During his first day in office on 20 Jan, US President Donald Trump issued two executive orders that will change America’s global tax and trade policy and throw into disarray the reform of international tax rules for multinational corporations. Tax experts may have been stunned by the timing and forcefulness of the message, but its content should not have been a surprise.
The first executive order titled The Organization for Economic Co-operation and Development (OECD) Global Tax Deal pulls the United States out of the global tax agreement established by the international organisation.
It means that rules that create new taxing rights for jurisdictions in which the consumers of digital services are located (Pillar One) and the global minimum corporation tax rules (Pillar Two) will have “no force or effect” in the United States.
Any commitments made by prior US administrations regarding the “global tax deal” are null and void, unless Congress adopts them through legislation.
The prospect of tax retaliation
While this is not much of a change – the Biden administration supported the reform but was unable to push its implementation through Congress – the executive order goes further.
It directs the Secretary of the Treasury to investigate how foreign countries comply with US tax treaties and whether they apply tax rules that are extraterritorial or disproportionately affect American businesses. In these cases, the Treasury is tasked with developing protective measures against such adverse foreign tax rules and treaty non-compliance.
It is almost certain that this assessment, to be presented to the US president within 60 days of the publication of the executive order, will include global minimum corporation tax measures and digital services taxes implemented by other countries.
The second executive order, titled The America First Trade Policy, calls among other things for the Treasury, along with the US Commerce Secretary and US Trade Representative, to investigate any discriminatory or extraterritorial taxation on US citizens and corporations overseas.
It authorises the unprecedented use of section 891 of the Internal Revenue Code as a retaliatory tool that could effectively double the tax rates for foreign companies and individuals from these countries on income earned in the United States.
Background on the ‘global tax deal’
Although successive US administrations have publicly supported the OECD-led reform of global tax rules for multinationals, America’s relationship with Pillar One and Pillar Two has always been complicated.
More than 130 member jurisdictions, including the US, agreed the development of the two-pillar framework in October 2021.
But the attempt to formulate harmonised rules for taxing companies in the digitalised economy was mainly driven by US opposition to individual countries imposing digital service taxes unilaterally. This is because, in practice, they are targeting mainly US multinational tech companies.
At the time when countries agreed the development of the two-pillar framework, Republican lawmakers threatened countries that levy digital services taxes with the same type of retaliatory measures that are now being developed.
Harmonised rules were meant to address the issue but negotiations never progressed to a level that was politically palatable in the United States.
Under Pillar One, the world’s largest corporations, which are mostly American, would pay more taxes in countries where they have a large customer base, and fewer taxes in their home jurisdictions where they are headquartered or have operational activities.
The second pillar, which has the aim of establishing a global minimum corporation tax rate of 15% – and in the process eliminating low tax jurisdictions – was introduced almost as an afterthought.
It was mainly driven by the likes of Germany and France but some parties also considered it to be an incentive for the US to agree to Pillar One.
The global minimum tax would increase taxes for companies generating earnings in low-tax jurisdictions. It too concerns mainly the United States, as it has the highest number of multinational corporations and the largest amount of overseas profits in low-tax jurisdictions.
However, the US had already addressed this issue with its own version of a global minimum tax that applies to its multinational companies – the tax on global intangible low-taxed income (GILTI).
In short, the US never wanted Pillar One and never needed Pillar Two.
US legislators believed that agreeing to the new rules could lead to tax losses, give other countries extraterritorial jurisdiction over American businesses and constrain their ability to set tax policy.
They also wanted to retain control of all the levers affecting the competitiveness of US corporations, including their effective tax rates, both in the United States and overseas.
Criticism is not new
None of this comes as a surprise.
In September 2024, members of Congress wrote to the Secretary General of the OECD Matthias Cormann to express their opposition to elements of the international tax regime such as the under-taxed profits rule (UTPR). They wrote, “Should foreign governments seek to target Americans through the UTPR or other mechanisms in the OECD Global Tax Deal, we will be forced to pursue countermeasures.”
In a letter in UK newspaper The Times on 12 Jan. 2025, Ron Estes, R-Kan, who serves on the influential House Ways and Means Committee wrote a week before the executive orders were issued: “My House Ways and Means colleagues and I have long warned that the Pillar 2 agreement – which mandates a global minimum tax, implements the unfair undertaxed profits rule, and unfavourably treats US tax credits – is detrimental to our country’s tax sovereignty, American ingenuity, the federal treasury and our national economy.”
He accused the outgoing Biden administration of pressuring countries to adopt Pillar 2 to achieve a critical mass and warned there was no reason for any country to implement the rules.
“If these countries move forward with Pillar 2, US companies will be forced to report the impact of the proposed guidance in their financial statements. This could distort the market and be misleading to investors, especially when the US adopts a different approach to the OECD under the new administration. Companies may be required to make significant write-offs now, only to reverse them a quarter or two later when the US affects change at the OECD,” Estes predicted.
It is clear now that the US will not only disregard the rules of Pillars One and Two but also retaliate against those countries that do apply them to US multinationals.
New digital services taxes on the horizon
Although the negotiations over Pillar One were never finalised and the project is now effectively halted, OECD Secretary General Matthias Cormann said at the EU Tax Symposium at the European Parliament in March there was still scope for a pragmatic resolution of the issues around the two-pillar framework.
At the same event, EU Commissioner Wopke Hoekstra insisted the global tax deal “remains just as relevant and valid today as it was two, three or four years ago.” He said, “The bottom line is that the OECD deal is important, and the European Union will continue to pursue this work diligently.”
However, any negotiations involving the United States over Pillar One appear unrealistic over the next four years.
Given the withdrawal of the United States and the absence of agreed international rules, several countries including Austria, Canada, France, Italy and Spain have indicated that they will proceed with their own digital service taxes unilaterally.
Some countries like France already have digital services taxes and may be inclined to expand measures in particular for US tech giants like Google, Amazon and Apple.
In the United Kingdom, in contrast, ministers are reportedly prepared to scrap an £800 million-a-year tax on American tech companies as part of an economic deal with the US to escape the worst of President Trump’s tariffs.
Still, US multinationals will find it difficult operating in a market like the European Union where they could face a patchwork of different national rules and taxes applied to their digital services.
This is not only going to result in higher compliance costs than under a single global OECD standard, it will also inevitably lead to more trade disputes with the United States.
Global minimum tax becomes a flashpoint when applied to US multinationals
Unlike Pillar One, the global minimum corporate tax has been agreed and can function without US participation. Yet, at the same time, Pillar Two can still impact US companies.
To understand the extent of possible US retaliatory measures it is necessary to consider how the global minimum tax is designed to work. It consists of three main ways to raise effective corporate tax rates to a global minimum.
First, the country in which an entity operates can impose its own top-up tax, known as a qualified domestic minimum top-up tax (QDMTT), to bring that entity’s effective tax rate up to 15%. This rule applies everywhere but it targets predominantly zero-tax and low-tax jurisdictions. Some of these jurisdictions, like Bermuda, Switzerland or Singapore, are implementing QDMTT into their legislations. Others, like the Cayman Islands, so far have not.
If QDMTT is not levied, the country in which the ultimate parent entity is located can impose a top-up tax on the parent entity under the income inclusion rule (IIR). If the parent entity’s home country does not adopt the income inclusion rule, and it is clear the US is not going to apply it, the undertaxed profits rule (UTPR) comes into effect.
UTPR would allow all other countries in which the multinational corporation has constituent entities to increase the tax burden of those affiliates operating within their borders equal to the amount that would be required to raise the effective tax rate of low-taxed entity, which operates overseas, to 15%.
Much of the expert analysis of the US rejection of Pillar 2 has so far focused on UTPR, because by definition it is applied extraterritorially. It is also the rule that has irked US lawmakers the most, because it could be applied both to domestic entities of US corporations and those operating in zero-tax or low-tax jurisdictions, if their effective tax rate is below 15%.
A recent study by the OECD indicated that, contrary to popular belief, more companies have effective tax rates of less than 15% in large economies than in offshore financial centres. This is often the result of local tax breaks and incentives, such as tax credits on research and development, which the new rules would curtail to some degree.
While the main focus is therefore on the UTPR, there is no reason to assume that a US administration that rejects the “global tax deal” in its entirety could not also view the qualified domestic minimum top-up tax as a harmful new tax that “disproportionally affects American businesses”, even if it cannot be characterised as extraterritorial.
Such a tax would either take tax revenue away from the United States, which could collect it under GILTI and other US tax laws, or, to the extent that the US would not levy a tax on these US overseas entities, it could be seen as affecting their competitiveness.
If the US administration takes this position remains to be seen, but it would put low- and zero-tax jurisdictions in a difficult position, if they implemented a QMDTT in an effort to comply with the global minimum tax.
Limited room for negotiations
It is clear that the current US administration has a disdain for any kind of internationally agreed rules-based order, in particular if it can affect US interests.
Some tax experts have argued that negotiations could continue at the OECD level. Pascal Saint-Amans, the former head of tax policy at the OECD, in an interview with Luxembourg business publication Paperjam said if the US is only trying to prevent countries from applying a top-up tax to US multinationals that within the US do not have an effective tax rate of 15%, then a time-limited safe harbour for US multinationals could be agreed to keep the discussions going.
If the American objective goes deeper and is to stop any kind of top-up taxation to 15% for US businesses, even in low-tax jurisdictions, the project could be dead in the water, Saint-Amans said.
Several governments are reviewing whether adopting Pillar Two is still practical after the US withdrawal, while others including the European Union, Japan, Korea and the United Kingdom are moving ahead with its implementation.
Some are set to enact UTPRs in the tax year 2025, but the OECD has provided a transitional safe harbour until the end of 2026 by eliminating the UTPR top-up tax if the ultimate parent entity of a multinational group is located in a jurisdiction with a statutory corporate income tax rate of at least 20%.
This will provide some breathing room for potential negotiations until such taxes are implemented and the US reacts with retaliatory measures.
Saint-Amans, now a partner at Brunswick and professor at Lausanne University, said the EU will still go through with Pillar 2 because it would need unanimity to change course, which not likely.
“If there is a group of countries determined to implement it, it protects the others. In this perspective, the reform is far from dead and the OECD is not in disarray. New negotiations on Pillar 2 will happen.”
So far, the US has not pulled out of the OECD, leaving at least the potential for further negotiation. This could mean Trump may want to have the agreement amended to reflect his demands by having the US permanently exempt from the undertaxed profits rule.
A new trade and tax order
However, a US administration that is willing to upend the postwar security world order for its NATO partners, cut United Nations funding, and leave the World Health Organisation or the Paris Agreement on climate, may also have few reservations to defund or at the very least ignore the OECD.
Since President Trump issued the executive orders, it has become apparent that international tax rules are just one of several subsets of the president’s mercantilist view of trade and his preference for transactional, bilateral relationships, instead of international cooperation, in which the US can exercise its greater power.
The wording of the executive orders hint at Trump’s espoused worldview that “foreign countries are ripping America off”. It stands to reason that taxes, just like tariffs, may not just be a negotiating tool but a permanent instrument to wield power.
In this context, it is not important if retaliatory measures are based on the tax code or new tax laws. Section 891, for instance, may be limited in its effect by existing double-tax agreements. The US president has an extensive range of retaliatory measures at his disposal, in particular tariffs.
Saint-Amans believes that a tax war is unlikely but disagreements over tax could still lead to everyone taxing in their own way with retaliatory measures including commercial and tax sanctions.
This would result in a further fragmentation of the global tax landscape. Taxation might also become a tool in the wider trade conflicts, for instance, if the European Union ties market access to tax standards.
The Cayman Islands with its tax neutral position will be largely unaffected by these developments, in particular as it relates to the OECD global tax deal. Its financial services industry could in fact benefit, if it manages, as it has in the past, to offer solutions that facilitate cross-border business transactions, trade and investments flows in an increasingly complex world.
Pascal Saint-Amans is the key note speaker at Cayman Finance’s 2Q member event: ‘International Tax Cooperation in the New Era: Risks and Opportunities for the Cayman Islands’ on Thursday, 8 May 2025. Click to RSVP
