AI Podcast: Trump's Tax Wars and the Global Economic Fallout

Audio generated by Kozy Space

It was only a matter of time before former US President Donald Trump's impact on the old global economic order spread from the trade arena to other battlegrounds. Just as his "Liberation Day" tariff schedule was about to take effect, the first skirmishes of the second battle—a conflict over tax rules—had already erupted.

The Rise of American Tax Supremacy and the G7 Forced to Accept Exemptions

In 2021, under the leadership of the Group of Seven (G7) and the Organisation for Economic Co-operation and Development (OECD), countries reached a compromise on reforming international corporate tax rules. The old network of bilateral tax treaties failed to avoid double taxation and often led to situations of double non-taxation, where companies easily exploited loopholes to claim that profits were earned in low-tax or zero-tax jurisdictions. The successful landing of the "Base Erosion and Profit Shifting" (BEPS) reform efforts is largely attributed to Trump's first Treasury Secretary, Steven Mnuchin, whose new rules allowed countries to tax companies operating in their jurisdictions but bearing an insufficient tax burden in other regions.

However, allowing other countries to gain the right to tax US corporate profits was clearly not going to satisfy Trump. Insisting on US tax sovereignty and opposing the extraterritorial jurisdiction of other countries is a bipartisan consensus in Washington. Given Trump's combative style, conflict was inevitable, and the question is how other countries would respond.

Last Saturday, other G7 countries accepted the US demand—exempting their companies from two rules that the US deemed "particularly unreasonable." In return, the US agreed to remove Clause 899 from the "Overly Broad Based Benefit Amount" (OBBBA) bill—which may have been inserted to create bargaining chips, and was intended to impose new additional taxes on companies from countries deemed discriminatory against US companies. The OECD welcomed the agreement.

Compromises Conceal Risks and Digital Tax Disputes in the Future

Making concessions to the US may not be a wise choice: after all, it has proven that "coercion" works, and the credibility of the Trump administration is questionable. While the US Treasury Department has assured other countries that it will resolve the domestic "substantive" risks of profit shifting "in parallel with the international plan," how this promise will be implemented and enforced remains unclear.

Other G7 countries may believe that this is not a "must-win battle" amid the many disputes. Canada is an example, having quickly surrendered in another tax dispute. When Trump cancelled trade negotiations and threatened to impose higher tariffs on Canada, Canada immediately withdrew the digital services tax (DST).

Digital tax will also be a flashpoint for conflicts with European countries: the UK, France, Spain, and Italy have all implemented similar taxes. The UK's digital tax survived the first US trade statement, but it remains a potential target for Washington. EU countries should be more able to resist pressure given the larger size of the trade group, and they should resist pressure to concede on tax sovereignty in order to reach a quick agreement in trade negotiations with Trump.

It is clear that such disputes do not benefit businesses: multinational corporations now face a more complex system of double taxation, although the nominal overall tax burden remains unchanged. Tax rules have become a "legitimate" target for economic coercion, increasing policy uncertainty. Whether Trump intended it or not, the costs of cross-border operations have risen by another level.