Trump’s Tax Gambit: Global Tax Confrontation Looms

Donald Trump’s recent threat to double tax rates on foreign nationals and companies operating in the US underlines his broader “America First” policy, setting the stage for a contentious global tax dispute. By invoking the rarely-used Section 891 of the US tax code, Trump is signalling a dramatic escalation in international tax negotiations, which could impact cross-border trade, multinational corporations, and global tax frameworks.

The Mechanics of Section 891

Section 891, dating back to the 1930s, empowers the US president to impose double taxation on foreign entities if their countries engage in discriminatory tax practices against US citizens or corporations. What makes this particularly striking is that the provision bypasses Congressional approval, allowing swift and unilateral action. Trump’s directive to the Treasury Secretary to investigate potential discriminatory practices against US companies further raises the stakes for countries imposing levies like digital services taxes (DSTs).

This move directly challenges the Organisation for Economic Co-operation and Development's (OECD) 2021 global tax pact, which aims to establish a 15% global minimum corporate tax and grant jurisdictions the right to levy top-up taxes on multinational profits. Trump’s withdrawal of US support for the OECD agreement not only undermines years of negotiations but also places key trading partners, including the UK, EU member states, and Canada, on notice.

Potential Economic and Diplomatic Fallout

Trump’s manoeuvre risks igniting a global tax war. By doubling taxes on foreign firms, the US could deter foreign investment and exacerbate tensions with allies. The UK’s digital services tax, for instance, targets revenues from tech giants like Apple and Alphabet but disproportionately impacts US firms. Trump’s opposition to such taxes reflects his administration’s broader focus on safeguarding American corporate interests.

From an economic perspective, doubling tax rates would likely prompt retaliatory measures. EU leaders, already wary of Trump’s policies from his previous term, have labelled the move as “economic warfare.” It’s a shift from multilateral negotiations to a more confrontational, bilateral approach, aligning tax policy with trade strategy.

Notably, the OECD estimated its 2021 agreement could generate an additional $192 billion in global tax revenue annually. If the US pulls back, this financial windfall for many countries could shrink, increasing fiscal pressures, especially in jurisdictions heavily reliant on corporate tax income.

Implications for Big Tech and Investment Strategies

Trump’s tax agenda appears to be influenced by the interests of Big Tech. As the US grapples with maintaining its technological hegemony, punitive measures against countries targeting intellectual property-heavy firms may shield revenues but at a diplomatic cost.

From an investment standpoint, firms with significant overseas exposure, especially in jurisdictions like Ireland and the EU, could face heightened tax uncertainty. Investors should monitor developments closely, particularly as Trump’s directives could lead to sudden policy shifts impacting earnings projections and sectoral valuations.

MY ANALYSIS: Risks and Opportunities

While Trump’s aggressive stance might resonate with domestic constituents, it introduces significant risks for global markets. Retaliatory taxes could disrupt supply chains, reduce foreign direct investment (FDI), and dampen global economic growth. At the same time, opportunities may arise in sectors less exposed to international taxation.

For private equity (PE) and investment banking (IB), dealmakers should assess geopolitical risks in due diligence, focusing on sectors with high tax predictability. Infrastructure, renewable energy, and domestic-focused industries may offer relative stability amid global tax volatility.

Trump’s latest tax salvo is a stark reminder of the fragility of international agreements in the face of unilateralism. While Section 891 is unlikely to be implemented wholesale, the threat alone reshapes negotiations and compels foreign governments to reconsider their tax strategies. For investors, this evolving tax landscape underscores the importance of vigilance, scenario planning, and diversification.

In conclusion, Trump’s invocation of Section 891 reflects a strategic pivot towards assertive unilateralism in international taxation. The ripple effects could redefine cross-border investment flows, tax planning, and global economic alliances in the years to come.