Multinational companies had been preparing for years for the impacts from the 15% minimum global corporate tax initiative and a global tax reform framework.
Yet within hours of his Jan. 20 inauguration, President Donald Trump ordered the U.S. out of the “global tax deal,” leaving companies and experts uncertain about how U.S.-based multinationals will need to comply.
Trump’s move was heralded by some as a kind of death knell for the global minimum tax, known as Pillar 2, an initiative which has been led by the Organization for Economic Co-operation and Development. It has also raised questions about what exactly the broadly written directive was targeting.
The answers are not yet altogether clear. It will take some time before the true state of the global tax regime and where and how companies must comply in the Trump era emerges, according to Grant Wardell-Johnson, global tax leader at the Big Four accounting and consulting firm KPMG.
The next official step he expects will come in mid-March, when the Treasury Secretary and U.S. trade representative were ordered to deliver their recommendations for protective measures against foreign countries whose tax rules may be harming U.S. companies. “The big question is…`What will the U.S. ask be?,’” Wardell-Johnson said in an interview. Still, he believes the global tax regime can likely survive without U.S. support.
While the directive did not directly mention the global minimum tax, Wardell-Johnson asserts that it appears to be what is in the crosshairs of any negotiations that the U.S. has on the global tax deal, along with the related undertaxed profits rule. Known as UTPR, it allows a country to “top up” or increase taxes on a business if that business is part of a larger company that pays less than the proposed global minimum tax of 15% in another jurisdiction, according to the Tax Foundation.
Already a “critical mass” of countries have introduced the Pillar 2, including the Europe Union countries, the United Kingdom, Japan, Korea and Australia. Despite that, he said he sees a possible avenue for negotiations in non-U.S. companies agreeing to turn off the tax on profits within the U.S. but keeping it in effect for profits of subsidiaries of U.S. companies located in countries that have the tax. Another option that could be a point of negotiation would be to extend an existing safe harbor that has given U.S. multinationals more time to transition to the new tax rules, he said.
The uncertainty around the global tax deal comes as Trump separately announced on Sunday that he would be enacting 25% tariffs on all steel imported into the U.S., according to ABC News and other media reports.
Trump’s directive appears to be an opening salvo that could prompt tax negotiations, Wardell-Johnson said, citing a similar strategy by the president in threatening tariffs against Mexico and Canada.
“I think the Jan. 20 directive was designed to appear strong but to leave options open for the future as to what they might want to adopt,” he said.
