Title: Trump Announces Exit from Global Tax Deal, Embracing "America First" Trade Policy
On his inaugural day in office, President Donald Trump took several initiatives, with global tax and trade policies garnering substantial attention. While the hiring freeze and the return-to-office mandate for federal employees acquired the spotlight due to their potential influence on the IRS workforce and the ensuing tax season, Trump's orders pertaining to international tax and trade policies should not be overlooked.
The U.S. Exits the Global Tax Deal
A presidential memorandum was issued, directing the Secretary of the Treasury, the U.S. Trade Representative, and the U.S. Permanent Representative to the Organisation for Economic Co-operation and Development (OECD) to inform the OECD that any obligations the previous administration made regarding the Global Tax Deal are invalid within the United States unless Congress approves the relevant provisions.
OECD and Pillars One and Two
Countries, including the U.S., have faced challenges in determining how and at what rate to levy taxes on multinational corporations. The advancement of globalization and technology further complicate matters by enabling corporations to allocate profits to lower-tax nations through strategies like base erosion and profit shifting (BEPS).
To address these challenges, the Organization for Economic Co-operation and Development (OECD) has advocated for change. The OECD, comprising 38 member countries, contends that the existing tax system unfairly advantages multinational firms over domestic enterprises. Moreover, such maneuvers undermine public trust in voluntary tax compliance.
Since 2013, these challenges have been categorized into two key areas, known as Pillar One and Pillar Two.
Pillar One
Pillar One focuses on deciding where taxation applies, considering the concept of nexus—similar to the tax debates between U.S. states. The principal question is who has the right to tax income, given the absence of a physical presence.
Pillar Two
Pillar Two tackles the issue of unequal tax rates across nations.
As of now, 140 countries support the pillars, including the U.S. Initially.
Beneath the Pillar One agreement, large multinational firms will be obliged to pay taxes in the countries they operate, rather than just in their headquarter nations. This measure aims to discourage firms from establishing offices in lower-tax countries solely to shift profits.
By contrast, Pillar Two aims to institute a worldwide minimum corporate tax rate of 15%. The current U.S. corporate tax rate is 21%, while Ireland's corporate tax rate—a popular location for U.S. firms like Apple—is 12.5%.
The shifting U.S. standpoint on suitable corporate tax rates is transparent. With the TCJA, corporate tax rates decreased. Had he been re-elected, former President Biden had signals to revert corporate tax rates. Presently, Trump suggests potential rate reductions.
In light of Pillar One requirements, updating tax treaties—a responsibility held by Congress—will likely be required. Similarly, adjustments to corporate tax rates under Pillar Two will necessitate Congressional action.
As a result, while a prompt alteration is less likely, the U.S.'s stance indicates a shift in perspectives. Considering the U.S.'s influential role in the global economy, this change could present problems for the OECD and impact U.S.-foreign relations consequently.
Furthermore, the memorandum instructs the U.S. Trade Representative to investigate potential violations of U.S. tax treaties by foreign nations and questionable tax rules adversely affecting U.S. businesses. If such breaches or disadvantageous regulations are identified, the U.S. Trade Representative will be tasked with drafting retaliatory measures.
"America First" Trade Policy
The following presidential memorandum advocates for the adoption of an "America First" trade policy. This extensive directive assigns various responsibilities to advisors for implementing a strengthened trade policy.
Key tasks include:- The Secretary of the Treasury to identify causes behind U.S. trade deficits and propose solutions.- The Treasury Secretary to collaborate with other agencies to develop a new tax collection agency—the External Revenue Service (ERS). This entity would manage tariffs, duties, and other foreign trade-related revenues.- The U.S. Trade Representative and other agency heads to assess unfair trade practices by foreign countries, propose remedies, and evaluate the impact of the United States-Mexico-Canada Agreement (USMCA) on American workers, farmers, ranchers, and service providers.
Conclusion
President Trump's directives do not carry the same legal force as an executive order but possess some delegative authority and can influence administrative matters. His withdrawal from the OECD Global Tax Deal's Pillar Two commitment caused a stir among Republican Finance Committee members, who voiced support for the move to disavow the OECD's "global tax overreach."
- Despite President Trump's focus on domestic policies, his presidential memorandum on international tax policies directed the U.S. withdrawal from the OECD's Pillar Two of the Global Tax Deal, which aims for a global minimum corporate tax.
- The OECD's Pillar Two, supported by 140 countries including the U.S., proposes a minimum corporate tax rate of 15% to mitigate the advantage multinational corporations have over domestic enterprises by shifting profits to lower-tax nations.
- Trump's memorandum on global tax policies also instructs the U.S. Trade Representative to investigate potential tax treaty violations and unfair tax rules affecting U.S. businesses by foreign nations, potentially leading to retaliatory measures.
- The OECD's Pillar One, alongside Pillar Two, has received support from various countries, including the U.S. Initially. Pillar One focuses on determining the nexus to decide where taxation applies in the absence of a physical presence.
- The Trump administration's stance on suitable corporate tax rates under Pillar Two has undergone changes, contradicting former President Biden's plans to revert corporate tax rates and aligning with Trump's recent suggestions for potential rate reductions.
