March 8, 2024

  • The OECD global tax deal has long suffered implementation delays, and will continue to do so in 2024.
  • What happens next strongly depends on the outcome of the November 2024 US presidential election, which will dictate whether the US participates in the agreement.
  • The chances of US buy-in are higher if Joe Biden, the Democratic incumbent, wins a second term, although a divided Congress will make immediate implementation difficult.
  • In contrast, the US would probably exit the agreement if Donald Trump, the likely Republican nominee, wins. This would fragment the global tax landscape and could trigger a disruptive global trade war.

In 2021 nearly 140 countries signed the OECD’s global tax deal. The two-pillar agreement aims to halt a “race to the bottom” in global tax competition and discourage cross-border tax avoidance by firms. Pillar 1 aims to reallocate the residual profits of large multinationals from their home countries to jurisdictions where they generate revenue, and Pillar 2 establishes a 15% global minimum corporate tax. As signatories begin to enact the agreement’s provisions, we examine developments to watch in 2024, and how the outcome of the upcoming US presidential election will shape the trajectory of this OECD-led process. Despite repeated delays, companies should follow these developments closely to gauge the longer-term implications on their operations across different tax jurisdictions.

Expect further delays in 2024

Although the OECD initially planned for Pillar 1 to be implemented through an international treaty by 2023, the process continues to face delays, as we had expected. The current timeline aims to finalise the treaty by end-March 2024, with a signing ceremony scheduled for June. However, we believe that these targets will also prove overly ambitious and will be delayed further. Getting so many signatories to agree on such a technical document is difficult enough, and is made no easier by continued opposition among some participants. The Biden administration in particular has raised concerns about the latest draft treaty, despite having long supported the process.

Even if a treaty were to be finalised on schedule, the US would still be unlikely to sign, possibly prompting other countries to follow suit. A US opt-out would largely stem from domestic politics; we assume that the Biden administration would see little benefit in endorsing a treaty that Republicans staunchly oppose, few voters understand and that could be a liability in a tight election.

We expect that the threat of a US-led trade war over digital service taxes (DSTs) will also delay implementation of Pillar 1. If the treaty were to advance on schedule but without US involvement, signatory countries would impose DTSs on the US, which the treaty negotiation process has so far put on hold. We expect that this would prompt retaliatory trade measures by the US, given the Biden administration’s previous threats, owing to its view that DSTs disproportionately burden US technology firms.

This would be a sub-optimal outcome for most countries. The threat of US retaliatory tariffs has already prompted some signatories (such as Canada and EU countries) to delay their DSTs. We expect this leniency to continue at least until after the US elections, which would also help to ensure the US’s continued participation in the OECD process if Mr Biden wins.

We believe that the second pillar’s 15% minimum corporate tax is more likely to advance this year, as the implementation mechanism is more straightforward; unlike Pillar 1, Pillar 2 only requires countries to adopt the tax unilaterally in their parliaments. More than 40 countries have taken steps to enact the tax, and the EU has already mandated member states to do so by end-March. Although such rapid moves to adopt the tax should encourage other countries to do the same, there is a risk that inevitable differences in national measures will compromise Pillar 2’s aim of creating a consistent tax landscape.

A Biden win will keep hopes of US participation alive

Our current forecast that Mr Biden will win a second term bodes well for the US’s continued involvement in the global tax deal. The Biden administration played a central role in developing the 2021 agreement, and we expect it to continue prioritising US alignment. However, our assumption that Congress will remain divided, with neither Democrats nor Republicans holding a commanding majority, means that rapid US implementation is unlikely. Ratification of Pillar 1’s treaty would require a supermajority in the Senate (the upper house), which will not materialise as long as Republicans oppose it. Efforts to adopt Pillar 2 will also hit a wall, as when Mr Biden tried (unsuccessfully) to integrate these provisions into the 2022 Inflation Reduction Act.

Mr Biden will still have scope to negotiate with signatory countries, and we believe that this will be key in maintaining US involvement. A full renegotiation of the two pillars is unlikely, given the advanced stage of global implementation. However, we would expect some openness from OECD officials and major signatories to addressing the more targeted concerns of US lawmakers and the business community, with the aim of encouraging eventual US alignment. This could include retooling the most contentious provisions (including over DSTs), providing carve outs and extending timelines. The Biden administration already secured safe-harbour concessions for US firms in July 2023 until 2026, allowing more time to amend Pillar 2’s controversial “undertaxed profits rule”, which allows compliant countries to impose additional taxes on firms operating in non-compliant jurisdictions.

The OECD process could move ahead without the US, especially as some signatories have expressed frustration over the continued delays. However, we would still expect concessions to be offered to avoid a full breakdown of talks with the US and an escalation into a DST-related trade war. Implementing portions of the agreement without the US could even encourage congressional support for the OECD process if businesses perceive the costs of non-compliance to be disproportionately high.

A Trump win would trigger US disengagement

A Trump victory is a strong possibility, in which case we would expect him immediately to pull the US from the deal. This could prompt a wide-ranging trade war as the international pause on DSTs is lifted and Mr Trump retaliates with tariffs, including on goods trade.

Such a scenario would be highly disruptive for multinationals, especially if US defection encouraged signatory countries to implement the agreement more quickly. This would create a highly disjointed global tax landscape, raising uncertainty and compliance costs for companies that operate in the US and in signatory countries. The burden on technology firms would be particularly high. The planned renewal of the United States-Mexico-Canada Agreement in 2026 could also suffer if DST tensions derail negotiations. Such adverse consequences could ultimately prompt the business community to lobby for US alignment with the OECD tax deal, particularly if multinationals face penalty taxes for non-compliance. However, this would remain difficult for as long as Mr Trump remains averse to multilateral frameworks and Republicans oppose the agreement in principle.

Source: Economist Intelligence Unit (EIU)
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