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Your guide to what the 2024 US elections mean for Washington and the world
Donald Trump was widely expected to launch a tariff war as soon as he returned to office. In the end, the first shots of his war against the globalized economy were fired on a quite different front. In his flurry of orders and memos this week, Trump definitively withdrew already shaky US support for the global compromise on taxing the profits of multinational corporations, a reform painstakingly crafted over the past decade. He also threatened punitive retaliation against any country that imposes “extraterritorial” or “discriminatory” taxes on American multinationals.
The new administration challenge to the global agreement is bad news in every sense. After the global financial crisis, it became clear to cash-strapped governments and their taxpayers that the longstanding network of bilateral treaties designed to avoid double taxation was increasingly facilitating double non-taxation for multinational companies. The ability to evade taxes by allocating profits in low-tax jurisdictions was neither politically nor financially sustainable.
This problem also affected the United States. Domestic rules that made it easier to store accounting profits in tax havens reduced U.S. tax revenue and discouraged companies from investing or redeploying their funds at home. Therefore, ironically, the first Triumph The administration helped push reform. Much of the initial political momentum was achieved by then-Treasury Secretary Steven Mnuchin and his French counterpart.
An agreement on profit sharing and a minimum corporate tax rate was reached in 2021, but failed to pass Congress under the Biden administration. Some of the reforms are is already being implemented However, in many countries, this could increase overall tax revenue by approximately 200 billion dollars.
The United States’ interest in reform had been driven by other countries that rebelled against the presence of large American companies – particularly technology companies – that paid very little taxes. The United Kingdom, France, Italy and others have passed laws to impose digital services taxes on the local revenues of such companies. Turnover taxes are not typically covered by tax treaties and drew the ire of Washington. when the international tax agreement was hit, these countries offered to waive their taxes to facilitate a multilateral approach.
US withdrawal of the reform will harm first of all the United States itself. Other countries may continue to enforce the global minimum tax rule against American companies or decide to revive their DSTs, unless Trump somehow bullies them into submission. If it also manages to torpedo the rest of the world’s adoption of the rules, we would return to the tax undertaxation of the past, with the same incentives for American and other multinationals to bury their profits abroad.
A better result is conceivable. The EU has said it intends to hold talks with the new administration on how to achieve the goal of ensuring effective minimum taxation for multinationals. Even if a change of heart in the White House seems unlikely, other countries should strive to sensibly tax the profits of multinationals within a coalition of those willing. They have several options for dealing with the United States and other non-cooperative nations. Countries with DST could simply let the tax work; those who do not have one could submit one. A coordinated approach could be applied at EU level, although that would not be simple. Meanwhile, the repercussions if the Trump administration were to retaliate could be serious.
Trump has threatened punitive US tariffs and taxes on citizens and companies in countries that challenge his demand. These countries are not powerless to fight back. But there is a lot at stake. With the stroke of a pen, Trump has raised the risk of unraveling an entire network of cross-border investments.