Trump Orders Withdrawal From Global Tax Deal And Initiates America First Trade Policy

On his first day in office, President Donald Trump tackled several action items, including some that could have tax implications. While those focused on federal employees (including a hiring freeze and a return-to-office requirement) attracted the most attention because of their potential impact on the IRS workforce and the upcoming tax season, directives focused on global tax and trade policy are just as significant.

The U.S. Will Back Out Of Global Tax Deal

A presidential memorandum directed the Secretary of the Treasury, the U.S. Trade Representative, and the Permanent Representative of the U.S. to the Organisation for Economic Co-operation and Development (OECD) to notify the OECD that any commitments made by the prior administration “with respect to the Global Tax Deal have no force or effect within the United States absent an act by the Congress adopting the relevant provisions of the Global Tax Deal.”

So what does that mean? Some context here might be helpful.

The OECD And Pillars One And Two

Countries like the US have struggled with how and at what rate to tax multinational corporations. This hasn’t gotten any easier, as globalization and technology have made it easier for companies to structure transactions to shift profits from high-tax countries to lower-tax countries. These strategies are often called base erosion and profit shifting, or BEPS.

The Organization for Economic Cooperation and Development, or OECD, has been clamoring for change for years. The OECD, which includes the US, is made up of 38 member countries. It believes that the current system gives multinational companies—those that can easily move their operations and property across borders—an unfair advantage over domestic businesses. More importantly, the OECD believes that when taxpayers see multinational corporations avoiding paying taxes, even if it is done legally, it undermines all voluntary compliance.

For years, the challenges have been broken down into two sets of talking points or pillars. You’ve probably heard them referred to as Pillars One and Two.

Pillar One focuses on where tax should be paid. You can think of it in terms of nexus—similar to the same kinds of discussions we have in the U.S. between states. The critical question is: Who has the right to tax income even if there’s no physical presence?

Pillar Two examines the amount of tax to be paid, with an eye toward the unequal tax rates from country to country.

Today, 140 countries have agreed in theory to the pillars—until recently, that included the U.S.

As part of the Pillar One agreement, large multinational companies must pay taxes in the countries where they operate, not just where they have their headquarters. This would prevent companies from opening headquarters in lower-tax countries simply to shift profits.

The Pillar Two agreement would establish a global minimum corporate tax rate of 15%. The current corporate tax in the US is 21%. In contrast, Ireland’s current corporate tax—where many US companies like Apple had previously established headquarters—is just 12.5%.

You can see what tax rates in Europe look like, generally, here:

The U.S. has ping-ponged on what an ideal corporate tax rate would look like. Under the TCJA, corporate tax rates came down. If he had been granted a second term, Former President Biden had signaled that he wanted corporate tax rates to go back up. Now, Trump has suggested that rates could go even lower.

But really? It’s not up to the White House. Since Pillar One would change the rules for taxing corporate profits, it would likely require updating tax treaties—a change only Congress can make. Ditto for corporate tax rates (Pillar Two).

That means that there’s no immediate change here, but it does signal a shift in U.S. sentiment. Since the U.S. is a big player in the global economic scene, this could cause real problems for the OECD—and U.S. foreign relations—moving forward.

Foreign relations may have a second challenge. As part of the memorandum, Trump also directed the U.S. Trade Representative to investigate whether any foreign countries are out of compliance with U.S. tax treaties or have any tax rules that “disproportionately affect American companies.” If so, the U.S. Trade Representative is tasked with creating a list of protective measures or actions the U.S. should take in response.

America First Trade Policy

A second presidential memorandum calls for implementing an “America First trade policy.” In this (much lengthier) directive, Trump directs his advisors to take action to establish “a robust and reinvigorated trade policy.”

Those actions include directing the Secretary of the Treasury to investigate the causes of trade deficits and recommend solutions. The Treasury Secretary is also tasked with working with other agencies to “investigate the feasibility of establishing and recommend the best methods for designing, building, and implementing” a new agency—the External Revenue Service (ERS). The ERS would collect tariffs, duties, and other foreign trade-related revenues.

The U.S. Trade Representative is charged with working alongside other agency heads to review and identify any unfair trade practices by other countries and recommend appropriate actions to remedy those, as well as assessing the impact of the United States-Mexico-Canada Agreement (USMCA) on American workers, farmers, ranchers, and service providers. The memorandum includes additional directives to review and assess the policies and practices of major U.S. trading partners and recommend measures to counter currency manipulation.

The Economic and Trade Agreement Between the Government of the United States of America and the Government of the People’s Republic of China also gets a second glance, with an eye towards increasing tariffs.

The Secretary of Commerce and the Secretary of Homeland Security are also directed to investigate the “unlawful migration and fentanyl flows” from Canada, Mexico, China, and other relevant jurisdictions and recommend appropriate trade and national security measures.

And, notably, the Secretary of the Treasury has been ordered to investigate whether any foreign country subjects U.S. citizens or corporations to discriminatory or extraterritorial taxes. If so, section 891 of the tax code allows the President to double U.S. tax rates due by citizens and corporations of those countries, subject to certain thresholds.

Presidential Memorandum

So, how much power do these directives wield? The answer is mixed.

A presidential memorandum is similar to an executive order but less formal. Like an executive order, a presidential memorandum may focus on administrative matters and is often used to delegate tasks, but not create new law (they may carry the force of law).

As a result, unlike an executive order, presidential memoranda are not required to be published in the Federal Register. (You can find the most recent memoranda on the White House website.)

Reaction

The news was met with cheers from Senate Finance Republicans. In a statement, U.S. Senate Finance Committee Chairman Mike Crapo (R-Idaho) indicated that he “and all Senate Finance Republicans praised President Trump’s executive order” to end what he described as the OECD’s “global tax overreach.” He added that “President Trump’s executive order to nullify those America-last commitments could not come soon enough.”

And remember when I said that a presidential memorandum didn’t create new law? Ways and Means Committee Chairman Jason Smith (MO-08) and Committee Republicans introduced the Defending American Jobs and Investment Act (H.R. 591) which would officially reject the OECD framework for a global tax deal.

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