Five Things to Know About Trump’s Global Minimum Tax Order

This week, the incoming Trump administration issued a day-one executive order on the global minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. agreement known as Pillar Two, which seeks to ensure multinational corporations pay at least 15 percent in income tax. The order contains two main elements: the first is that policy promises made by the Biden administration’s Treasury officials have no effect except insofar as the US Congress passes laws to back them up. The second is that the US may retaliate against extraterritorial taxes.

The relationship between the US and the Organisation for Economic Co-operation and Development (OECD) minimum tax deal is complex, but below are the five elements most key to understanding the situation.

1. The US tax code is not aligned with the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. promulgated by the OECD, and only Congress can change that.

The US under current law already has tax rates that align with the global minimum tax agreement’s minimum. With a domestic rate of 21 percent and a scheduled increase in the effective tax rate on international income to 16.4 percent in 2026, the US exceeds the OECD’s 15 percent. Both tax rates date to 2017, before the Pillar Two negotiations began. But tax rates alone are not enough for compliance; tax bases matter too. When the OECD defined its methods for calculating a rate, it made different methodological choices in defining “tax” and “income” than American legislators had made in the past. The result is that in a few areas—most notably, the US treatment of research and development (R&D) expenditures, or the grouping of international income into a single “blended” calculation—the US operates differently than OECD specifications. These tax provisions are significant and specified in laws Congress has previously enacted. For the US to change these provisions, Congress would have to act.

2. The US tax code is, overall, significantly tougher than the Pillar Two agreement requires.

Although European countries often have higher overall tax burdens than the US, usually through value-added taxes, the US tax regime generally taxes corporations significantly more than the minimum Pillar Two requires for jurisdictions to avoid top-up tax. Domestically, the US rate is well above the minimum, and, internationally, details like expense allocation and un-generous rules for carrybacks and carryforwards make the global intangible low-taxed income (GILTI) regime more onerous than Pillar Two requires. If the goal of Pillar Two is to demand a general minimum level of revenue raised from corporations, then the US tax code comports with that goal already. The US complies with the spirit of the agreement, if not the letter.

The main area where the US differs on a matter of legitimate substance is the blended international income calculation; the OECD’s country-by-country approach is more forceful at isolating income in low-tax countries and “topping up” the taxes on that income, while the “blended” US approach allows small amounts of low-tax income to mix with high-tax income elsewhere, avoiding top-up. Advocates of Pillar Two would have preferred for the US to take a more active role as a Pillar Two enforcer by adopting a country-by-country approach. However, such an approach would come with significant costs: the country-by-country method is significantly more complex, and it could exacerbate some of GILTI’s flaws, such as un-generous carrybacks and carryforwards.

3. Congress has never enacted major legislation to support the agreement.

The Trump administration’s statement that Pillar Two is not law in the US is more of a realistic description of the status quo than a true change of course. Pillar Two is indeed not law in the US. Though the Biden administration encouraged the development of the OECD global minimum tax, Congress has not legislated to address the discrepancies. In some cases, it has not even attempted to do so. The most critical change to US taxes, a country-by-country GILTI provision, was at least present in the Biden administration’s budget and in the drafts of the Build Back Better However, Build Back Better was ultimately pared back into other legislation, missing the GILTI modifications. And other issues—such as the seeming conflict between the US R&D regime and the agreement’s requirements—went completely unaddressed. The Biden Treasury’s commitments to the OECD, therefore, greatly exceeded not just the limits of what the executive branch alone could do, but also any reasonable expectations of what laws Congress might pass.

4. The agreement contains some significant downsides for the US.

The Pillar Two agreement has two potential downsides for the US, both of which may be operative even as President Trump rejects it. First, increased foreign income taxes on US corporations will result in reduced income for US shareholders and lower taxes for the US Treasury, because US law offers credits for foreign taxes paid. In general, the more foreign taxes are paid, the more credits are offered. Second, there is a potential loss of fiscal sovereignty; to fully comply, the US would have to effectively outsource significant domestic tax policies to foreigners.

5. The US could retaliate against the agreement’s main enforcement mechanism if it is applied to US income—and the US may also retaliate against other discriminatory taxes by OECD members.

The Pillar Two agreement is intended to incentivize non-compliant countries into compliance. One mechanism—the Pillar Two rules for how participating countries treat their own companies—is relatively uncontroversial; countries are allowed to tax their own companies, even on revenue earned abroad. However, Pillar Two also introduces an unprecedented extraterritorial enforcement mechanism known as the undertaxed profits rule (UTPR). This rule would allow countries to charge extra tax on corporations that pay a sub-15 percent tax burden in other jurisdictions, even if it is not their own corporation, and even if they have no authority over the jurisdictions in question. In a few cases—primarily US companies that heavily spend on R&D—it is possible that US companies are eligible for the UTPR. Congressional Republicans, and now the Trump administration, have advocated that the US retaliate against the UTPR if it were levied on US companies.

In addition to the UTPR, the broad language of the executive order suggests that digital services taxes (DSTs) that discriminate against US companies may also induce retaliation. DSTs are partly a separate issue from Pillar Two, but also partly connected; the stalled momentum of a separate international agreement, Pillar One, is often used as a justification for imposing DSTs. The US has already taken actions to fight DSTs under the Biden administration as well, so the latter is not necessarily a change of posture from Trump’s predecessor.

Retaliation, unlike compliance with Pillar Two, does not require Congress to act. Congress has for almost a century delegated to the president some authority to retaliate against discriminatory foreign taxes, in response to a French tax law from the 1930s. And retaliation against existing DSTs could come quickly; the Trump executive order gives the Treasury Department 60 days to examine foreign taxes for discrimination.

The Trump administration’s statement does leave open the possibility that Congress may later change US law to become more aligned with Pillar Two. Full alignment is extremely unlikely, but a token concession or two followed by détente would be preferable to escalating retaliation over an international agreement that the US already roughly follows. Policymakers, foreign and domestic, should prioritize outcomes over processes, and learn to live with the modest differences between the US and OECD approaches.

Share this article