The Impact of Trump's Withdrawal From the OECD Global Tax Deal

(GREGOIRE CAMPIONE/AFP via Getty Images)

The OECD logo is seen at the organization's headquarters in Paris, France, on Dec. 5, 2024.

U.S. President Donald Trump's decision to pull out of an international tax agreement and investigate whether other countries impose extraterritorial or discriminatory taxes on U.S. companies could open the door to trade retaliation and punitive tax measures targeting foreign companies and individuals, as well as a broader conflict over the taxation of U.S. tech companies. One of the ''Day One'' executive orders Trump signed on Jan. 20 stated the United States would no longer honor any commitments made by former President Joe Biden to the Organisation for Economic Cooperation and Development, or OECD, as part of a global tax deal reached in 2021, in which 140 countries agreed to impose a global minimum tax on large multinational companies (the bulk of whom are based in the United States). The order also directed the U.S. Treasury Department and the U.S. Trade Representative, or USTR, to investigate other countries' tax policies to see whether any were ''extraterritorial or disproportionately affect[ed]'' American companies, and to present President Trump with a list of options for how to respond to such discriminatory tax rules within 60 days. If the U.S. agencies find a country to be imposing discriminatory or extraterritorial taxes on U.S. companies, the Trump administration will be able to double the tax rates for respective foreign companies and individuals without requiring congressional approval.

Existing domestic U.S. legislation (Section 891 of the Internal Revenue Code) allows the Trump administration to double taxes on companies and citizens of countries that are found to impose discriminatory taxes on U.S. companies operating in those jurisdictions. The legislation has never been invoked, so it is unclear how the provision would apply in practice.

Trump's executive order takes direct aim at the 2021 OECD-sponsored international tax deal that Biden helped secure, in which 140 countries agreed to impose a global minimum tax on large multinational companies (the bulk of whom are based in the United States). The OECD agreement consists of two pillars: Pillar 1 seeks to tax multinational companies in the territories where they earn their revenue and not only where they are based, while Pillar 2 introduces a global 15% minimum corporate tax. However, the OECD agreement remains unfinalized due to domestic political pushback in the United States, particularly among U.S. business leaders and lawmakers in Congress. This is because implementing Pillar 1 of the deal risked translating into a tax revenue loss for the United States, while the potential revenue gain from implementing Pillar 2 hinged on Congress taking action to raise the U.S. tax rate on the earnings of large American companies' foreign subsidiaries. The U.S. Congress, in particular, has been a vocal critic of the OECD agreement, which he argues risks transferring tax revenues to other countries and restricting the United States' ability to lower corporate taxes (or keep them low).

Negotiations on implementing Pillar 1 of the OECD agreement have proven contentious, as taxing large companies based on where revenues are earned — instead of where they are headquartered — would reduce revenue for the United States, which is home to the bulk of the world's large multinational companies. Indeed, the Joint Committee on Taxation estimates that if Pillar 1 were implemented, the United States would lose $ 1.5 billion in annual revenue and that 70% of the reallocated taxes would come from U.S. multinational companies.
The loss of revenue from Pillar 1 is supposed to be somewhat offset by the United States implementing the global corporate tax rate outlined in Pillar 2. However, this has also proven controversial because many multinational companies — especially tech ones — are American, and the 15% global corporate tax proposed in the OECD deal would make it more difficult for multinational companies to shift their profits to low-tax jurisdictions. The minimum tax also imposes a higher tax burden that would see large companies pay more taxes in the countries where they have customers and less in the country where they are headquartered if the corporate minimum tax in their home country is lower than 15%. From a U.S. perspective, higher foreign taxes would mean less income for shareholders of U.S. companies, not least because a 15% global minimum tax would make it impossible for multinational companies to shift their profits to low-cost jurisdictions and thus minimize their tax bill. It may also lead to lower taxes to the extent that higher foreign taxes translate into domestic tax credits. The OECD agreement thus risks increasing taxes on U.S. multinationals and reallocating tax revenue away from the United States.

The U.S. investigations will likely find that national digital service taxes are discriminatory, reviving a long-standing source of tension between the United States and the rest of the world that the OECD agreement had sought to address. The OECD agreement was meant to resolve tensions between the United States and the growing number of countries that have imposed national digital services taxes (DSTs) on the mostly U.S.-based tech companies operating in their markets. During his first term, Trump launched Section 301 investigations that found that the DSTs imposed by Austria, France, India, Italy, Spain, Turkey and the United Kingdom disproportionately impacted U.S. companies (like Google and Facebook). In response, the USTR threatened to impose a 25% tariff on $1.3 billion worth of goods, but these were later suspended by the Biden administration after the countries pledged to remove their DSTs following the successful conclusion of negotiations on implementing the OECD deal. Most other OECD members also agreed to halt the imposition of new DSTs until January 2026, with plans to abandon them entirely once Pillar 1 of the deal entered into force. However, the failure to finalize the tax agreement, especially Pillar 1, will lead countries to introduce their DSTs.

About half of EU members have announced, proposed or enacted DSTs.

There is a reasonably high chance that the United States will also find that many OECD countries' tax policies disproportionately target U.S. companies, particularly if more countries reintroduce the DSTs that the OECD deal was designed to replace. If the Treasury and USTR find other countries' policies related to the 15% global minimum tax (as per the OECD agreement) or DSTs to discriminate against U.S. companies, relevant countries may face U.S. trade retaliation. In light of this prospect, most countries may find the costs of Trump's punitive measures outweigh the benefit of maintaining their ''discriminatory'' DSTs and global minimum corporate taxes. While smaller countries (especially those whose companies have a significant presence in the United States) will find it particularly difficult not to acquiesce to U.S. pressure, even larger economies like the European Union have signaled a willingness to negotiate. However, the Trump administration does not appear open to compromise and will instead likely continue to threaten to double tax rates for or impose tariffs on countries that impose top-up taxes up to 15% under the OECD agreement or that introduce DSTs in a way that primarily affects U.S. tech companies. Economically weaker countries may, in turn, have little choice but to abandon or scale back their DSTs and plans to implement a 15% minimum corporate tax, depriving them of the added tax revenue they would have received under the OECD agreement. This will prove especially painful at a time when both borrowing costs and debt are high in many countries.

The OECD estimates that implementing the 15% global corporate tax would raise global tax revenue by $200 billion.

More broadly, the Trump administration's apparent willingness to impose unilateral measures on countries that exploit their economic dependence on the United States could set the stage for a transatlantic tax war if European countries move forward with imposing DSTs. Trump's move to withdraw the United States from the OECD agreement and threaten economic retaliation against countries with ''discriminatory'' tax policies reflects a broader shift toward greater unilateralism under his administration aimed at leveraging U.S. bargaining power. In the likely case that the OECD agreement collapses under U.S. pressure, European countries will likely impose or reimpose national DSTs, raising the risk of U.S. tax and trade retaliation. Either way, international tax policy will remain a major point of contention for the foreseeable future and could see the United States not only impose higher taxes on foreign companies but threaten broader discriminatory trade measures against individual countries or the European Union as a whole.