In October 2021, the members of the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) agreed on a two-pillar solution to update the international tax rules as a logical consequence of the rise of the digital economy.
More than 130 countries have agreed to the outline of the new international corporate tax rules. They have uniform regulations tailored to stipulate that any excess profits of these tech giants should be taxed at the minimum of 15% in any jurisdiction where they operate.
The two-pillar inclusive tax framework, set in motion by the agreed parties, the introduction of “Global Tax Deal” by which it will be ensured that large multinational corporations pay a minimum level of tax on the income arising from each jurisdiction where they make their supplies.
The accession to the agreed framework of the Global Tax deal isn’t mandatory by the members of the OECD, however, if they decide to introduce it through domestic legislation, the common rules should be followed.
One of the first major decisions of the U.S. The President is to withdraw the U.S. from the “Global Tax Deal”, an international tax deal that paved the way for introducing the digital services tax and the like on the income of the multinational corporations.
Many of these multinational corporations are U.S. based. The President stated the GloBE Model Rules were “not-friendly” towards the U.S. tech giants, but they are tailored to limit their growth. The President issued an executive order to the US Treasury Secretary to investigate if any jurisdiction that has mandated the GloBE rules imposes any unfair or disproportionate income tax or similar levy to US enterprises.
Future of GloBE Model Rules
Last February, President Trump issued a presidential memorandum, through which it mandated the US Treasury secretary and other officials to conduct a thorough review of tax policies and regulations of any jurisdiction that has mandated the digital services tax or other similar levies on the income of the U.S.-based digital service providers.
The primary parameter in this approach is to protect the U.S. – based MNEs tech giants from any “disproportionate” extraterritorial income tax. The memo calls for scrutiny of all jurisdictions that have mandated the OECD GloBE rules through domestic legislation that “target” US tech giants.
President Trump announced that any jurisdiction that has enacted digital services taxes that unfairly tax U.S. digital enterprises opens the possibility of experiencing import tariffs or similar levies towards the companies that have their place of business within those jurisdictions.
The US hasn’t passed the laws that back Pillar Two.
The scope of potential remedies that the U.S. government could enact to “protect” the likes of Meta, X Inc., Google, starts from imposing new or increased import tariffs of goods or services from “unfriendly” tax jurisdictions.
Currently more than 50 countries have implemented Pillar Two Globe Model Rules. If we follow the tone and direction of the announcement of President Trump, the tax policies these jurisdictions have in place will probably be the first ones under scrutiny by the US government.
US measures vs DST jurisdictions
What measures the US government will adopt as a response to the jurisdictions that have legislation in place that enforces the tax rules described as “unfair or discriminatory” towards the US digital enterprises is still very early to predict.
The first parameter that will, in some manner, dictate the content of the US government response, is based on the results of the inquiry of the tax framework these countries have in place. In cases where the review of tax policies results in a disproportionate tax burden on US-based MNEs, President Trump will get a formal document with a list of options that could or should be applied to these countries.
The scope of measures invoked following the US legal framework is quite broad. The President can increase the taxes for the economic operators who originate from these countries. The income tax for these firms could be doubled.
One of the options that will be on the table, and which is already used, is the imposition of new or additional import tariffs towards the imports from the jurisdictions that are “seen” as the ones that are “unfriendly” or have in place discriminatory tax rules towards US companies.
The newly elected US government’s shift towards the international tax standards outlined by the agreed OECD Model Rules for digital tech giants guarantees that there will be many turbulences between the US and other trade partners in the next period.
It remains to be seen what the answer of the US government will be towards the digital services tax that many countries have enforced through domestic legislation, which primarily impacts(among others) many U.S. – based digital service providers.
The US government could increase the income tax for foreign digital service providers, increase the import tariffs for goods from the EU and/or other regions.
Aleksandar Delic
1stopVAT Indirect Tax Manager – E-Commerce