Newly inaugurated US President Donald Trump has wasted no time and signed an executive order that throws the idea of a global corporate minimum tax into chaos.

The international agreement, which was conceived and championed by the Organization for Economic Cooperation (OECD), was supported by former President Joe Biden and nearly 150 other countries.

Trump's executive order makes it clear that earlier US support and commitments are null and void. "The Global Tax Deal has no force or effect in the United States" without the action of Congress, according to the document.

It is an attempt to recapture "our nation's sovereignty and economic competitiveness" and go up against foreign tax practices that could lead to "retaliatory international tax regimes" for American companies, it went on further.

What the global tax deal would do

The OECD-backed deal has two parts:

1. Making sure big companies pay taxes at all.

This means a global minimum tax of 15% will be levied on the profits of big multinational corporations. If they don't pay at least 15% in their home countries, other countries could charge them a "top-up" tax.

The rule only applies to companies that report global revenue of €750 million ($782 million) or more. This high hurdle means only around 100 global digital companies will be subject to such a rule.

2. Making companies pay some taxes where profits are made.

This means certain taxable income will be shifted, and taxed, to where it is earned instead of where a company may be headquartered or have a physical presence.

Is US participation necessary for a deal?

For such a global deal to work efficiently, the US needs to be a part of it — not least because many of the companies that would be targeted are American companies like Amazon, Apple, Google and Facebook.

"The failure of the agreement is a real possibility due to US non-participation in the deal," Robert Dever told DW last July. "Unfortunately, this means that the success of the deal will likely be held hostage by the political situation in Washington," said the Dublin-based partner and Irish tax practice lead at Pinsent Masons, a multinational law firm. 

Several countries have introduced the OECD-backed rules, while others are still in the process of doing so or rethinking their participation.

The US never ratified the deal as Biden was unable to get enough votes in Congress, which means there is no immediate change for US-based businesses after the country turned its back on the deal this week.

 Global tax and tariffs threats

Republicans in Congress have long been against the agreement but have flip-flopped about why, said Kimberly Clausing, a professor at the UCLA School of Law who specializes in tax law.

"At first, they said they can't tax these companies because foreign countries would just undercut the US. Now they say they want to tax these companies themselves since foreign countries have raised their rates."

This Republican about-face reveals their true colors, "which is they don't want US multinationals to have to pay tax anywhere," Clausing told DW. "So they're therefore hoping to undermine the agreement itself by threatening countries that have adopted the agreement with tariff retaliation." 

However, tariffs are likely to drive up prices for American consumers and lead to higher inflation. Not taxing the world's most profitable companies is also "contrary to the populist rhetoric" used by Trump who portrays himself as a cheerleader for American workers, said Clausing.

"This is just an attempt to take the tax burden away from the rich and to levy it on the poor instead," she said.

Leaving the agreement is another way for Trump "to try to extract policy out of other countries," Clausing said. 

Do all roads lead to tariffs?

Clausing, the deputy assistant secretary for tax analysis at the US Department of the Treasury during the first part of the Biden Administration, thinks other countries can keep the deal alive by sticking to a minimum tax in exchange for access to their markets.

Companies that don't want to pay could avoid doing business in these countries. For this to work without US cooperation, these countries would need unwavering collaboration, especially as the US government will not look kindly on countries that tax American companies unilaterally.

To dampen these attempts ahead of time, Trump's executive order gave the head of the Treasury and the United States Trade Representative 60 days to "investigate whether any foreign countries are not in compliance with any tax treaty with the United States or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies."

Companies face unilateral digital service taxes

With hopes fading that a global tax deal will materialize, countries are expected to compete against each other and reach for unilateral tax regulations.

France, Italy, Spain, the UK, India and New Zealand already have "digital service taxes" in place. Others are likely to implement or reactivate them soon.

Digital service taxes are taxes on the revenue of companies that provide services such as online advertising, data usage, e-commerce, or streaming. These taxes ensure that countries can tax profits generated in their local markets, even if these companies don't have a physical presence there.

However, unilateral taxes may lead to more unilateral actions. Mixing "America First" policy, corporate taxes, and the threat of tariffs could be a recipe for chaos.  

Edited by: Rob Mudge