Negotiations at the United Nations resumed last week in New York over a global tax framework, and those talks may gain new impetus after President Donald Trump signed an executive order rejecting the two-pillar framework that the Biden administration had been negotiating with the Organization for Economic Cooperation and Development.
On Inauguration Day,
The U.S. has not yet ratified the OECD/G20 Inclusive Framework on tax base erosion and profit-shifting framework, or BEPS for short, due to opposition from Republican lawmakers. But Trump's repudiation of the global tax framework on his first day in office was a striking move for some observers.
"I was not so much surprised by this kind of policy direction, but just the timing," said Zorka Milin, policy director of the FACT (Financial Accountability and Corporate Transparency) Coalition, a nonpartisan alliance of over 100 state, national and international organizations. "I don't think any of us who follow international tax expected this to be a day one priority issue, so that came as a surprise."
The executive order comes at the expense of losing the gains made at the OECD on a global tax agreement. "In addition to all the trade wars, if we're going to have a tax war, which is what they want this order threatens, that would not be in anyone's interest," said Milin.
Trump's executive order threatens punitive action against other countries that are implementing parts of the OECD plan such as the Under-Taxed Profits Rule and the top-up tax, or the digital services taxes that countries like France and Canada have levied on multinational tech giants.
It says, "The Secretary of the Treasury in consultation with the United States Trade Representative shall investigate whether any foreign countries are not in compliance with any tax treaty with the United States or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies, and develop and present to the President, through the Assistant to the President for Economic Policy, a list of options for protective measures or other actions that the United States should adopt or take in response to such non-compliance or tax rules. The Secretary of the Treasury shall deliver findings and recommendations to the President, through the Assistant to the President for Economic Policy, within 60 days."
The Trump administration's stance toward the OECD framework on global minimum taxes and country-by-country reporting could shift the action over to the United Nations now, where negotiations are underway on the UN Framework Convention on International Tax Cooperation. The Biden administration wasn't able to get the OECD framework passed in Congress despite former Treasury Secretary Janet Yellen's support for the effort.
"It doesn't change anything, because everyone knew that the Biden administration couldn't get these things through, but in some ways, it just clarifies that they're not going to apply in the U.S.," said Alex Cobham, chief executive of the Tax Justice Network, a U.K. advocacy group concerned about tax avoidance. "But I think it's the other piece of the memorandum that's more significant. It's the threat to go after other countries that are introducing elements of the OECD proposals, or indeed other types of tax incentive responses to the OECD's failure, like digital services taxes. That takes things to a different level, and there's an interesting possibility that it might backfire. What it won't do is show countries, perhaps particularly in the European Union, that there's no hope for getting any improvements on what's already quite a weak OECD proposal, and instead push them into the United Nations process where something more significant could be achieved, which is exactly what I think the Trump administration would want to avoid. They may have given it rather a big push."
Bargaining power
The U.S. delegate
The UN tax negotiations have not been receiving as much attention as the OECD's Pillar One and Pillar Two framework, but the move could shift momentum toward the UN.
"We need to have a multilateral agreement on tax issues because these are global problems, and the solution also has to be global," said Milin. "I think that the OECD has done a lot of good work over the years and made a lot of progress, and the agreement was supported by something like 140 countries. It's a big achievement, and maybe the UN can build on that achievement. But whether we're talking about the OECD or the UN, I think it is unfortunate that the U.S. as a major international economic actor wouldn't be at the table in those discussions. To be clear, I don't expect that to happen necessarily, because if we read and parse carefully the text of that order, it's not that the U.S. is withdrawing from their membership in the OECD. They will stay at the table, and I suspect try to gain additional leverage. I don't think that this is the end of the story for the OECD process. I think it's something that we'll have to continue to watch to see how it evolves. If certain provisions of the previous agreement have to be reopened, that will be interesting to see, but I don't think it will just be thrown out. I'm not even sure that that's the policy goal of the Trump administration."
DST impact
Canada's digital services tax could pose a problem for the U.S., no matter what happens at the OECD or the UN. "There will be a test case very soon with Canada's DST," said Cobham. "Will Canada accept the tariffs, or whatever is going to be imposed? We'll see that by the end of March. I think we'll see the proposals come forward. Will Canada fold and give up their DST, or will they fight? That will be interesting to see, but it's different when it's one country. If we have 100 countries signing the UN convention, I think there will be a commitment to play together, to pass that into law collectively, perhaps to face collective punishment, but without the same kind of ability to pick off individual countries. I think we will see a move, almost because the U.S. multinationals will move first. In 2017 and 2018, it only took a few countries to start the process of introducing DSTs, and the big tech multinationals in the U.S. forced the administration into negotiations again at the OECD. Once it becomes clear that the UN convention could go much further than that, I think the U.S. Treasury will be hearing very clearly that they need to be full participants in the negotiations, even if that's largely trying to block it. That's going to be difficult, because you need a significant minority, at least, to be able to block at the UN."
GILTI vs. UTPR
The upcoming negotiations in Congress over the extension of the Tax Cuts and Jobs Act of 2017 may also play a role. The TCJA includes some international tax provisions, such as Global Intangible Low-Taxed Income, or GILTI for short, and Foreign-Derived Intangible Income, or FDII. Similarly, the Biden administration's version of a global minimum tax in the Inflation Reduction Act of 2022, known as the corporate alternative minimum tax, mainly applies to companies earning over $1 billion and
Trump's executive order could be one way for the U.S. to regain leverage in the OECD process.
"Maybe they think they can get a better deal than what was negotiated under the previous administration," said Milin. "That's how I read the order, especially when we think about the context and the history here. The process was initiated under the first Trump administration, actually. It goes back to the days of [former Treasury] Secretary [Steven] Mnuchin and some of the policy ideas that were included in the 2017 Republican tax bill around the Global Intangible Low-Taxed Income. The U.S. was the first to introduce a tax like that, and the OECD was a forum where that policy idea could go global. I think that this has actually been a policy win for Republicans, even though it's strange that they don't see it that way. What is unfortunate is the order seems to be targeting — but it's not explicit — an aspect of the international tax agreement that is called Under-Taxed Profits Rule, which is something that was included in order to deal with companies from non-implementing countries, in particular China, at the insistence of U.S. negotiators. If they're successful in undermining UTPR, that's a gift to China, and I don't think that's what they would want."
In contrast, Trump's new executive order authorizes the Treasury Secretary to retaliate against other countries that seek to impose taxes on U.S. multinational companies.
"If we take the order on its face, the results would be that the U.S. would be imposing these punitive, retaliatory taxes on some of our major trade partners and political allies in Europe, Canada, Australia, Japan, while on the other hand, helping out China, and that makes no sense," said Milin. "I don't think that that is consistent with foreign policy of this or any other U.S. administration."
Democrats are in the minority in both houses of Congress now, and Republicans plan to pass a tax bill through the budget reconciliation process that would sideline Democrats, allowing Republicans to bypass the requirement for a two-thirds majority in the Senate to overcome a filibuster. Nevertheless, Democrats nevertheless reintroduced a bill last week that might have some influence on the tax debate, especially since the Trump administration has expressed the desire to bring jobs back to the U.S. from abroad. Sen. Sheldon Whitehouse, D-Rhode Island, and Rep. Lloyd Doggett, D-Texas,
The Trump executive order seems to envision possible retaliatory actions by the U.S. against other countries that could include tariffs or even sanctions.
"It could be a form of trade sanctions, or even potentially an additional tax on U.K. companies operating in the U.S.," said Cobham. "The U.K., because it's quite isolated now, having left the European Union, is one that you can see being picked off in that way. But the European Union has also committed to introduce the UTPR, the Under-Taxed Profits Rule, and that's the one where you where you can say, if the headquarters country is not applying a reasonable minimum rate of tax and the multinational operates in your country, then you can use the UTPR to apply that top-up tax. So I think that will be the big clash. Canada's DST is interesting, but the European Union's UTPR is the big one. If in effect, the Trump administration's investigation over the next 60 days finds that the EU's UTPR is effectively in breach, in their view, because they they would say it's extraterritorial to try to top up the taxes being paid in the U.S., whereas the EU would say this is making sure that economic actors within the EU are paying fair tax. But that's the difference, the tension this is bringing out. If there is a specific proposal to put some kind of tariff or tax measures on European Union countries or their multinationals, this very quickly comes to a head. It feels like the OECD proposals are already faltering. I think this is really the end of any prospect of global adoption, certainly, and the question is really whether it boosts momentum for the UN process instead."
Disillusionment
The U.S. isn't the only country that has become more skeptical about the OECD framework, and that could pave the way for the UN framework to make more headway.
"Hstorically, the OECD has really led the way here, but what happened in 2022 was a UN resolution," said Cobham. "That's something that the G77, the countries of the developing world, have really wanted for about 20 years, but have never been able to make progress with. What happened in 2022 was that so many OECD member countries had become so disillusioned with the OECD process that the resolution to begin looking at a UN convention went through the General Assembly by consensus. And that was quite remarkable, really unprecedented. Since then, they've had an ad hoc committee, as they call it, of delegates from every country in the world putting together the terms of reference for the full negotiations."
Those delegates began meeting last week and plan further talks. "We have a schedule now for about two and a half years of negotiations to create a framework convention," said Cobham. "That can do two things, really. It can create new rules within the convention, but as we have with the UNFCCC [United Nations Framework Convention on Climate Change], it will create a framework body. They'll be able to set new tax rules in the future, on top of anything that's agreed in this two and a half years in the convention. Potentially, this will displace the OECD as the global tax rule setter, and in that shift, the U.S. will lose the power of veto that it effectively has in the OECD."
On the same day Trump signed an executive order repudiating the OECD global tax deal, he signed another
"I think the dynamics are different in the sense that in the Paris Agreement, there isn't any mechanism against noncooperating countries," said Cobham. "It may make it harder for the world to limit the degree of climate damage, but it doesn't give anyone else the power to try to punish the U.S. And nothing that other countries do on climate, unless they were to come up with some kind of sanctioning measure around U.S. carbon emissions, let's say, but that's really not being thought of. Whereas on the tax side, you can move ahead very quickly — and you might move ahead quicker if you don't have the U.S. at the table — with measures that will apply to U.S. multinationals in other countries where they operate, so almost without anyone trying, the tax convention will have an impact on U.S. economic actors. And I think that means the dynamics are different. I think it would be very hard for Trump to ignore that this is happening, even if he thinks the UN is worthless or illegitimate or anything else. The fact that this will affect the taxes paid by U.S. multinationals may affect the access of U.S. financial institutions to world markets if they're seen as outside the cooperative sphere. The convention could do things in that space too. All of that means that the lobbying pressure from business and finance on the Trump administration on the Treasury, I think, would be hard to resist."
