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It was only a matter of time before Donald Trump’s war on what we knew as the world economy that transferred to trade to other areas. And yes, although his trade war has been established next week for a new phase – when the US president’s tariff schedule is supposed to enter into force of the US president – we have just witnessed the first skirmish on the second front, about taxes.
In 2021, under the leadership of the G7 and the OECD, countries reached a compromise on reforming tax rules for international companies. Not updating an old web of bilateral tax treaties that are aimed at avoiding double taxes, had, too often, led to a situation of double non-taxes, allowing meshes to pretend that their profit was made in jurisdictions with low or zero loads. The efforts “Basic erosion and profit shift” eventually arrived – in the most not -lasting part thanks to Trump’s Prime Minister of Treasury Steven Mnuchin – on new rules with which countries can burden companies in their jurisdiction if those companies are insufficiently charged.
But giving other countries that tax the profit of American companies would never go well with the president. Insisting on tax sovereignty for America and opposition to extraterritoriality by others are a dual business in Washington. Given Trump’s Pugilism, a conflict would come to a head. The question is how other countries choose to respond.
On Saturday, other G7 countries accepted An American demand for its companies to be exempt from two lines that it regards it as particularly. In exchange, Washington has arranged the removal of section 899 from the One Big Beautiful Bill Act. This section – which may have been inserted precisely to create leverage to force this result – would have imposed new American taxes on companies from countries that are supposed to discriminate against American companies. The OECD has welcomed the agreement.
Putting on to the US may not have been the wisest choice. After all, it has shown that blackmail can work. At the same time, it is never clear with the Trump administration what obligations it will remain. In this case, the American treasury has reassured counterparts that it is committed to tackling a “substantial” profit -changing risks within his domestic system, “side by side” with the international scheme that others have fully registered. But it is unclear how this obligation will be followed and maintained.
However, the other G7 countries can reason that this was not to choose under the many fights. That was certainly true for Canada, which quickly surrendered in a different tax fight. It quickly withdrew a tax on digital services after Trump had broken down trade negotiations and threatened higher rates for Canadian goods. DSTs also become flash points with European countries: the UK, France, Spain and Italy all have a version of it. The DST of the UK survived the first trading announcements with the US, but is perhaps still in the Washington’s throats. The EU countries, protected by the size of their large trade block, should find it easier to resist. While they are looking for a solution for trade negotiations with Trump, they must resist any pressure to compromise on tax sovereignty for a fast deal.
What is clear is that the business community does not benefit from these types of struggles. Instead of a heavily fought compromise, some multinational companies will now be confronted with a more complex double system that will apparently raise the same amount of taxes. The fact that tax rules have become in legitimate goals for economic coercion adds low policy uncertainty. Whether it was Trump’s intention or not, the costs of doing things across borders have just risen again.