Trump effectively pulls U.S. out of global corporate tax deal

Trump effectively pulls U.S. out of global corporate tax deal

Sub: IR

Sec: Int Groupings

Why in News?

• Former U.S. President Donald Trump declared the 2021 Global Corporate Tax Deal “has no force or effect” in the United States.
• This decision effectively withdraws the U.S. from the OECD-led agreement involving 140 countries, potentially reviving digital service levies targeting American firms.

Context

The global corporate tax deal aimed to:

• Establish a 15% global minimum tax rate.
• Address tax base erosion and profit shifting.
• Share taxing rights on multinational companies, particularly in nations where their products are sold (Pillar 1 framework).

Trump challenges these goals, while citing protection of American companies and economic sovereignty.

Key Highlights

• U.S. Policy Stance
  • The U.S. maintains a 10% global minimum tax under Trump’s 2017 Tax Cuts and Jobs Act.
  • The U.S. Congress did not approve the 15% global minimum tax.
  • Trump directed the Treasury to implement protective measures against foreign tax practices.
  • Countries adopting the 15% tax (e.g., EU, Britain) could impose a “top-up tax” on U.S. firms paying lower rates.
  • The memorandum emphasized economic sovereignty and retaining U.S. competitiveness in the global market.
• Impact on Digital Services Taxes (DST)
  • Without U.S. participation in the Pillar 1 framework, countries like Italy, France, Britain, Spain, and Turkey might reinstate unilateral DSTs targeting U.S. firms like Meta and Apple.
• Historical Context
  • The OECD-led negotiations aimed to curb tax competition and prevent multinational firms from exploiting low-tax jurisdictions.
  • In 2021, then-Treasury Secretary Janet Yellen endorsed the global deal to ensure fair taxation.

Conclusion

Trump’s withdrawal from the global tax deal prioritizes U.S. sovereignty but raises concerns over potential trade tensions and economic disruptions. The decision reopens debates on the global tax structure, potentially reviving unilateral DSTs and risking retaliatory measures.

What is the Global Minimum Tax (GMT)?

GMT is a standard minimum tax rate applied to the corporate profits of large multinational enterprises (MNEs) worldwide.

Objective: To curb tax competition among nations and reduce profit-shifting by companies to low-tax jurisdictions (tax havens). 

Rate: The OECD’s proposal sets a minimum rate of 15% on foreign profits of large MNEs.

Key Features of the OECD Plan

• Two-Pillar Framework:
  • Pillar 1: Redistributes a portion of taxing rights from large MNEs to countries where their customers and users are located.
• Covers only the most profitable MNEs.
• Aims to replace unilateral Digital Services Taxes (DSTs) and resolve disputes.
• Pillar 2: Establishes the 15% minimum tax rate.
• Targets MNEs with global revenues exceeding 750 million euros.
• Allows countries to impose a “top-up tax” on profits taxed below this rate in other jurisdictions.

Digital Services Taxes (DST)

• DSTs are levies on revenues earned by companies from providing digital services like online advertising, digital marketplaces, and user data monetization.
• Purpose: They address the challenge of taxing digital businesses that derive significant profits from a country without a physical presence there.
• Applicability: Typically targets large multinational companies, particularly in the tech sector.

GAFA Tax

What It Stands For: GAFA refers to Google, Amazon, Facebook, and Apple, representing the major tech companies often targeted by these taxes.

French Implementation:

In 2019, France introduced a 3% GAFA tax on revenues earned from digital services within its borders by companies. This became a model for other countries considering similar taxes.

Global Pushback: U.S.-based companies criticized the tax as discriminatory, leading to trade tensions.

Equalisation Levy (India)

Introduced in 2016 to tax online advertising services provided by foreign companies to Indian businesses. In 2020, extended to cover e-commerce operators earning revenue from India without physical operations in the country. A 2% levy applies to revenues from online goods and services.

Objective: Address tax avoidance by tech companies that use cross-border digital models to avoid paying taxes in India.