Donald Trump’s second time period within the White Home threatens to set off world spats over tax, with specialists voicing considerations over Republican vows to penalise international locations making use of additional levies to US multinationals.
The top of tax at one massive multinational advised the Monetary Occasions that 2025 “could be the year that everything goes to hell in a handbasket and businesses get caught in the middle”.
Alan McLean, chair of the Business at OECD tax committee, which represents enterprise pursuits in discussions among the many Paris-based group of wealthy economies, stated the imposition of tariffs in response to world tax measures “could hamper economic growth by raising operational costs for businesses and increasing prices for consumers”.
The disputes are specializing in Republicans’ unhappiness a couple of important factor of a worldwide tax pact agreed on the OECD that from this 12 months will enable different international locations to levy top-up taxes on US multinationals.
Trump, a self-described “tariff man”, has typically threatened to resort to utilizing the levies to make sure that the pursuits of US companies and households are protected. Since profitable the US election, the president-elect has threatened to tear up a free commerce settlement with Canada and Mexico and impose 25 per cent tariffs on imports from its neighbours.
Tax specialists imagine the EU is within the crosshairs of Republicans, who’ve branded a key a part of the OECD deal, referred to as the undertaxed earnings rule and also known as the UTPR, as “discriminatory”.
The rule permits international locations to extend taxes on a neighborhood subsidiary of a multinational group if the multinational pays lower than 15 per cent of company tax in some other jurisdiction. The rule would imply different international locations would be capable to levy top-up taxes on US corporations.
“There is a broad feeling among Republicans that US companies shouldn’t be paying the UTPR,” stated Aruna Kalyanam, EY’s world tax coverage chief.
The EU enacted the measure beneath a directive in 2022, however some specialists imagine the bloc may compromise with Trump on its enforcement in return for beneficial therapy of its exports.
The EU has a commerce surplus with the US of €158bn, in keeping with figures from the European Fee.
“Europe has a strong legal culture and law is law, but I can imagine a future arrangement between Trump and the EU where the EU will give up the UTPR for the sake of not getting engaged in an economic war,” stated Valentin Bendlinger, a senior marketing consultant at ICON Wirtschaftstreuhand, a tax consultancy firm in Austria.
Nevertheless, others say {that a} change is unlikely as it could require settlement from all 27 member states.
“[The UTPR is] widely implemented, a powerful bargaining chip, and can’t be easily rolled back,” stated Rasmus Corlin Christensen, a global tax researcher at Copenhagen Business Faculty.
Since 2021, greater than 140 international locations have been working on the OECD on implementing the landmark tax settlement.
The deal, which international locations agreed in precept, consists of two “pillars”. The primary seeks to drive the world’s largest multinationals to declare earnings and pay extra within the international locations the place they do enterprise. The second introduces a 15 per cent world minimal efficient company tax charge, designed to restrict multinationals shifting domiciles to pay much less tax on their earnings.
Influential Republican congressman Jason Smith in 2023 described the worldwide OECD deal as “Biden’s global tax surrender”.
Smith drafted a invoice to extend the tax charge on earnings of corporations headquartered in jurisdictions with “extraterritorial and discriminatory taxes”, in opposition to US multinationals, together with the UTPR. The invoice was not enacted however that might be revived beneath Trump’s presidency.
It might not be a “heavy lift” for a Republican administration, which controls all branches of presidency, to enact it, Kalyanam stated.
Smith’s opposition to the OECD deal is shared by Republican senators. One senior congressional aide echoed Smith’s language and stated the UTPR rule was broadly seen by Republican lawmakers as “discriminatory” and “extraterritorial”.
“Generally, Senate Republicans feel the tax deal undermines US interests,” the aide stated.
The query of whether or not a tax struggle ensues may rely on if and the way different international locations search to implement the UTPR rule.
Up to now, the UTPR has been legislated in jurisdictions together with Australia, Canada, Japan, New Zealand, Norway, South Korea, Turkey and the UK, alongside the EU.
Nevertheless, some international locations on the OECD which are conscious of US considerations have launched a “temporary safe harbour”. This delays the date the UTPR applies till 2026 for international locations with a statutory company tax charge above 20 per cent. The US has a charge of 21 per cent — although Trump has proposed reducing it to simply 15 per cent for home producers.
Not all jurisdictions which have enacted the UTPR have launched the secure harbour clause.
“That’s causing a lot of hand-wringing for companies,” stated Danielle Rolfes, head of KPMG’s Washington nationwide tax observe.
Others are optimistic {that a} compromise might be discovered amongst international locations that might additionally avert a tax struggle.
“There will be some kind of deal. That’s what Trump likes to do. It’s going to be painful along the way though,” the multinational tax head stated.
A technique that international locations would possibly determine to keep away from the potential downside of US multinationals being topic to the UTPR is to additional delay the date the enforcement rule kicks in previous 2026.
Grant Wardell-Johnson, world tax coverage chief at KPMG Worldwide, stated: “I suspect they will kick it down the road and the UTPR safe harbour will be extended. Many countries wouldn’t want a political fight with the US in relation to that.”
