Trump attacks global minimum tax
President Donald Trump’s withdrawal from the OECD minimum 15% global tax deal could hurt Africa.
Amid Donald Trump’s blizzard of executive orders fired off moments after being inaugurated as United States (US) president on 20 January was one withdrawing the US from the Organisation for Economic Co-operation and Development (OECD) global tax deal.
The deal requires all large multinationals (with revenue of over 750 million euros a year) to pay a minimum tax rate of 15% in all the jurisdictions (territories) where they operate.
In 2021, 136 countries agreed to this deal, and some began implementing it in 2024. The US’ Biden administration was among those that agreed but had not begun implementing.
Trump threatened protective measures against any foreign country that taxed US companies that were ‘extraterritorial or disproportionately affect American companies.’ His order has been interpreted by the Tax Justice Network as effectively demanding that ‘countries surrender tax sovereignty at economic gunpoint.’
The network said Trump’s order would frustrate the OECD’s efforts to curb the widespread practice of multinational enterprises dodging their tax obligations by shifting profits away from jurisdictions where they earn income, to lower tax jurisdictions.
This profit-shifting has affected Africa especially badly over the years. A 2020 report from the United Nations (UN) Conference on Trade and Development conservatively estimated that Africa lost US$88.6 billion a year in illicit financial flows (IFFs).
Africa loses US$88.6 billion a year in illicit financial flows – mostly from large commercial corporations
It’s hard to isolate the tax avoidance component of IFFs. In a 2015 report, an African Union high-level panel estimated that of the roughly US$50 billion a year in IFFs from Africa, 65% were from commercial activities, 30% from criminal activities and 5% from corruption. The panel’s definition of commercial activities included non-tax practices such as mis-invoicing of trade. It said ‘large commercial corporations are by far the biggest culprits of illicit outflows.’
Trump’s executive order said the OECD global tax deal ‘not only allows extraterritorial jurisdiction over American income but also limits our nation’s ability to enact tax policies that serve the interests of American businesses and workers.
‘Because of the global tax deal and other discriminatory foreign tax practices, American companies may face retaliatory international tax regimes if the United States does not comply with foreign tax policy objectives.’
The order states, ‘The global tax deal has no force or effect in the United States.’ And Trump instructed his officials to investigate protective (read retaliatory) measures for the US if any country tries to impose them on US companies.
The OECD explains that the 15% global minimum tax ‘ensures that large multinational enterprises pay a minimum level of tax on their income in each jurisdiction where they operate, thereby reducing the incentive for profit shifting and placing a floor under tax competition, bringing an end to the race to the bottom on corporate tax rates.’
A US withdrawal could collapse the OECD global tax system, cutting African tax collections and boosting IFFs
It has been estimated that the tax would increase overall corporate income tax revenues by US$155 billion to US$192 billion per year, or between 6.5% to 8.1% of current global corporate income tax revenues.
In its statement, the Tax Justice Network said Trump ‘plans to question the right of any country to tax American multinational corporations and is threatening to take countermeasures against countries that do not, in effect, cede their tax sovereignty over US multinationals operating within their own borders.’
Tax Justice Network Chief Executive Alex Cobham said: ‘The US will now investigate the tax rules of every other country in the world, and is threatening sanctions for any measure that they view as “extraterritorial” or “disproportionately” affecting US companies.
‘Republican lawmakers have already made clear that they view most current proposals as falling foul of these criteria – and that means that all OECD member countries and many others are now under threat.’
The African Tax Administration Forum (ATAF) has a slightly different view. An official told ISS Today that the OECD tax allows a country to top up tax collected from a multinational in its territory to the 15% minimum – but only if the country has enacted a ‘domestic minimum top-up tax’ rule. Without the rule, the country where the multinational’s parent company is located may collect the top up tax – if it has enacted an ‘income inclusion rule.’
On the plus side, the withdrawal could increase global support for a UN convention on international tax cooperation
If neither rule has been adopted, a third kicks in – the under taxed profits rule. It allows all countries where the multinational operates to collect enough tax to make up 15%. This could include taxing the multinational’s operations in the parent company’s country.
The ATAF official said it seemed to be this under taxed profits rule that bothered Trump, who regarded it as an extraterritorial tax on US companies. The official said he didn’t think the US was concerned about its multinationals being charged the 15% rate by a country for the profits generated in that country.
If so, the Trump administration is not threatening the tax collection of say, African countries. However the withdrawal of the US from the global minimum tax did threaten to collapse the entire OECD global tax system – which would greatly reduce African tax collected, and boost IFFs.
On the plus side, Cobham told ISS Today that Trump’s executive order would likely increase global support for negotiations on a UN framework convention on international tax cooperation, which starts next month. The resolution to start the process was introduced by Nigeria on behalf of the African Group, and could deliver a more inclusive and ambitious global tax deal than the OECD one.
Danny Bradlow, global economic governance expert at the University of Pretoria agrees. He said while Trump’s order was bad for the OECD tax deal, ‘it is important to recall that the US had not yet implemented it. Thus its direct impact on issues like IFFs is not likely to be substantial, at least in the short run.
‘In addition, this development could be positive for African countries’ efforts to promote a UN tax framework convention – especially if Trump’s action persuades other OECD countries that the OECD tax deal is not sustainable.’
That UN convention is ultimately the right instrument to ensure a just international tax regime. But would the unilateralist Trump abide by a UN ruling any more than an OECD one?
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