Noted With Interest - The Art of Plucking a Golden Goose: The Future of the OECD’s Global Anti-Base Erosion Model Tax Rules

In the Seventeenth Century, French Finance Minister Jean-Baptiste Colbert famously declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Four centuries later, proposals for a global tax agreement are at risk because of a new Executive Order issued by President Trump on the day of his inauguration. On January 20, 2025, President Trump issued an Executive Order stating the “Global Tax Deal” of the Organization for Economic Co-operation and Development (“OECD”) shall have “no force or effect” within the US (The Organization for Economic Co-operation and Development (OECD) Global Tax Deal (Global Tax Deal) — The White House) (the “Executive Order”). The Executive Order has been championed by the Trump administration as restoring the United States’ sovereignty and economic competitiveness, but as a reversal of the United States’ support for the Global Tax Deal under the Biden administration, it has caused uncertainty in the global corporation tax regime.

The Global Tax Deal

            Although the Executive Order does not specifically address any part of the OECD’s tax initiatives itself, the “Global Tax Deal” refers to the OECD’s proposal of a global minimum tax on profits of multinational enterprises (“MNEs”) at 15%, regardless of where profits arise. The global minimum tax was introduced in December 2021 in the OECD’s Global Anti-Base Erosion Model Rules (the “GloBE Model Rules”). It is Pillar II of a two-pillar solution the OECD established to address base erosion and profit shifting (“BEPS”): base erosion is where MNEs reduce taxable profits in one jurisdiction; profit shifting involves moving taxable profits from one jurisdiction to a lower tax jurisdiction, whether or not they have economic activity in that location.

            Operatively, the global minimum tax is made up of three primary mechanisms: the Income Inclusion Rule, the Undertaxed Profits Rule, and the Domestic Top-up Tax, to ensure profits of MNEs are charged at an effective corporation tax rate of 15%, by allowing countries to impose a ‘top-up tax’ on MNEs’ profits, even if they would not otherwise be taxed on profits there.

            The rationale for implementing the global minimum tax and reducing BEPS is to align the taxation of profits with the location of value creation, following an overall decline in statutory and effective tax rates around the world (UNCTAD, World Investment Report 2022—International Tax Reforms and Sustainable Investment (United Nations 2022) 111). More broadly, the global minimum tax aims to limit a “race to the bottom” in international tax competition that arises from governments’ efforts to attract investment by offering favorable tax treatment. Since December 2021, over 140 jurisdictions have signed up to the proposals and agreed to implement the rules. 

The Executive Order

            The Executive Order described the Global Tax Deal as allowing “extraterritorial jurisdiction over American income” (e.g., using the top-up tax mechanism) as well as curbing the United States’ ability to enact “tax policies that serve the interests of American businesses and workers” (presumably, through offering effective tax rates below 15%). In addition, it directs the US Treasury Secretary and US Trade Representative to investigate whether any countries fail to comply with US tax treaties, or have any tax rules in place that are extraterritorial or disproportionately affect US companies, and to develop a list of protective measures or other actions that the US should take to respond to such rules.

            In a separate, but related, Executive Order, President Trump directed the US Treasury Secretary to investigate whether other countries subject US citizens or companies to extraterritorial or discriminatory rules. If so, the Executive Order indicated that the US may look to exercise s.891 of the US Internal Revenue Code, which imposes a double tax rate on citizens and companies of countries which do so, if they are subject to US taxes.

            The US administration’s withdrawal from the deal plainly strikes a blow to the effectiveness of the Global Tax Deal. From an economic perspective, the United States’ exclusion will materially diminish the global tax base and will require a recalibration of other countries’ cost-benefit analysis of their domestic rules. From a political perspective, this could prompt other countries to follow suit, unravelling the entire grounding of the “global” tax harmonization efforts.

Disputes on the Horizon

            With an existing corporate tax rate of roughly 10%, difficulties in passing the relevant provisions of the global minimum tax through Congress, and President Trump’s prior condemnation of the global minimum tax, the United States’ withdrawal from the Global Tax Deal was not surprising. Nevertheless, the categorical terms, and timing, of the Executive Order herald a new era of tax competition, at odds with the tax harmonization spirit of the GloBE Model Rules.

            The indication that the US is exploring potential retaliatory tax measures against other countries for implementing “extraterritorial” or “discriminatory” tax rules gives rise to significant legal uncertainty. It is unclear how the US Treasury Secretary will interpret those terms, meaning a plethora of foreign tax provisions may be in scope. Further, the statutory provision cited in the Executive Order, s.891 of the Internal Revenue Code, has never before been exercised by the US; so there is no precedent for how it may be interpreted. Enacted in 1934, the provision pre-dates most modern tax treaties, with no language to allow for interaction with such treaties. 

            Aside from the United States’ recent change of position, the global minimum tax has proved complex to implement and nuanced to comply with. Although the OECD agreement sets out a framework of rules to be implemented, they are not legally binding, and only have the force of law when implemented into domestic law, over which each jurisdiction retains discretion. For example, although EU Member States must implement the global minimum tax, Norway will not introduce an undertaxed profit rule; Estonia and Latvia elected to delay applying the income inclusion rule and undertaxed profit rule until 2030; and Malta elected not to introduce a domestic top-up tax.

            The global minimum tax has previously been scrutinized for its propensity to give rise to disputes under international investment agreements or treaties (bilateral or multilateral investment treaties). Those agreements, intended to protect investments made in one jurisdiction by investors of another jurisdiction, mandate fair and equitable treatment, non-discrimination and regulatory stabilization (e.g., applicable to tax incentives in extractives industries to ensure fiscal stability). There has been considerable uncertainty as to the way in which these principles will be interpreted in the context of the global minimum tax: for example, jurisdictions with tax incentives in the extractives industries may have frozen tax rates in their international investment agreements for the period of a significant project; or MNEs who lose tax incentives or favorable tax treatment in special economic zones or otherwise individually negotiated special tax regimes may seek to bring a claim for breach of the “fair and equitable treatment” principle under an investment agreement. As the global minimum tax enters the statute book around the world, they may become swiftly subject to challenge under these agreements.

Conclusion

            A fragmented approach to the OECD’s global minimum tax proposal is likely to leave MNEs grappling with increased compliance costs, legal uncertainty and possible disputes on the horizon, as they navigate a patchwork of conflicting rules across different countries. This is not simply a direct consequence of the Executive Order: many jurisdictions are yet to implement domestic legislation to bring the effective corporation tax rate in line with the global minimum tax rate; inconsistencies are almost inevitable as the global minimum tax is implemented into domestic laws; and conflicts with established principles under international investment agreements may lead to prolonged disputes before the tax rules are settled. In seeking a minimum tax, the proposal may well have maximized hissing and honking, from governments and MNEs alike.