It appears that former US President Donald Trump's impact on the old global economic order extends beyond just trade. With the "Liberation Day" tariff schedule approaching, the first sparks of war have already begun in another battle: a conflict over tax rules.
In 2021, countries, under the leadership of the G7 and the OECD, 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 double non-taxation, as companies easily exploited loopholes to claim profits were earned in low or zero-tax jurisdictions. The ultimate achievement of the "Base Erosion and Profit Shifting" (BEPS) reform efforts is largely credited to Trump's first Treasury Secretary, Steven Mnuchin, whose new rules allowed countries to tax companies operating in their jurisdictions but bearing insufficient tax in other regions.
However, granting other countries the right to tax the profits of American companies was clearly not to Trump's liking. Insisting on US tax sovereignty and opposing foreign jurisdiction are a bipartisan consensus in Washington. Given Trump's aggressive style, conflict was inevitable, and the question is how other countries will respond.
The other G7 countries agreed to the US request last Saturday to exempt their companies from two rules that the US considered "particularly unreasonable." In return, the US agreed to remove Article 899 from the "Outstanding Beauty Act" (OBBBA) - an article that may have been included to create bargaining chips and was scheduled to impose new additional taxes on companies deemed discriminatory against American companies. The OECD welcomed the agreement.
Making concessions to the US may not be a wise choice: after all, this proves that "coercion" works, and the credibility of the Trump administration's promises is questionable. Although the US Treasury Department has assured other countries that it will resolve the domestic "substantial" risks of profit shifting "in parallel with the international plan," how this promise will be implemented and enforced remains unclear.
Other G7 countries may see this as not a "must-win battle" in the midst of many disputes. Canada is an example, as it quickly surrendered in another tax conflict. When Trump canceled trade negotiations and threatened to impose higher tariffs on Canada, Canada immediately withdrew the Digital Services Tax (DST).
The digital tax will also be a flashpoint for disputes with European countries: Britain, France, Spain, and Italy have all imposed similar taxes. The British digital tax survived the first US trade statement, but it may still be a target for Washington. EU countries should be able to resist pressure more easily due to the size of the trade bloc, and in trade negotiations with Trump, they should resist pressures to compromise on tax sovereignty in order to reach a quick agreement.
It is clear that such disputes do not benefit businesses: multinational companies now face a more complex system of double taxation, although the nominal total tax burden remains the same. Tax rules have become a "legal" target for economic coercion, further increasing political uncertainty. Whether Trump intended it or not, the costs of cross-border operations have risen again.
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