There has been such a flurry of mad statements and demagogic executive orders from Donald Trump since he retook the White House that one can easily be discombobulated and miss important details. So allow me to drill down on one particular policy you might have missed, as it wasn’t widely covered in the Australian media.
Trump has withdrawn the US from a global agreement on corporate taxation brokered by the OECD. The agreement was the most ambitious effort so far to prevent multinational companies artificially shifting their profits to jurisdictions with lower tax rates, like the Cayman Islands.
The US withdrawing will weaken the deal’s effectiveness and could embolden other countries to renege on their obligations too. It is a major boon for the large companies, such as Meta and Google, that are alleged to have engaged in tax minimisation techniques. Some of their CEOs have rallied around the new president since his victory in November, and this suggests their arse-kissing is already paying off.
The language in Trump’s memorandum suggests his administration could even go further, and shield US-based multinationals from foreign taxation in more radical ways. And the Australian government has particular reason to watch on with nervous anticipation.
What was the global tax agreement?
The deal, known as the Base Erosion and Profit Shifting project (BEPS), was agreed to by 134 OECD member jurisdictions in 2021. It contained two “pillars”.
Pillar One reallocates a portion of a multinational’s residual profits to the jurisdictions where their services were consumed, regardless of where their offices are physically located, so profits can’t be shifted around as easily. Pillar Two established a global minimum corporate tax rate of 15%, to prevent a race to the bottom.
However, even prior to the US’s withdrawal, countries had been bickering over the details, causing the deadline for implementation (June 30, 2024) to be pushed back indefinitely. One major hang-up has been Pillar One’s “transfer pricing” i.e. how much of a company’s profits are allocated to each jurisdiction. Even the Albanese and Biden administrations, both strong backers of the deal in general, have come to recent blows over these technicalities.
The Trump administration’s ire, however, seems to have been drawn by the proposed enforcement of Pillar Two. If a company is based in a jurisdiction with lower than 15% company tax, many countries have committed to charging them “top up taxes” on their foreign business to even things out. Trump has vowed that if any such taxes are imposed on US-based companies, he would retaliate against the countries imposing them. Exactly what form that retaliation would take remains unclear, but we know Trump has a penchant for tariffs.
Given the stalling of the BEPS, some countries got sick of waiting and sought to apply interim taxes of their own, particularly on large digital platforms like Meta and Google. But Trump’s memo appears to cast these as “retaliatory” too, meaning they could also provoke a fight.
Does the US withdrawing mean game over?
Not all is lost. Many countries have already passed laws to enact the BEPS, which won’t evaporate just because Trump threw a tantrum. Patchy progress is better than none. The OECD, under the leadership of former Australian politician Mathias Cormann, is also trying to stay upbeat, vowing to continue working with signatory nations — including the US — to reach an amicable settlement.
And even with a less coordinated approach, many countries are making individual progress. The Fair Tax Foundation believes “the global race to the bottom on corporate income tax [has] finally bottomed out”, with more jurisdictions hiking corporate tax than lowering it in 2023.
But Trump’s actions will undoubtedly hamper further progress, potentially emboldening recalcitrant countries to dig in their heels and frightening some countries away from enforcing the deal against US-based companies — some of the worst offenders.
Australia particularly stands to lose from Trump’s recalcitrance. Australia is the seventh biggest loser of revenue to multinational profit shifting globally, losing US$24 billion per year. Each dollar lost is money Canberra can’t spend on schools, hospitals, transport and welfare.
And it might get even worse…
Perhaps the scariest interpretation of Trump’s memo is that he could go even further than the immediate actions he has outlined. His language leaves open the possibility of a radical undermining of global tax rules.
For instance, his memo complains that the BEPS “allows extraterritorial jurisdiction over American income”. As the Tax Justice Network (TJN) points out, this could be read as calling into question “the right of any country to tax American multinational corporations” whatsoever. Under such an interpretation, literally any country imposing any taxes on US companies (that’s most countries) could be subject to Trump’s wrath. This would, according to TJN, turn the clock back to a pre-WWI time “when companies could only be taxed by the imperial power they came from”.
But even if Trump loses interest in such a sweeping offensive, Australia could find itself in more targeted crosshairs. Another White House memo suggests Republican officials will go looking abroad for “discriminatory” taxes on US-based companies. As the University of Melbourne law professor Miranda Stewart notes, the Albanese government’s news media bargaining code could jump out at them. And you can bet Mark Zuckerberg will be cashing in any brownie points he has gained from sucking up to Trump by pointing him in our direction.
There will be plenty of distracting antics in Trump’s second term, but we must keep our eye on the ball. One of the defining achievements of Trump’s first term was a massive tax cut for large US companies and the richest Americans. This time around, he looks to be taking that agenda global.
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