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

How Europe can prepare for Trump 2.0

 

How Europe can prepare for Trump 2.0 – an overview

Published: November 7, 2024 10.17am GMT The Converstation

After an unprecedented political comeback and sweeping victory, Donald Trump will soon be the 47th US president, the first in over 120 years to win a second non-consecutive term. He is also the first convicted felon and twice-impeached president to be re-elected.

But historic firsts aside, what does this mean for Europe, and how can EU countries prepare for four more years of Trump? During his last term, Trump was no friend to Europe, but the “good” news is that this time around, EU leaders know what to expect, as Trump has made his intentions very clear.

He claims he will end the war in Ukraine within 24 hours and bury Ukraine’s bid to join NATO. He will also levy 10% to 20% tariffs on all European imports (and 60% duties on all Chinese imports), and plans to pull out of the 2015 Paris Agreement on Climate Change for the second time.

His return will also have a huge impact on European politics, emboldening far-right parties who embrace his stance on immigration and national identity. In short, Trump will further destabilise the global order and undermine multilateralism, transatlantic relations, and European unity.

Security and NATO under threat

In anticipation of Trump pulling the plug on Ukraine and potentially NATO, European nations must immediately step up their defence capabilities and spend at least 2% of GDP on defence.

This is crucial for two reasons. Firstly, EU members must finally come to terms with the need to rely on one another for defence and security. Secondly, this would send a positive signal to Trump, who has repeatedly accused NATO allies of not paying their dues.

It will also be essential to promote cooperation between EU countries with significant military-industrial complexes such as France, Italy, Spain, and Poland. This will spur European markets and create much needed innovation and economic growth.

Europe is already moving tentatively in this direction. The recent Draghi report, published in September this year, encourages EU countries to focus on their own arms industries instead of buying weapons from the US – currently, 63% of Europe’s arms come from the US.

EU countries may also consider taking on joint debt as a way to pool defence spending and arms procurement, and the European Investment Bank should lend money to EU countries for defence investments. This joint borrowing (by raising “eurobonds”) could also increase overall funds available to Kyiv, which will be especially important if Trump backs out of Ukraine.

Trade and tariffs

Trump’s protectionist intentions have been no secret – at a recent rally he said that “outside of love and religion, it’s the most beautiful word there is: tariff.”

EU leaders are very jittery about the threats of increased tariffs, as these could lead to a huge plunge in EU exports to the US, potentially impacting millions of jobs. The US-EU trade relationship is the largest in the world, standing at $1.3 trillion. EU-China trade, for comparison, is a distant $758 billion.

Machinery, vehicles, and chemicals – sectors which represented 68% of EU exports to the US in 2023 – would be affected most. Germany, the Netherlands, Ireland, and Belgium would be most exposed to a drop in bilateral trade.

To Trump-proof itself against high tariffs, the EU must turn towards other regional markets. It should, for instance, finally ratify the Mercosur agreement and pursue other regional alliances to reduce its reliance on US demand.

The bloc should also try to negotiate before opting for retaliatory tariffs. This already happened during the first Trump presidency, when Ursula Von der Leyen personally met with Trump and tried to secure more favourable terms of trade.

Given Trump’s volatility, this kind of personal negotiation may actually be essential in getting him to make trade agreements, such as exemptions for certain exported goods.

Democracy and the undermining of European values

Trump’s victory will energise and embolden far right parties across the EU who share his illiberal ideas on immigration and national identity, many of whom are EU and NATO sceptics like he is. Viktor Orbán of Hungary, for instance, recently said that he would celebrate a second Trump presidency with bottles of champagne.

Many of the EU’s far-right parties, including Alternative for Germany (AfD), the Netherlands’ Freedom Party, France’s National Rally (RN) and the Brothers of Italy, consider Trump to be the figurehead of their movement. They will want to foster closer ties with the US president, and will feel empowered to spread and normalise their ideas across the continent.

This can only undermine the fundamental democratic values upon which the EU was founded, and lead to greater tension in the social fabric of member countries.

To counter the rise of such anti-democratic forces, the EU cannot be equivocal, and should establish ways to sanction or even expel member countries who no longer adhere to its founding principles of democracy and human rights.

The EU can also limit their influence by, for instance, changing its voting systems. Many decisions made in Brussels currently require unanimous consensus among 27 countries, and this gives a smaller, more illiberal country like Hungary the power to block important decisions. Indeed, Orbán has blocked EU military and financial aid to Ukraine on several occasions.

This should no longer be allowed, and a simple change to voting systems – from unanimous to majority votes – would prevent the EU’s most extreme members from exerting a disproportionate level of power.

Such measures would not be enough to prevent the rise of illiberalism in the EU, but they could prevent it from derailing the continent’s democratic structures.

Can we Trump-proof Europe?

All of the above measures will require greater European unity and cooperation. The good news here is that past crises have spurred more collective action among EU members. The Eurozone crisis led to more fully integrated banking systems, the Covid pandemic led to joint purchases of vaccines for all EU countries and EU-wide borrowing to fund the economic recovery program, and the invasion of Ukraine prompted EU countries to rally in support of Kyiv.

Let’s hope a second Trump presidency leads to similar joint actions, strengthened unity, and more strategic autonomy. The immediate future of the EU depends on it.

Russian Lawmaker Says Biden Is Risking WW3 With Missile Decision

A Ukrainian service member from the special police unit Hyzhak (Predator) fires a
howitzer D30 towards Russian troops, amid Russia's attack on Ukraine, near the frontline
city of Toretsk, Ukraine October 25, 2024. REUTERS/Stringer/File Photo

Russian Lawmaker Says Biden Is Risking WW3 With Missile Decision

MOSCOW (Reuters) -Russian lawmaker Maria Butina said on Monday that the administration of President Joe Biden was risking World War Three if it had allowed Ukraine to use U.S.-made weapons to strike deep into Russia.

"These guys, Biden's administration, is trying to escalate the situation to the maximum while they still have power and are still in office," Butina told Reuters.

"I have a great hope that (Donald) Trump will overcome this decision if this has been made because they are seriously risking the start of World War Three which is not in anybody's interest."

Reuters, citing two U.S. officials and a source familiar with the decision, reported on Sunday that Biden's administration has made the decision to allow Ukraine to make the strikes with U.S. weapons deep into Russia.

The New York Times also reported that Biden's administration had made the decision. The Kremlin has yet to comment on the reports.

President Vladimir Putin said on Sept. 12 that Western approval for such a step would mean "the direct involvement of NATO countries, the United States and European countries in the war in Ukraine" because NATO military infrastructure and personnel would have to be involved in the targeting and firing of the missiles.

In late October, Putin said that Russia's defence ministry was working on different ways to respond if the United States and its NATO allies help Ukraine to strike deep into Russia with long-range Western missiles.

"I guess there are some people in the United States who have nothing to lose for whatever reason or who are completely off the grid so much that they simply do not care," said Butina, who spent 15 months in U.S. prison for acting as an unregistered Russian agent and is now a lawmaker for the ruling United Russia party.

(Reporting by Guy Faulconbridge; Editing by Lidia Kelly;)   Copyright 2024 Thomson Reuters.

Trump's defense pick spooks even allies