Trump’s America exploits its ‘revenge tax’ to back out of historic deal

The “revenge tax” is dead but the fate of a global tax deal that took more than 40 years to achieve is now up in the air.

Earlier this month, the G7 countries – the US, Canada, France, Germany, Italy, Japan and the United Kingdom – announced a deal to exempt the US from the global minimum tax arrangements agreed by nearly 140 countries in 2021 after decades of discussions and a decade-and-a-half of detailed negotiations co-ordinated by the OECD.

US President Donald Trump has been a vocal critic of the global tax deal. Credit: AP

In exchange, the US will drop Section 899 of US President Donald Trump’s “One Big Beautiful Bill Act”, the so-called “revenge tax”, which would have enabled the US to impose retaliatory taxes of up to 20 per cent on companies and individuals from countries that have imposed “discriminatory” taxes on US companies.

The negotiated outcome creates what the parties described as a “side-by-side” system that excludes the US from the 15 per cent minimum global tax deal the Biden administration agreed to in 2021 and which was supposed to raise an extra $US150 billion ($230 billion) of annual global tax revenues.

That global tax regime was targeted at the biggest of multinational companies and was designed to shift some tax revenue from countries where the companies are legally located to where they actually operate and generate their revenue and profits.

The winners from that deal would be the wealthier countries with higher tax rates and the losers, tax havens, countries, like Ireland – with very low corporate tax rates designed to lure international head offices and revenue streams – and the 100 or so multinationals targeted by the agreement. About half of those companies are American.

That deal, despite the prominent role former US treasury secretary Janet Yellen played in it, wasn’t ratified by the US Congress and was subjected to intense criticism by Trump and the Republicans because it would impact US companies most – particularly politically powerful tech and pharmaceutical giants – and would limit US tax sovereignty.

The US has its own version of a minimum corporate tax regime, although it is quite different to the OECD’s version and would, arguably, be less impactful on US tax revenues and its companies than the OECD-sponsored plan.

The US leverage that enabled it to gain the exemption from the global minimum tax regime was provided by Section 899, which could have made the US apply a tax surcharge to the income of foreign companies and individuals, initially set at 5 per cent, but ratcheting up via 5 percentage point increments until it reached 20 per cent.

That provision was a double-edged sword.

Then US treasury secretary Janet Yellen played a prominent role in the global tax deal announced in 2021. Credit: Getty Images

It would have provided the US with a non-tariff threat to force countries to change their tax regimes to suit the US – removing value-added taxes or digital sales taxes on US companies, for instance.

It might, indeed almost certainly would, however, have precipitated a flight of foreign capital from the US, raising the cost of capital for US companies and potentially the interest costs for a US government that plans to add $US3.3 trillion ($4.5 trillion) to the existing $US36.2 trillion of government debt via the One Big Beautiful Bill budget legislation.

It may also have triggered rounds of retaliatory taxes from the countries whose companies and citizens were impacted – a new and destructive global tax war to add to the trade wars the US has ignited.

Current US Treasury Secretary Scott Bessent, in a post on X last week, said he had asked the US Senate and House to remove Section 899 from the One Big Beautiful Bill Act. The G7 announcement of the compromise deal said it recognised that the removal of the section was crucial to their agreement and in providing “a more stable environment for discussions to take place.”

The agreement is a framework rather than a concluded deal, given that the G7 countries, while very influential, are only the first among many of the countries that signed up to the global minimum tax rules.

More discussions are planned, with the G7 statement saying there was a shared understanding that a “side-by-side” system could preserve important gains made in tackling base erosion and profit shifting and could provide greater stability and certainty in the international tax system in future.

Whether a global tax deal can work to address the profit-shifting and erosion of tax bases that has become a structural element of multinational corporate structures without the US and its big tech and pharma companies being covered is questionable, even though Bessent now says the US will continue to work with other countries to enact the deal with the rest of the world.

Confronted by the potential threat inherent in Section 899, however, the non-US G7 members probably had no choice but to take what was on offer. A future US administration might, of course, have a different view of its global responsibilities than the eco-nationalism and anti-multilateralism that permeates the Trump administration.

The global tax deal targeted some of the biggest companies in the world. Credit: Bloomberg

Left unmentioned by the G7 announcement were digital sales taxes. A number of countries have introduced taxes on digital revenues while waiting for the minimum tax arrangements to be introduced – it was a condition of the agreements to the global tax deal that digital sales taxes be abandoned.

Those taxes are a sore point for the big US tech and pharma companies, which were supportive of the global minimum tax deal because it would abort the trend towards imposition of digital sales taxes.

Trump’s “reciprocal” tariffs, to be unveiled on July 9, are supposed to reflect issues other than trade deficits the US has with most other economies.

“Unfair” taxes on US companies and individuals were among the potential factors to be included in calculating the excess within individual tariff rates above the 10 per cent universal baseline tariff on all imports to the US.

The European Union’s valued-added tax system (and similar valued-added goods and services taxes elsewhere, including the GST in Australia) and digital sales taxes have been previously targeted in commentary by the trade hawks within the Trump administration.

It is conceivable that, while heading off the threat posed by Section 899, the non-US G7 members have left open the prospect of another confrontation over domestic tax arrangements, with the US using tariffs rather than Section 899 to try to force the rest of the world to organise their tax affairs, as they apply to US companies and citizens, as the US directs.

Tax sovereignty, at least as it is viewed by the US, is apparently a one-way street.

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