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“ESPECIALLY INSANE.OECDOECD OECD OECD OECD OECD OECD OECD OECD PCYour browser does not support the element.” “Drastic.” “Noisy and provocative.” These are just a few of the words used by tax experts—normally an even-keeled bunch—to describe Donald Trump’s threat to hit foreigners with punitive tax rates depending on the policies implemented by their governments. It is a sign of how the potential global economic damage from Mr Trump’s return to the White House goes beyond trade and tariffs. Indeed, tax disputes may end up being even more contentious.At issue is the question of how countries treat foreign companies. The international tax system has long suffered from two related problems: firms go to great lengths to book profits in low-tax jurisdictions, and governments thus have strong incentives to compete with each other in cutting levies so as to attract investment. Hoping to forestall a race to the bottom, 136 countries reached a compromise in 2021 to overhaul tax rules—the outcome of talks held under the auspices of the , a group of mainly rich countries. The crucial element was that governments would impose a minimum tax rate of 15% on the profits of multinational companies.Now the Trump administration is threatening to blow up the agreement. Unlike America’s withdrawal from the World Health Organisation and the Paris climate agreement, the framework is not a formal treaty that America can leave. Rather, it is a common approach that depends on governments each passing legislation to impose top-up taxes on companies that pay less than the 15% minimum. This means that, if some countries choose to tax a multinational firm at a lower rate, others can claim the difference. It has been clear for some time that America would struggle to pass such legislation owing to opposition from Republicans, who think the deal encroaches on Congress’s powers. But Joe Biden’s administration encouraged other countries to enact their own laws, knowing the logic of the deal was that it would ultimately compel officials throughout the world, including in America, to come into line. If not, foreign authorities would have a claim on revenues from their “undertaxed” firms.Mr Trump hopes to break this logic by promising brutal retaliation. Any country that imposes a top-up tax on an American company would, in his administration’s view, be guilty of extraterritorial overreach. In executive orders issued on January 20th, the day of Mr Trump’s inauguration, it said that it could respond by doubling taxes on citizens and firms from any offending countries. These orders displayed his advisers’ talent for unearthing obscure statutes that serve their goals: the law that allows the doubling of taxes on foreigners has been in place for nine decades without being used. Even if Mr Trump’s objection to the dealwas expected, his threat’s ferocity surprised observers.Where does that leave the global minimum tax? Some experts reckon it will end up in tatters. In America corporate tax accounts for 7% of the government’s tax revenues, well below an average of 12% in other countries. And that may fall further if Mr Trump gets his way and cuts the corporate-tax rate again, as in his first term. Adam Michel of the Cato Institute, a libertarian think-tank, thinks this would be a decent result. He calls international competition on tax “a broadly good force”, which has led to fewer distortionary taxes and more business investment.The fear is that any vacuum which results from the gutting of the global minimum baseline will be filled not by benign competition but by rancour and retribution. About 40 countries, including Britain, Germany and Japan, have already adopted top-up tax laws. If they enforce these, and Mr Trump is true to his word, messy conflicts will arise. Mr Trump’s order about doubling tax rates is an extreme threat, and so may not seem all that credible. But Republicans in the House of Representatives have introduced legislation to create an option for milder retaliation that would still be serious (tax rates on the American incomes of rich investors and firms from targeted countries would increase by five percentage points each year for up to four years). Moreover, unlike tariffs, which largely affect goods exporters, higher taxes could well hit a much broader array of foreigners, from bankers to lawyers.Other countries would not sit idly by if America were to slap higher taxes on their citizens. As it stands, dozens have introduced taxes on digital services that American officials decry as unfairly punishing their tech giants. Although many governments had put these on hold pending implementation of the full pact, if Mr Trump follows through on his punitive taxes they would probably have few qualms about charging ahead. Add Mr Trump’s threatened tariffs to the mix, and it becomes still more combustible.Itai Grinberg, America’s lead negotiator in the talks under Mr Biden, reckons that big American firms may come to regret encouraging the Trump administration to demolish the global framework. “If you’re a business that has double-digit revenue growth year after year, an increase of a couple of points in your effective tax rate at the margin just doesn’t matter that much,” he says. What matters more is an international environment conducive to continued growth, and that is jeopardised by escalating fights over taxation.One irony is that the American corporate-tax regime is not radically different from the standards set in the international deal. In fact, it was Mr Trump’s reforms in 2017 that helped inspire the framework by introducing an American version of a global minimum tax, set at 10.5% of global profits. In substance, there are differences: the American minimum applies to pooled profits, whereas the one applies to each individual country. But such are the sort of details that can be worked out in talks. “This is clearly setting us up for protracted negotiations,” says Pat Brown of w, an accounting giant.If America and others want to find a solution, there are ways forward. Countries that had paused their digital-services taxes could continue to hold off, pending talks. The global-minimum tax deal includes a “safe-harbour” provision, which delays the top-up tax until 2027 in places with a minimum domestic corporate income tax of 20%—a threshold that, for now, includes America. The safe harbour could be extended. At the same time, America’s own global minimum rate is set to rise in 2026 from 10.5% to a little over 13%, closing the gap between America and the rest. Stanley Langbein of the University of Miami notes a potential upside in the links between trade and tax disputes: if the Trump administration believes that it has scored a victory on one side of the ledger, it may be happier to concede on the other.The trouble with these compromises is that they are generally based on negotiators wanting to sit together and work towards an agreement. Given Mr Trump’s hardline approach on global taxes, such goodwill seems implausible for the time being. “The rest of the world at the political level will not be eager to show that the bullying worked,” says one diplomat. During Mr Trump’s first term, company bosses and investors alike learned about the danger of tit-for-tat tariffs as American levies were met with retaliation by other countries. In Mr Trump’s second term they had better brace for tit-for-tat taxes.
