Donald Trump’s second time period within the White Home threatens to set off international spats over tax, with specialists voicing issues over Republican vows to penalise international locations making use of additional levies to US multinationals.
The pinnacle of tax at one massive multinational instructed the Monetary Occasions that 2025 “might be the 12 months that every thing goes to hell in a handbasket and companies get caught within the center”.
Alan McLean, chair of the Enterprise at OECD tax committee, which represents enterprise pursuits in discussions among the many Paris-based group of wealthy economies, mentioned the imposition of tariffs in response to international tax measures “may hamper financial progress by elevating operational prices for companies and growing costs for customers”.
The disputes are specializing in Republicans’ unhappiness a few essential aspect of a world tax pact agreed on the OECD that from this 12 months will enable different international locations to levy top-up taxes on US multinationals.
Trump, a self-described “tariff man”, has usually threatened to resort to utilizing the levies to make sure that the pursuits of US companies and households are protected. Since successful the US election, the president-elect has threatened to tear up a free commerce settlement with Canada and Mexico and impose 25 per cent tariffs on imports from its neighbours.
Tax specialists consider the EU is in the crosshairs of Republicans, who’ve branded a key a part of the OECD deal, often known as the undertaxed income rule and sometimes called the UTPR, as “discriminatory”.
The rule permits international locations to extend taxes on a neighborhood subsidiary of a multinational group if the multinational pays lower than 15 per cent of company tax in some other jurisdiction. The rule would imply different international locations would have the ability to levy top-up taxes on US firms.
“There’s a broad feeling amongst Republicans that US firms shouldn’t be paying the UTPR,” mentioned Aruna Kalyanam, EY’s international tax coverage chief.
The EU enacted the measure beneath a directive in 2022, however some specialists consider the bloc may compromise with Trump on its enforcement in return for beneficial remedy of its exports.
The EU has a commerce surplus with the US of €158bn, based on figures from the European Fee.
“Europe has a powerful authorized tradition and legislation is legislation, however I can think about a future association between Trump and the EU the place the EU will surrender the UTPR for the sake of not getting engaged in an financial battle,” mentioned Valentin Bendlinger, a senior advisor at ICON Wirtschaftstreuhand, a tax consultancy firm in Austria.
Nevertheless, others say {that a} change is unlikely as it might require settlement from all 27 member states.
“[The UTPR is] broadly applied, a strong bargaining chip, and may’t be simply rolled again,” mentioned Rasmus Corlin Christensen, a world tax researcher at Copenhagen Enterprise College.
Since 2021, greater than 140 international locations have been working on the OECD on implementing the landmark tax settlement.
The deal, which international locations agreed in precept, consists of two “pillars”. The primary seeks to drive the world’s largest multinationals to declare income and pay extra within the international locations the place they do enterprise. The second introduces a 15 per cent international minimal efficient company tax fee, designed to restrict multinationals shifting domiciles to pay much less tax on their income.
Influential Republican congressman Jason Smith in 2023 described the worldwide OECD deal as “Biden’s international tax give up”.
Smith drafted a invoice to extend the tax fee on income of firms headquartered in jurisdictions with “extraterritorial and discriminatory taxes”, in opposition to US multinationals, together with the UTPR. The invoice was not enacted however that might be revived beneath Trump’s presidency.
It will not be a “heavy elevate” for a Republican administration, which controls all branches of presidency, to enact it, Kalyanam mentioned.
Smith’s opposition to the OECD deal is shared by Republican senators. One senior congressional aide echoed Smith’s language and mentioned the UTPR rule was broadly seen by Republican lawmakers as “discriminatory” and “extraterritorial”.
“Typically, Senate Republicans really feel the tax deal undermines US pursuits,” the aide mentioned.
The query of whether or not a tax battle ensues may rely on if and the way different international locations search to implement the UTPR rule.
To this point, the UTPR has been legislated in jurisdictions together with Australia, Canada, Japan, New Zealand, Norway, South Korea, Turkey and the UK, alongside the EU.
Nevertheless, some international locations on the OECD which can be aware of US issues have launched a “non permanent secure harbour”. This delays the date the UTPR applies till 2026 for international locations with a statutory company tax fee above 20 per cent. The US has a fee of 21 per cent — although Trump has proposed slicing it to simply 15 per cent for home producers.
Not all jurisdictions which have enacted the UTPR have launched the secure harbour clause.
“That’s inflicting a whole lot of hand-wringing for firms,” mentioned Danielle Rolfes, head of KPMG’s Washington nationwide tax observe.
Others are optimistic {that a} compromise might be discovered amongst international locations that may additionally avert a tax battle.
“There will probably be some sort of deal. That’s what Trump likes to do. It’s going to be painful alongside the best way although,” the multinational tax head mentioned.
A method that international locations may determine to keep away from the potential drawback of US multinationals being topic to the UTPR is to additional delay the date the enforcement rule kicks in previous 2026.
Grant Wardell-Johnson, international tax coverage chief at KPMG Worldwide, mentioned: “I think they’ll kick it down the street and the UTPR secure harbour will probably be prolonged. Many international locations wouldn’t desire a political struggle with the US in relation to that.”
