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Global Perspectives
Global Tax Update
The OECD's Global Tax Initiatives
The United States' withdrawal from the Organisation for Economic Cooperation and Development (OECD) global tax agreement has rocked the international tax landscape. The OECD's twin initiatives - Pillar I and Pillar II - were designed to address the digital economy's tax challenges and introduce a global minimum corporate tax rate. President Trump's executive orders have substantially undermined these efforts, raising questions about the future of international tax cooperation and enforcement.
Overview of Pillar I and Pillar II
Pillar I has been designed to reallocate taxing rights principally in the digital economy, thus ensuring that large multinational enterprises (MNEs) pay taxes in jurisdictions with significant customer-facing activities, regardless of physical presence. The measures aim to modernise tax rules designed in the 1920s—a period which had no inkling of the dramatic impact and reach of the digital economy. The new rules mainly target major technology companies that have historically profited from low taxation in key overseas markets.
Pillar I has faced significant headwinds due to its complexity and the challenges of implementation, and has struggled to gain traction. In contrast, Pillar II introduces a global minimum corporate tax rate of 15%, aimed at curbing profit shifting by companies to low-tax jurisdictions, and has received widespread support.
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Global Implementation Status
Still, despite the U.S. pullback, many countries have indicated a desire to continue their implementation efforts or have already implemented Pillar 2 legislation. Many EU countries, including France and Germany, have already passed enabling legislation and integrated the global minimum tax into their domestic laws. Others are in the transposition process, benefitting from available deferrals.
In the Asia Pacific, Japan, Singapore, and Australia have introduced bills to adopt the global minimum tax, showing an active commitment to the OECD framework. In the Middle East, the United Arab Emirates has implemented a domestic minimum tax and has sought to align with Pillar II principles and guidelines.
The Implications of U.S. Withdrawal
On January 20, 2025, President Trump signed an executive order declaring that the OECD Global Tax Deal "has no force or effect" in the United States without Congressional approval. This action effectively withdraws U.S. support from the international agreement and directs the U.S. Administration to investigate foreign tax practices that may be extraterritorial or discriminatory toward large American firms.
The withdrawal has triggered alarm over potential double taxation risks for U.S. multinationals, trade tensions with allies and the overall viability of the OECD's tax reforms without the participation of the world's largest economy. The President has called for a review under the U.S. Tax Code section 891 by March 22 2025. The review aims to identify countries applying 'discriminatory' levies to American multinational companies and to consider countermeasures, including double taxation.
Implications for International Financial Centres
The U.S. withdrawal has triggered fresh challenges for IFCs, including for jurisdictions that had already taken steps to align with the OECD's tax initiatives, such as economic substance requirements and enhancing transparency arrangements.
Tax-neutral jurisdictions like the Cayman Islands and BVI have traditionally implemented economic substance laws and exchange-of-information agreements to maintain global legitimacy. Without U.S. participation, the pressure to fully adopt Pillar II may ease, allowing them to sustain their tax-neutral stance without the burden of radically altering their tax systems.
The Channel Island jurisdictions of Jersey and Guernsey have embraced OECD guidelines, introducing regulatory changes to comply with economic substance rules, were early adopters of information exchange, and have implemented domestic legislation to embed the minimum tax framework.
Jersey has moved to accommodate the application of foreign Controlled Foreign Corporations (CFC) rules in the U.S., by implementing a credit for certain blended tax charged under those rules, with a 7.50% cap. This provision has been designed to address the application of, amongst others, the U.S. GILTI regulations, which have been provisionally approved by the OECD as being in line with the Pillar II creditable taxes.
The U.S. withdrawal is unlikely to prompt a fundamental shift in approach, provided the Channel Island commitments to date are met with safe harbour status and an absence of discrimination, should the global consensus on Pillar II weaken.
Luxembourg and Ireland, as EU members, have moved forward with the OECD's minimum tax framework. Still, the absence of U.S. participation might impact the effectiveness of the reforms, especially given the significant U.S. interests in both jurisdictions.
Asia's prominent IFCs, Singapore and Hong Kong, have also complied with OECD tax rules. However, given their proximity to China, they too may reassess their position considering the rapidly changing global landscape.
The Approach of India and China
India and China have expressed varying commitment to the OECD's tax initiatives, though domestic economic considerations have influenced their responses. India has quickly voiced fresh concerns following the U.S. announcement. The Modi government has questioned the enforceability of the framework without the U.S. and is advocating for greater clarity on tax arbitration mechanisms. India's participation will be contingent on how the global community proceeds and may be influenced by the scale and pace of adoption.
China has generally supported Pillar II, but the geopolitical landscape and the absence of U.S. involvement, should an unlevel playing field emerge, may cause them to reconsider. Beijing may leverage this development to negotiate more favourable treatment for its state-owned enterprises and digital giants, potentially resisting stringent enforcement of the OECD's minimum tax rules. What’s good for the goose may be good for the gander.
Global Tax Policy Determination
The U.S. withdrawal from the OECD's agreement can potentially alter the trajectory of global tax policy. A complicated mix of factors will likely influence international tax cooperation, with a retreat to bilateralism as a present and significant threat.
The OECD will actively engage with the Trump administration to sustain global tax reform momentum. A fallback position may see the OECD engaging in bilateral negotiations or regional agreements to compensate for the lack of U.S. participation.
Of course, some developing nations have called for a shift in global tax governance to the UN, arguing for a more inclusive framework that accommodates a broader range of interests. The UN initiative will face challenges due to President Trump's ambivalence toward multi-lateral fora. Absent a broad global consensus, countries may revert to alternative bilateral tax agreements to address specific concerns. A more fragmented international tax landscape could ensue.
Summary
Global business tax is at a crossroads. The OECD's Pillar I and Pillar II initiatives now face serious obstacles due to a lack of U.S. support. As countries proceed with implementing these reforms, the interplay between national policies, international agreements, and economic competition will increasingly shape the future of global taxation.
Stakeholders - businesses, governments, and financial institutions - must closely monitor these developments and be prepared to adapt to the rapidly evolving tax landscape at short notice. As the Americans would say – ‘pivoting on a dime’ may be just the response needed on 22 March.
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About Mourant
Mourant is a law firm-led, professional services business with over 60 years' experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Luxembourg and provide specialist entity management, governance, regulatory and consulting services.
