Will the Trump Administration pull the plug on the OECD's Pillar 1 & 2 Work?

1.    Introduction[1]

The mood at the OECD's tax secretariat is unlikely to have been at its best after Donald Trump's electoral victory last fall. The OECD is led by the USA, and the type of global tax work the organization may undertake is largely determined by the sitting American administration. Republicans have made it a tradition to try to dismantle all global projects initiated by Democrats in the OECD.

Democratic administrations use the OECD as a tool to achieve certain goals in the international tax area. In 1996, the Clinton administration initiated the OECD's tax competition project to abolish harmful tax regimes within the OECD and to establish information exchange with tax havens. From 2013-2016, the Obama administration drove the BEPS work, which aimed to improve conditions for taxing multinational enterprises (“MNEs”). During 2021-2024, the Biden administration has led the ongoing work on Pillar 1 and 2. A global framework agreement was reached in October 2021, but work on reaching an agreement on the various components of the pillars has continued to this day. All these initiatives have aimed to pressure the rest of the world to align with the OECD's (read: the USA's) tax policy objectives.

Republican administrations prefer that the OECD abstain from any form of global tax work. Republicans generally disapprove of the OECD having opinions on other countries' tax policies and especially that it interferes with the U.S. Congress work on tax matters. They can live with the OECD issuing recommendations and "best practices," but only as long as these do not involve coercion or pressure. Against this background, the Bush administration shortly after its inauguration in 2001 pulled the plug on the OECD's tax competition project, which led to the project going into hibernation during President Bush's two terms. For the same reason, the previous Trump administration sabotaged the continuation of the BEPS work regarding the taxation of the digital economy. Now we are yet again in the same situation. President Trump announced on his first day at work (!) in a "Memorandum" that the Trump administration does not want to be associated with the OECD's "Global Tax Deal." This refers to the OECD's ongoing work on Pillar 1 and 2.

Below, I will give my view on the content of President Trump's memorandum.

First, however, a few words on the purposes of the pillars 1 and 2 and the measures the Biden administration have taken during its term to implement the pillars agreement.

2.    Pillar 1 and 2

Pillar 1

Pillar 1 consists of two completely separate sets of rules given the designations "Amount A" and "Amount B."

Amount A

Amount A is the outcome of the OECD's[2] continuation work on BEPS Action Point 1. Amount A (grossly simplified) aims to redistribute income earned primarily by American tech companies ("digital companies")[3] from residence to market states. Normally, minimum physical presence requirements must be met in source states to trigger taxation. Digital companies may, however, conduct extensive activities in source states without establishing any taxable presence. Several countries have therefore adopted new taxes ("digital taxes") that impose tax on digital companies on a basis other than physical presence. Through the Amount A agreement, countries that have adopted digital taxes commit to phasing out these taxes in exchange for certain digital companies' income being redistributed from residence to market states. This is to be done based on "allocation keys" (so-called formulary apportionment) primarily based on sales.

Amount A is to be implemented through a multilateral convention. However, no finalized convention text has yet been published. The OECD does not seem to have reached final agreement on which national digital taxes should be phased out. The Biden administration took no measures during its term to implement Amount A.

Amount B

Amount B aims to simplify the application of arm's length rules regarding routine low-risk transactions such as marketing and distribution. Relying on these rules, MNEs no longer need to prepare comparability analyses in each individual case and can instead use certain standardized arm's length margins.

Amount B exists in both a non-binding and a binding version. The former was adopted by the OECD in February 2024 and was inserted as an annex in the OECD's transfer pricing guidelines. The Biden administration, however, conditioned approval of Amount A on the OECD also reaching an agreement on a binding version of Amount B. The OECD has not succeeded in agreeing on the binding version. Disagreement remains on how relevant "routine low-risk transactions" should be defined and priced.

In December 2024, the Treasury laid out a proposal for regulations that essentially incorporates the content of the non-binding version of Amount B.[4]

Pillar 2 – Global Minimum Tax ("minimum tax")

The purpose of the minimum tax is to ensure that MNEs' global income is taxed at a minimum rate of 15%. Pillar 2 functions in principle as classic CFC legislation. If the source state does not tax the MNE's income at 15%, the MNE's residence state is expected to ensure the income is taxed at that rate. Pillar 2, however, contains an additional rule not found in CFC legislation. If neither the source nor the residence state taxes the income at 15%, third countries where the MNE has subsidiaries (or permanent establishments) may instead levy tax on the income until the 15% threshold is reached (so-called UTPR taxation).

Unlike Pillar 1, Pillar 2 has come into force, but its rules are still under development. Beyond the EU countries, relatively few states have implemented all components of the minimum tax.[5]

The OECD's minimum tax is essentially a variant of the U.S.'s GILTI and BEAT rules that were enacted through Trump's tax reform in December 2017.[6] At present, the U.S. rules are more generous than the minimum tax. The Biden administration presented a legislative proposal in the fall of 2021 to harmonize GILTI and BEAT's tax rules with the OECD's minimum tax.[7] The Democratic-controlled Congress, however, rejected the proposal arguing that they wanted to wait and see if the rest of the world implements the minimum tax. The Democrats then lost the majority in the House of Representatives in 2023, with the consequence that the Biden administration, in practice, gave up its attempts to implement the minimum tax.

Thus, U.S. law does not meet the OECD's minimum tax requirements today. This means that if American MNEs' global income (calculated according to the minimum tax rules) is subject to less than 15% tax in the U.S., other countries where American MNEs have subsidiaries can levy additional tax until the 15% threshold is reached (so-called UTPR taxation). Note, therefore, that regardless of whether the U.S. implements Pillar 2 or not, American MNEs are affected by its rules. [8]

3.    The Memorandum

3.1 Content

President Trump's memorandum emphasizes the following regarding the OECD's work on Pillar 1 and 2:

·       the work was supported by the Democratic administration;

·       the rules allow other countries to tax American income on an extraterritorial basis;

·       the rules allow for punitive taxation of American MNEs unless the U.S. submit to "foreign policy objectives"; and

·       the rules restrict Congress' taxing power.

It is emphasized that the purpose of the memorandum is to clarify that the Trump administration now "recaptures [its] national [tax] sovereignty" and that "the Global Tax Deal has no force or effect in the United States."

The memorandum also contains two provisions.

Section 1 instructs the U.S. Secretary of the Treasury to inform the OECD that the Trump administration does not consider itself bound by political commitments made by the previous administration.

Section 2 invites the Treasury Secretary, in consultation with the Trade Representative, to review whether countries have (1) adopted legislation that violate undertakings in U.S. tax treaties, (2) introduced extraterritorial taxation rules, or have (3) adopted other rules that "disproportionally affect American companies." They are further invited to recommend “protective measures” against such foreign legislation. The review is to be presented by March 22.

How should this be interpreted? At first sight one is inclined to conclude that the U.S. wants to pull the plug on the entire Pillar 1 and 2 process. But is it that simple? Let's take a closer look at what the memorandum seems to say and imply regarding Pillar 1 and 2.

3.2 Assessment

Pillar 1

Amount A

There is little doubt that the memorandum targets Pillar 1's Amount A since this set of rules – would the U.S. implement them – curtails Congress' taxing power over a certain category of income of American MNEs ("limits our Nation’s ability to enact tax policies") and thus forces Congress to submit to "foreign policy objectives." By emphasizing that the Trump administration does not consider itself bound by "any commitments made by the prior administration," it clarifies that the U.S. will not sign the Amount A convention. This means the Amount A will not come into force since the convention's entry-into-force rules are designed in such a way that it can only become operational if signed by the U.S.

The Trump administration further emphasizes in Section 2 that it intends to resume “the hunt” for foreign discriminatory digital taxes (taxes that "disproportionally affect American companies"). The previous Trump administration identified a number of countries having such taxes and threatened to impose trade tariffs on these countries. The Biden administration subsequently postponed the imposition of tariffs while the OECD work on the digital economy was ongoing.[9] Since then, more countries have adopted digital taxes. Judging by the wording of Section 2, the U.S. now intends to take measures against all countries that have introduced such taxes.

If the above becomes the end result, we are in fact back to square one, i.e., to the situation that prevailed in 2018 when the Commission abandoned its controversial plans for a common EU digital tax and the question on how to tax the digital economy was moved to the OECD.

Even if the Trump administration sends Amount A to the dustbin, it does not mean that the underlying issue will meet the same fate. The global economy is moving towards increased digitalization, so the issue will only take on increasing importance. The Trump administration should realize that it is not sustainable in the long run to continue punishing countries that introduce digital taxes without even trying to present an alternative solution to the question on how countries may tax U.S. tech companies operating within their borders (something I referred to in a previous post from the fall of 2021 as "gunboat diplomacy"). Section 1 seems however to leave an opening in this regard. It is stated that the OECD agreement does not bind the U.S., "absent an act by the Congress adopting the relevant provisions of the Global Tax Deal." This may be interpreted as the Trump administration opening up for implementing other solutions agreed under the OECD's umbrella.

The most system-consistent solution would in fact be to reach a global agreement at the OECD on additional nexus and income allocation rules based not only on physical but also on “economic presence” that would then be implemented in national legislation and tax treaties. By taking such an approach, the OECD wouldn’t have to tear down the current international tax order in a desperate attempt to reach agreement on the issue. However, it seems unlikely at present that the U.S. would be willing to take that path since such rules would – regardless of its design – "disproportionally affect American companies." After all, Amount A is ultimately about finding a solution on how to tax a relatively limited number of (primarily) American mega-tech companies operating over the Internet.

Amount B

Regardless of what happens with Amount A, the U.S. probably wants to continue the OECD work to reach an agreement on a binding version of Amount B. Representatives of U.S. industry have on several occasions emphasized that they fully support this work. However, it may be difficult to keep the work on a binding version of Amount B alive if the Trump administration stops all work on Amount A. Many countries are willing to proceed with Pillar 1 only if agreement is reached on both Amount A and B. The willingness to reach an agreement on Amount B may create an incentive for the Trump administration to try to reach some form of agreement on Amount A.

Pillar 2 - the minimum tax

It is obvious that the memorandum also targets Pillar 2, and it is the UTPR taxation that particularly upsets the Republican administration. This is evident from the wording that "American companies may face retaliatory international tax regimes if the United States does not comply with foreign tax policy objectives."

In fact, the Pillar 2 work should be welcomed by both Republican and Democratic administrations. For decades, the U.S. has exerted pressure on European countries to increase residence taxation on MNEs’ foreign source income.[10] However, over the past forty years, the trend has been rather the opposite. European countries have tended to exempt an ever-larger share of their MNEs' foreign profits, to introduce increasingly generous tax sparing and similar provisions in tax treaties, and to “soften” the application of (inter alia) CFC legislation and transfer pricing rules, all in an effort to strengthen their own multinational industry's competitiveness. Eventually, even the U.S. began to loosen up its corporate residence taxation rules in the 1990s out of fear that American industry would lose in competitiveness.[11] But now that Europe (i.e., Germany and France) has finally taken the initiative to increase MNE residence taxation on foreign source income through the Pillar 2 framework, the Trump administration seems intent on blocking the work. How do you explain this?

The Trump administration does not necessarily seek to forcibly bring about the abandonment of Pillar 2. The introduction of GILTI rules through the U.S. tax reform in 2017 significantly increased the share of MNE foreign income that is subject to residence taxation on a current basis. If the rest of the world goes in the same direction, it is only positive from an American perspective. Because, if U.S. and foreign industry are subject to largely the same corporate regimes and rates, a level playing field is created, which ultimately benefits the U.S.

The Trump administration, however, does not accept that the OECD tries to impose its taxation framework on the U.S. They find it even more unacceptable that the OECD's minimum tax rules subject U.S. MNEs to “punitive taxation” unless the U.S. implements Pillar 2. For the minimum tax rules operate exactly in this way. If the U.S. does not implement Pillar 2 and American MNEs' income is not taxed (in the U.S. or abroad) at least 15%, third countries may instead tax the income (so-called UTPR taxation). This despite the fact that the income is neither earned in nor has any connection to such third countries. This is why UTPR taxation is considered "extraterritorial" and Pillar 2 is described as "a retaliatory international tax regime." The Trump administration considers that the OECD's taxation framework "punishes" countries that do not adopt Pillar 2 by imposing "unlawful" taxes. Section 2 also implies that UTPR taxation violates American tax treaties.[12]

So how could the OECD accommodate the U.S. concerns?

In fact, the OECD does not really have to do anything. It is not the OECD but individual countries that would UTPR-tax American MNEs. However, the Trump administration announces in Section 2 that the U.S. will take "protective measures" against countries that apply "extraterritorial" taxes on (read: that UTPR-tax) American MNEs. That threat alone is probably enough to induce most countries having implemented Pillar 2 to refrain from UTPR-taxing American MNEs. However, the Trump administration will hardly be satisfied that countries voluntarily refrain from UTPR-taxation. They are likely to demand that U.S. tax legislation be formally considered compliant with Pillar 2 in order to permanently remove the threat of UTPR-taxation. But if the OECD makes an exception for the U.S., other countries will demand the same treatment. And if the OECD starts approving exceptions to appease countries that feel disadvantaged, it will slowly pull the teeth out of Pillar 2 until only a shell remains.

Another way to address U.S. concerns would be to simply remove the UTPR rules from Pillar 2. This ensures that all states are treated equally. But if the UTPR rules are removed, the incentive for source and residence states to apply the minimum tax rules in good faith disappears. The mere suspicion that some states are gaming the system to favor their own industry is enough for any multilateral rule-based system to collapse.

A third way would be to make the UTPR transition rules applicable during 2025 permanent. These rules permit MNEs resident in countries with a nominal corporate rate of at least 20% to escape UTPR-taxation. However, such a solution also opens the door to circumventions. Luxembourg is a classic example of countries that have a high nominal corporate tax rate, but where its legislation consciously provides room to tax plan away almost the entire tax base.

A fourth way for the OECD would be to renegotiate Pillar 2 so that it instead conforms with the GILTI rules. This also permanently removes the risk of American MNEs being subject to UTPR-taxation. Such a solution would be technically possible, but would likely meet considerable resistance since it leads to the OECD's pillar 2 framework being watered down.

The last resort would be to put Pillar 2 on hold during the Trump administration's term. If the US withdraws its support, the rest of the world will anyway most likely freeze its implementation. If the EU absolutely wants to keep the minimum tax, its application could be limited to the EU area for the time being.

4.    Concluding Remarks

I suspect emotions were high among Republicans when the memorandum was drafted. They are indeed deeply tired of the OECD's insistence in trying constantly to curtail Congress’ taxing powers. However, notwithstanding the memorandum’s harsh wording, the end result does not have to be that the Trump administration pulls the plug on the entire Pillar 1 and 2 work. The memorandum should rather be seen as a clear statement on where the U.S.' red lines are in upcoming talks with the OECD. What the U.S. demands is that the Pillar 1 framework does not restrict the scope of the U.S. Congress' taxing powers and that Pillar 2 does not allow for UTPR-taxation of American MNEs. Whether such revisions are possible without the pillars collapsing remains to be seen.

As indicated above, however, the Trump administration has a vested interest in reaching some form of agreement on the taxation of the digital economy. Likewise, it is in the Trump administration's interest that the rest of the world follows the U.S. and moves toward increased MNE residence taxation of foreign source income. It should be added that it is hardly the right moment for the U.S. to dismantle the OECD's role as "rule-maker" now that the UN is on its way to establishing a competing global forum on tax matters. Against this background, the OECD may still hope that the U.S. chooses to keep the pillar process alive and complete the work in some form during president Trump’s term in office.

[1] For younger readers, it may be mentioned that I have worked on OECD issues for 18 years, both as an employee (10 years) and as a delegate (8 years) in various fora at the OECD.

[2] The OECD's pillar work is conducted by the multilateral forum "Inclusive Framework."

[3] Approximately 60-65% of the income covered by Amount A are derived by tech companies headquartered in the USA.

[4] Notice 2025-4, 2025-4 IRB 1.

[5] PwC and WTS Global publish and regularly update info showing the steps states have taken to implement Pillar 2, see https://www.pwc.com/gx/en/tax/international-tax-planning/pillar-two/pwc-pillar-two-country-tracker-summary-v2.pdf and https://wts.com/wts.com/hot-topics/pillar-two/implementation-status/wtsglobal-pillar-two-country-by-country-implementation.pdf.

[6] For a more detailed account of those rules, see Fensby, "The American Tax Reform from a Tax Policy Perspective – Part 2," SvSkT 2018, p. 568.

[7] The Build Back Better Act (H.R. 5376). The Bill aimed to raise the GILTI rate to 15%, to change the tax base calculation from a global basis (so-called "blending") to a country-by-country basis and to revise the BEAT rules to cover more types of payments and transactions. The BEAT rate would also be increased to 15%.

[8] US tax law is likely to meet the pillar 2 minimum tax requirements as a source state.

[9] Discriminatory digital taxes were identified in France, Italy, India, Spain, Turkey, the United Kingdom and Austria. The countries concerned committed to phasing out those taxes when Amount A is implemented.

[10] For a historical background on the issue, see the following post from the fall of 2021.

[11] This occurred through the introduction of "check-the-box regulations." See further Fensby, "Apple's Tax Planning from Three Tax Policy Perspectives," Skattenytt 2021, p. 588.

[12] The Treasury Secretary’s mandate includes "investigating whether any foreign countries are not in compliance with [U.S. tax treaties]."