Tech Giants Breathe a Sigh of Relief as Trump Axes Global Minimum Tax Deal
On Inauguration Day, President Donald Trump signed an executive order that sent a clear message to the tech industry: the US won’t be enacting a global minimum tax deal aimed at curbing corporate tax avoidance. This move is likely to bring cheer to tech giants, who stood to lose from the agreement.
A Global Minimum Tax Deal: What’s at Stake?
The deal, reached in 2021, aimed to combat tax evasion and avoidance by multinational corporations. It consisted of two pillars: Pillar One, which requires large multinationals to pay taxes in countries where their customers are located, and Pillar Two, which sets a global minimum tax rate of 15% on corporations with revenue above €750 million.
The Island of Jersey: A Tax Haven
Take the example of the tiny island of Jersey, a self-governing dependency of the UK with its own tax jurisdiction. With a corporate tax rate of 0%, Jersey has become a popular destination for companies looking to minimize their tax liability. If a company routes $1 billion through the island, it can save substantial amounts in taxes.
How Tech Giants Benefit from the Research and Development Tax Credit
The global minimum tax deal would have affected US tech companies, which heavily rely on the research and development tax credit. This credit reduces their effective tax rate, making them vulnerable to the undertaxed profits rule. For instance, Meta Platforms Inc. attributed its decreased effective tax rate to an increase in research tax credits. Alphabet Inc. and Tesla also benefit significantly from the credit.
Trump’s Executive Order: A Warning to Other Countries
Trump’s executive order not only solidifies the US stance on the global minimum tax deal but also serves as a warning to other countries: if they punish US companies through extra taxes, the US will retaliate. This move is likely to resonate with tech giants and other companies that utilize the US research and development tax credit.
Was the Executive Order Necessary?
While the Biden administration supported the global minimum tax, Congress had made no moves to legislate it into law. Former Treasury Secretary Janet Yellen was also negotiating an allowance that would not penalize US companies for taking the research and development credit. In essence, US companies were already insulated from the deal’s provisions.
A Realistic Way of Functioning in the World
As Alan Cole, senior economist at The Tax Foundation, notes, “Maybe that’s unappealing in some ways because we’re changing the way we do things just for the biggest and most powerful country, but that’s also a realistic way of functioning in the world.” Trump’s promise to retaliate serves as a reminder of this reality.
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