Tech Giants Relieved as Trump Executive Order Thwarts Global Tax Agreement

On Inauguration Day, several high-profile tech executives stood behind President Donald Trump, who later issued an executive order that eliminated a potential tax concern for these corporations. The order signaled the United States' withdrawal from an agreement among 140 countries aimed at preventing a "race to the bottom" in corporate income tax rates.

The Global Minimum Tax Deal

The 2021 agreement comprises two pillars:

* Pillar One: Multinational companies will be required to pay taxes in countries where their customers reside, even if they lack physical operations there.
* Pillar Two: Establishes a global minimum tax rate of 15% for multinational corporations with revenue exceeding €750 million (~$788 million), regardless of their location. Countries implementing Pillar Two can impose an "undertaxed charge" on companies that pay taxes in countries with rates below the global minimum.

Trump's Executive Order

Trump's order solidifies the US's opposition to the global minimum tax deal and warns of retaliatory measures if other countries punish US companies with additional taxes. This threat is likely welcomed by tech giants, as many utilize the US research and development (R&D) tax credit, which reduces their effective tax rates below the 15% threshold.

Impact on Tech Companies

For example, Meta, Alphabet (Google's parent company), and Tesla have all reported effective tax rates below 15% due to R&D credits. Under the global tax deal, these companies would face additional taxation, a prospect now averted by Trump's order.

Unnecessary Intervention?

Despite Trump's intervention, the global minimum tax deal may have been unnecessary for US companies. The Biden administration had expressed support for the deal, but Congress had not initiated legislation. Additionally, former Treasury Secretary Janet Yellen was negotiating an exemption that would not penalize US companies for claiming the R&D credit. A "safe harbor" rule in the deal would have also protected the US from the undertax rule.

"It may be unappealing to change the rules just for the most powerful country," said Alan Cole, senior economist at The Tax Foundation. "But it's also a realistic way of functioning in the world." Trump's order serves as a reminder of the consequences of deviating from this principle.