President Donald Trump has left the Narendra Modi government and its officials red-faced and flustered by declaring the US will not implement the global minimum corporate tax deal — an initiative that the OECD, an inter-governmental association of mostly rich nations, has been shepherding since 2019.
The global minimum tax is designed to ensure that large multinational enterprises with revenues above €750 million are subject to an effective minimum tax rate of 15 per cent regardless of where they operate.
The European Union, Britain and other countries have adopted the 15 per cent global minimum tax, but the US Congress never approved measures to bring America into compliance with it.
The US has a roughly 10 per cent global minimum tax, part of Trump’s landmark 2017 tax-cut package approved by Republicans.
Countries that have adopted the 15 per cent global minimum tax were hoping they would be in a position to collect a “top-up” tax from US companies paying a
lower rate.
That looks unlikely now after Trump issued an executive order on Monday that said: “The global tax deal has no force or effect in the United States.”
Trump also ordered the US treasury secretary and the US trade representative — the Sherpa who represents the US at global trade forums — to work together and come up within the next 60 days with a list of options on protective measures that the US could adopt to protect its companies from what he termed “discriminatory and extraterritorial tax measures”.
Trump’s nominee to the post of treasury secretary is Scott Bessent. Jamieson Greer has been appointed the US trade representative.
Trump’s decision is a huge embarrassment for a Modi government that had crowed about the grand outcomes from the first G20 summit held in India, in September 2023.
The communiqué issued at the end of that meeting had declared that the G20 nations had reaffirmed their commitment to work towards a “globally fair, sustainable and modern international tax system”.
The communiqué had gone on to add: “We remain committed to the swift implementation of the two-pillar international tax package.”
The OECD’s two-pillar framework, introduced in 2021, aimed to address the complexities of taxing digital economies.
Pillar One sought to reallocate taxing rights to countries where companies generate significant revenue. This pillar provides for the allocation of the profits of multinational enterprises (MNEs) to the market or destination countries where the consumers or users are located
Pillar Two provides for the adoption of the global minimum corporate tax of 15 per cent.
In January last year, the OECD had estimated that the 15 per cent global minimum tax would increase global corporate income tax (CIT) revenues by $155-192 billion each year, or between 6.5 per cent and 8.1 per cent of global CIT revenues.
But these so-called “Pillar 1” talks have largely stalled, and without US participation, countries including Italy, France, Britain, Spain and Turkey may be tempted to reinstate their digital taxes, risking retaliatory tariffs from Washington.
Revisiting options
India is carefully evaluating its response to Trump’s decision.
Industry will be hoping it will lead to a throwback to the equalisation levy – commonly referred to as the Google Tax –introduced in 2016. This levied a 6 per cent tax on foreign digital companies offering services to Indian companies or those with a permanent establishment in India. It specifically targeted companies offering digital advertising services with annual revenues of over ₹1 lakh.
The rate of tax was later lowered to 2 per cent. Finance minister Nirmala Sitharaman scrapped the levy in her budget last July in anticipation of the introduction of the global minimum corporate tax.
On Tuesday, the finance ministry signalled a cautious, wait-and-watch approach, emphasising the need for a thorough assessment of Trump’s executive order and its implications.
As the February 1 budget approaches, the government is under pressure to balance protecting its tax base and avoiding potential trade conflicts with the US.
“India was expecting a good-faith implementation of Pillar One to secure its fair share of taxes,” said Shaily Gupta, Partner at Khaitan & Co. “The US withdrawal creates significant uncertainty, forcing India to rethink its strategy.”
“The Google Tax, as it is commonly known, has a strong chance of re-emerging,” said Ayush Jindal, a Supreme Court advocate. “If brought back with stricter rules, it could level the playing field for Indian companies but also escalate challenges at the WTO.”
“India must tread carefully,” said Aravind Srivatsan, Partner at Nangia Andersen LLP.
“The US withdrawal weakens the OECD initiative, compelling India to strengthen its domestic tax laws or reintroduce unilateral measures like the EL or Significant Economic Presence (SEP) rules.”Trump’s directive to prepare countermeasures against “extraterritorial” tax policies, which he claims unfairly target US companies, poses additional challenges.