Through an executive order signed on 20 January 2025, US president Donald Trump has rejected the OECD Global Tax Deal, affirming that it has “no force or effect in the United States.” The goal of its administration is to regain the “nation’s sovereignty and economic competitiveness.”
Background
On 8 October 2021, the OECD announced that a total of 136 countries out of 140 countries--including Luxembourg and the US--had reached a political agreement on a minimum effective rate of 15% for companies. The goal was to fundamentally change the international corporate tax system.
Pascal Saint-Amans, partner at the consultancy Brunswick and a former director at the OECD, observed that companies based in Ireland, Luxembourg and Singapore--where the effective tax rate was below 15%--and countries without corporate tax such as Cayman Islands and Barbados have all been impacted by the new requirement.
“Countries did not have to apply the agreement” in their domestic laws, Saint-Amans said in an interview. In fact, he remarked that more than 50 countries such as those in the European Union, UK, Japan, South Korea, South Africa and Barbados applied it. “One has to understand that the agreement is not relevant to many African countries which have no companies in scope… yet 90% of the multinational companies around the world are covered by the minimal tax rate.”
Impact of US withdrawal
“We don’t know. The US are not really part of the agreement. They supported it but it has not been adopted,” Saint-Amans said on 3 February 2025. Yet the new US administration has not indicated that they are withdrawing from the OECD, contrary to the World Health Organisation or the Paris Agreement on climate. Trump may want to have the agreement amended to reflect his demands.
Saint-Amans stressed that the minimal tax rate on multinationals works even if the US and China do not apply the agreement. It is worth noting their firms will be taxed in other countries where they benefit from advantageous tax rates.
He explained that the agreement contains two pillars. The first one covers new rules enabling countries to share the profits, including rules to tax companies in the digital sector. It requires a multi-lateral convention for which an agreement was not struck. Even if a deal had been reached, “everyone knew that a two-thirds majority was required in the US Senate.” A tall order. “In short, the US did not withdraw from an agreement that they were not member of.”
Pillar 2 based on three mechanisms
On pillar 2, which covers the minimum corporate tax, the US agreed on the principles, but elected not to apply it. Saint-Amans commented that the first mechanism of this pillar enables European countries, in theory, to tax US companies based in the US or in tax haven countries where the tax levy is less than 15%. “The Europeans would take the difference” between 15% and the local effective tax rate, but “this was a no-go for the US Republicans.” Indeed, the US has said that they will oppose foreign countries levying tax on US companies based in the US.
Interestingly, Saint-Amans noted that such an event has a “limited materiality,” as the average tax rate in the US is around 25% (21% at the federal level and 3%-4% at the state level). Yet he remarked that tax credits on research and development may apply to pharmaceutical and tech companies but also entities with strong brands leading to an effective tax level below 15%.
The second mechanism targeted countries such as Barbados with low or no corporate tax hosting US companies earning money. “As someone will tax this profit at 15%, these countries concluded that they were better off taxing these companies themselves through the Qualified Domestic Minimum Top-Up Tax, or QDMTT.”
60 days to study the US position following the sign-off of the executive order by president Trump
The third mechanism is the undertaxed profits rule (UTPR) that enables countries to tax companies for “which nobody levies taxes.”
US: Reviewing its options
He thinks that the US may push for the removal of the clause enabling other countries to tax companies in the US. “That would blast off the minimum corporate tax given the absence of incentive to apply the minimum tax rate.” Alternatively, the US may exclude taxation on US soil but not in tax havens.
“We will see as [the secretary of the treasury] has 60 days to study the US position following the sign-off of the executive order by president Trump.” More specifically, the executive order stated that the former will review “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.”
Could Trump double the tax rate of European companies?
Saint-Amans noted that article 891 of the US tax code has been “resurrected” following the arrival of Trump, but its oversight is “very weak.” He thinks that judges would have to rule on executive orders seen as discriminatory against certain firms.
Besides, the power of the president includes the ability to apply commercial measures against European firms (tariffs). He thinks that the president has an extensive range of retaliatory measures at his disposal.
How to avoid retaliation measures against European companies?
European countries have adopted an EU directive to reflect the OECD Global Tax Deal.
“There must be unanimity to change the directive,” pointed out Saint-Amans. “A change of the directive is therefore highly unlikely.” On the other hand, he could imagine an agreement at the OECD whereby a company in a country taxed at a “elevated nominal rate” such as 25% in the US, for instance, would be exempted from the undertaxed payment rule (UTPR).
It is an elegant solution that may give US companies a comparative advantage, but Saint-Amans repeated that the materiality is low. “The US is not a tax haven.” Moreover, he thinks that Trump will not reduce corporate tax despite promises made during the presidential campaign.
Digital service taxes (DST)
Saint-Amans explained that the discussions at the OECD on taxing tech companies started more than 10 years ago without ever reaching an agreement. He thinks that Trump has been clear that the discussions are “stopped or dead.”
Yet countries such as France, Italy, Spain, the UK and India--but not Luxembourg--decided to apply a DST on digital companies. Saint-Amans observed that Trump responded with retaliatory taxes in 2019 that equated the amount levied by the countries applying the DST. The sanctions were lifted by then-president Biden but have been reactivated again by Trump.
Saint-Amans thinks that a tax war is unlikely. Yet it may not be race to the bottom, i.e., who will tax the least, but “everyone may tax their own way with retaliatory measures [such as] commercial and tax sanctions.”