the U.S. to introduce punitive tax rates on foreign companies located in the United States as well as retaliatory tariffs on countries found to impose a 15% percent minimum tax and/ or national digital services taxes. As many MNCs and especially tech MNCs are American, the introduction of a global 15 percent tax would make it more difficult for MNCs to shift their profits to low-tax jurisdiction. The minimum tax also imposes a higher tax burden if the corporate tax rate in the home country is lower than 15 percent. Under Pillar 2, large companies pay more taxes in countries where they have customers and less in countries where headquartered if the corporate minimum tax in their home country is lower than 15 percent. From an U.S. perspective, higher foreign taxes mean less income for shareholder of US companies. It may also lead to lower taxes to the extent that higher foreign taxes translate into domestic tax credits.
> The tax agreement risks increasing taxes on U.S. multi-nationals and to reallocate tax revenue away from the United States. Conflict over digital services taxes are a long-standing source of tensions between the United States and the rest of the world and will be revived with force if Treasury or USTRA find them to be discriminatory. Targeted countries could then be faced with tax and tariff threats, which could prove highly disruptive to their economic relationship with the United States.
> Previous U.S. administrations opposed the introduction of national digital taxes. About half of EU members have announced, proposed or enacted digital services taxes. Trump administration launched Section 301 investigations. The first Trump administration launched a Section 301 investigation and threatened tariffs in response, which led to a moratorium pending the conclusion of Pillar 1 talks. The USTR threatened to impose a 25% tariff on $1.3 billion worth of goods.
> The U.S. Global Intangible Low-Taxed Income (GILTI) tax imposes a minimum rate of 10.5 percent on a globally blended basis. However, because this tax rate is lower than the Pillar 2 minimum tax, it does not conform to the Pillar 2 rules and would subject many US MNCs to the so-called UTPRs abroad, forcing US multinationals to pay higher taxes in foreign jurisdictions under Pillar 2.
The change of the U.S. stance on international taxation mirrors the greater reliance of unilateral measures to exploit economic dependence of other countries on the United States, and creates an additional source of economic friction. First, the U.S. exiting the OECD agreement and threatening to impose discriminatory taxes on selected countries will further undermine multilateralism and reflects a broader shift toward greater unilateralism under the Trump administration aimed at leveraging U.S. bargaining power. Second, by abandoning the global minimum corporate tax and, depending on the outcome of the Treasury investigations, economically weaker countries may be forced to abandon or scale back national digital taxes as well as a 15 percent minimum corporate tax, which will lead to a further erosion of their tax or lead them to forego revenue they would have received under the OECD agreement. This is particularly painful at time when both borrowing, and debt are high across advanced, emerging and developing economies.
> The OECD estimates that the implementation of Pillar 2 would raise global tax revenue by $ 200 billion. The bulk of the additional taxes would go to advanced economies. But emerging and developing would nevertheless have received additional government income in the form. If these countries decide to abandon the 15% minimum tax and/ or digital taxes in response to U.S. pressure, they will forego much needed revenue in the face of continued and increasing fiscal and debt challenges. Every dollar counts.