The global effort to curb tax avoidance by the world’s largest companies faces new uncertainty following Donald Trump’s return to the U.S. presidency. Experts warn that the OECD’s landmark corporate tax agreement, aimed at preventing multinationals from shifting profits across borders to reduce their tax bills, is now in jeopardy. Signed in 2021, the OECD’s deal was hailed as a breakthrough, with over 130 countries agreeing to impose a minimum 15% tax rate on corporate profits, raising the potential tax revenue for many nations. However, the agreement, especially its second pillar, could face serious challenges under Trump’s administration.
The OECD’s “pillar two” is designed to ensure that companies pay at least a 15% tax rate in every country they operate in. If a multinational is taxed below that rate in its home country, other countries have the right to levy a “top-up tax” on its profits. But experts believe that this pillar could be undercut by a Trump administration unwilling to cooperate. Trump’s inclination toward protectionist policies, including his vow to impose sweeping tariffs on imports, could discourage other countries from enforcing the rule on American companies, fearing retaliatory tariffs on their exports to the U.S. Such a move would undermine the spirit of the global tax deal, weakening its effectiveness and creating friction with major trade partners.
Wei Cui, a tax law professor, highlights the predicament, describing pillar two as “in peril” under Trump’s administration. He notes that without U.S. cooperation, countries may hesitate to impose the top-up tax on American companies, effectively creating a loophole in the OECD’s minimum tax structure. This reluctance stems from the very real possibility that the Trump administration could respond with punitive measures.
Already, some U.S. advisors have proposed tariffs ranging from 10% to 60% on imports from countries that implement what Trump’s team views as discriminatory tax policies against American multinationals. In such an environment, the undertaxed profits rule (UTPR) that makes pillar two effective could lose its intended reach.
This anticipated backlash has stirred anxiety among many of the OECD deal’s key stakeholders, including European nations that were among the first to embrace the global minimum tax. The EU has been proactive in adopting both pillars of the OECD framework, believing that it would not only increase tax revenue but also ensure fairness by discouraging companies from seeking out low-tax jurisdictions. However, Europe’s stance may put it in the crosshairs of the U.S., which could impose retaliatory tariffs if EU countries attempt to enforce the UTPR on American firms. According to Rasmus Corlin Christensen, an international tax researcher, “the EU stands out as the most obvious target” for Trump’s administration.
With so many European countries already implementing the 15% minimum tax, a lack of U.S. compliance could create significant tension in transatlantic trade.
International deal to prevent tax avoidance by multinationals faces obstacles as Trump’s return threatens implementation.
Another looming challenge is the potential for the U.S. to counterattack through domestic policies that penalize foreign jurisdictions taxing American companies. Jason Smith, a prominent Republican congressman, previously introduced a bill to increase taxes on profits of companies based in countries that levy “discriminatory” taxes on American firms. Although the bill did not pass, it remains a potential tool that the administration could wield to deter countries from enforcing the OECD’s undertaxed profits rule.
Canada, which shares strong economic ties with the U.S., could be particularly vulnerable to this strategy. It recently enacted a 3% digital services tax that primarily affects American tech giants. As a result, Canada may face tariffs or other countermeasures should it enforce the OECD’s minimum tax on U.S. multinationals. Experts like Daniel Bunn from the Tax Foundation believe Canada could “be in the US’s sights” and that such tensions could harm both countries through potential trade disruptions.
The “pillar one” component of the OECD agreement, which requires multinationals to pay taxes where they do business, also appears vulnerable under Trump’s administration. For this rule to work, the U.S. would need to permit other countries to tax American companies on revenue generated within their borders—a significant concession. Given Trump’s previous stance against digital services taxes targeting U.S. tech giants, analysts are skeptical that his administration would support pillar one. Will Morris, global tax policy leader at PwC, warns that a failure to implement pillar one could lead to a wave of unilateral digital services taxes, a move likely to provoke swift retaliatory action from the U.S.
In fact, the Trump administration previously initiated investigations into nations with digital services taxes, citing them as discriminatory against American businesses. Under Section 301, a U.S. trade law provision that permits tariffs on imports, Trump’s trade representatives issued notices against 11 countries contemplating digital services taxes. Experts expect the administration to be just as aggressive this time around, and Alex Cobham of the Tax Justice Network warns that “countries pursuing DSTs unilaterally should expect countermeasures.”
Nevertheless, the EU has signaled that it may move forward independently if the OECD deal stalls under Trump. Wopke Hoekstra, the incoming EU tax policy commissioner, recently stated that the EU could consider imposing levies on U.S. tech firms should pillar one fail. Hoekstra clarified that while the EU prefers a global solution, it would act on its own if necessary. His comments highlight the determination among some EU officials to address what they see as unfair practices by American tech giants, despite the risk of inciting trade disputes with the U.S.
The situation reflects the complexities of enforcing global tax rules in an era of shifting political landscapes and protectionist policies. Trump’s renewed presidency raises questions about the durability of international agreements when a major participant like the U.S. resists multilateral efforts. Analysts suggest that if the OECD deal collapses, it could lead to a “patchwork” system of individual country taxes on digital services and corporate profits, fragmenting what was once an ambitious global initiative into a series of competing national policies.
Ultimately, the future of the OECD’s global minimum tax and the digital services tax depends on the willingness of countries to navigate these challenges without reigniting trade conflicts. The tax landscape in the coming years could become a testing ground for how far governments are willing to go to defend their tax revenues in an era of globalized business and political headwinds.
