Trump 2.0: an international tax perspective

Trump 2.0: an international tax perspective

Following his victory in the US presidential election, Donald Trump is preparing for his second term in the White House. In this post we consider how “Trump 2.0” might influence the shape of international tax policy over the next four years.

Domestically, Donald Trump has indicated that he intends to cut taxes. One option is to make permanent many of the measures introduced in the 2017 Tax Cuts and Jobs Act (TCJA), which reduced the tax burden for many individuals and businesses in America and which are due to expire at the end of 2025. He has also promised to lower the corporate tax rate to 15% for at least some US companies. 

These cuts may prove consequential outside of the US, because of how they will be funded – Trump’s basic premise is that the cost will be offset by revenue from import tariffs that he has promised to impose, and the threat of those tariffs risks halting recent progress on international tax reform. The impact may be felt most keenly in the context of the OECD’s “Two-Pillar Solution” to taxing the digital economy.

On Pillar One, the US has been at the heart of the debate surrounding the Amount A rules, which would give market jurisdictions the right to share in the profits of multinationals irrespective of where they are headquartered. Both these rules, and the domestic digital services taxes (DSTs) they were intended to supersede, have been viewed in Washington as an attack on US tech firms, and resistance is likely to harden under Donald Trump. 

It has proved difficult to achieve consensus on the Amount A rules even outside of the US, and the mechanics of their implementation – which require agreement from territories housing a majority of affected groups – mean that opposition from the White House may be terminal. The obvious response is for governments elsewhere to turn again to DSTs, but they will need to weigh the potential for additional revenue against the real risk of retaliatory US tariffs.

The prospect of new tariffs may also have an impact in the context of Pillar Two, which aims to impose a 15% global minimum tax on large multinationals. An income inclusion rule (IRR) is now in force in the UK, Canada and most EU member states, with legislation providing for an undertaxed profits rule (UTPR) from 2025 being enacted in most of that population. There remains, however, a long list of jurisdictions that have not yet implemented these rules, and the deferred introduction of the UTPR in particular presents an opportunity for the Trump administration to apply pressure on countries that may be considering introducing local Pillar Two rules. 

If countries see a linkage between whether they apply the Pillar Two rules and the US attitude to new tariffs, they may now think twice about adopting Pillar Two rules, or even consider repealing them. The fact that China and India have already opted to sit on the sidelines does not help their cause.

Trump 2.0 can therefore be expected to make progress more difficult for the two OECD pillars. The impact of this is compounded by the complexity and international reach of US domestic tax policy, from the Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) regimes introduced by TCJA, which are expected to remain in place, to the US corporate alternative minimum tax (CAMT) introduced under Biden as an alternative to Pillar Two. Trump’s return may reduce the prospect of greater alignment between US regimes and their more standardised alternatives in the EU and elsewhere (including the US choosing to implement Pillar Two).

There will also be concerns from a UK perspective. If new US tariffs directly or indirectly affect the UK economy, the new Labour government may be faced with the prospect of further tax rises to meet its spending commitments, having left little room for manoeuvre in its recent Budget. 

In other areas, the new administration may bring less controversial tax changes. Trump has suggested that he will end the double taxation of US citizens living abroad, which could dovetail nicely with the UK’s new inpatriate regime, and lower domestic taxes may help to bring businesses onshore. On balance, though, we can expect Trump 2.0 to push for “America first” in his approach to international tax, which is likely to result in contention and complexity.⍐

Source: https://www.macfarlanes.com/ 15-11-2024