Donald Trump’s return raises prospect of global tax war

As Donald Trump’s second term in the White House threatens to spark a global row over taxes, experts are concerned about Republican promises to punish countries that impose excessive tariffs on US multinationals.

The head of tax at a large multinational told the Financial Times that 2025 “could be the year everything goes to hell in a handbasket and businesses get caught in the middle”.

Alan McLean, business chair of the OECD Tax Committee, which represents business interests in talks between the Paris-based group of rich economies, said imposing tariffs in response to the global tax system “could disrupt economic growth by raising the cost of doing business and raising prices for consumers”.

The disputes are focusing on Republicans’ unease about a key element of the global tax deal OECD That would allow other countries to impose top-up taxes on US multinationals starting this year

TrumpA self-described “tariff man,” he has often threatened to use tariffs to ensure that the interests of U.S. businesses and households are protected. Since winning the US election, the president-elect has threatened to tear up a free trade agreement with Canada and Mexico and impose 25 percent tariffs on imports from the neighbors.

Tax experts believe The EU is in the crosshairs Republicans, who have branded a key part of the OECD agreement, known as the Under Taxed Profits Rule and often referred to as the UTPR, as “discriminatory”.

The rule allows countries to raise taxes on local subsidiaries of a multinational group if the multinational pays less than 15 percent of corporate tax in another jurisdiction. This rule means that other countries will be able to impose top-up taxes on US companies.

“There is a broad sentiment among Republicans that US companies should not be paying UTPR,” said Aruna Kalyanam, global tax policy leader at EY.

The EU implemented the system under a directive in 2022, but some experts believe the bloc could compromise its enforcement with Trump in exchange for favorable treatment of its exports.

According to European Commission figures, the EU has a trade surplus with the US of 158 billion euros.

“Europe has a strong legal culture and the law is the law, but I can imagine a future arrangement between Trump and the EU where the EU leaves the UTPR in order not to engage in an economic war,” said Valentin Bendlinger. Senior consultant at Austrian tax consultancy company ICON Wirtschaftstreuhand.

However, others say the change is unlikely because it would require agreement from all 27 member states.

“[The UTPR is] Widely implemented, a powerful bargaining chip, and not easily rolled back,” said Rasmus Carlin Christensen, international tax researcher at Copenhagen Business School.

As of 2021, more than 140 countries are working at the OECD to implement the landmark tax treaty.

The treaty, which countries agreed to in principle, consists of two “pillars”. The first seeks to force the world’s largest multinationals to declare profits and pay more in the countries in which they do business. The second introduced a 15 percent global minimum effective corporate tax rate, designed to limit the relocation of multinationals to lower taxes on their profits.

In 2023, influential Republican Congressman Jason Smith described the global OECD agreement as “Biden’s global tax capitulation.”

Smith drafted a bill to increase the tax rate on the profits of companies headquartered in jurisdictions with “extraneous and discriminatory taxation” against US multinationals, including the UTPR. The bill has not been enacted but could be revived under a Trump presidency.

It wouldn’t be a “heavy lift” for a Republican administration, which controls all branches of government, to implement it, Kalyanam said.

Smith’s opposition to the OECD agreement is shared by Republican senators. A senior congressional aide echoed Smith’s language and said the UTPR rule was widely viewed by Republican lawmakers as “discriminatory” and “exclusionary.”

“In general, Senate Republicans think the tax deal undermines U.S. interests,” the aide said.

The question of whether a tax war occurs may depend on whether other countries choose to apply the UTPR rules.

To date, the UTPR has been enacted in jurisdictions including the EU as well as Australia, Canada, Japan, New Zealand, Norway, South Korea, Turkey and the United Kingdom.

However, some OECD countries mindful of US concerns have introduced a “temporary safe haven”. It also delays the UTPR applicability date until 2026 for countries with statutory corporate tax rates above 20%. The U.S. has a 21 percent rate — though Trump has proposed cutting it to just 15 percent for domestic manufacturers.

Not all jurisdictions that have enacted the UTPR have enacted safe harbor clauses.

“It’s causing a lot of hand-wringing for companies,” said Daniel Rolfes, head of KPMG’s Washington national tax practice.

Others are hopeful that a compromise can be reached between the countries that would avoid a tax war.

“There will be some kind of agreement. That’s what Trump likes to do. Although it’s going to be painful down the road,” said the multinational tax chief.

One way countries could decide to avoid the potential problem of US multinationals being subject to the UTPR is to further delay the start date of the implementing rules past 2026.

Grant Wardell-Johnson, global tax policy leader at KPMG International, said: “I suspect they will take it down the road and the UTPR safe harbor will be extended. Many countries will not want a political fight with the US over this.”