The idea was simple: once everyone signed on to a global agreement, the DST would go away, and the UK would rake in some new revenue through the OECD’s Pillar One (whereby the largest multinational corporations would see a slice of their ‘residual’ profit reassigned to countries where they have significant sales) and Pillar Two (which would enforce a 15% minimum profits tax rate). The OBR said the Treasury would gain £2.8 billion in extra revenue by the end of this Parliament.
But that grand vision hinged on widespread compliance, especially from the United States, home to the most of the world’s largest multinationals. Now that Trump has put the kibosh on it, the blueprint for a global reallocation of tax revenue suddenly looks a pipe dream. If America, home to Google, Amazon and countless other giants, is out, then Britain’s additional revenues might come at a hefty price. Getting the extra cash requires keeping the DST and doubling down on the OECD’s other novel taxing rules. But that would now probably bring much bigger problems.
That’s because, in Section Two of Trump’s executive order, he directs his Treasury Secretary to identify any ‘extraterritorial or discriminatory’ levies targeting American firms in other countries. Britain’s DST, aimed predominantly at US-based tech platforms, sticks out like a sore thumb. Should Washington brand it unjust, it seems likely Trump will slam British exports with retaliatory tariffs or other higher taxes. That means higher taxes on UK citizens and businesses operating in America and targeted US duties that will gut industries ranging from Scotch whisky to luxury knitwear. In other words, the DST and the targeted top-up tax that Britain introduced as precursors to the OECD tax deal could herald a US-UK trade and investment war.
More than that, the entire premise behind Pillar Two – that every major economy would adopt the 15% minimum floor – lies in tatters. Already integrated into the UK law, British domiciled businesses could be left paying higher effective rates than their American competitors, putting them at a glaring disadvantage. The Chancellor could well be left with a fiscal black hole, compounded by companies facing less of an incentive to call Britain their home.
What can Britain do, to both avoid Trump’s ire and prioritise its own economic well-being?
First, it should abolish its DST – an easy target for anti-American accusations anyway. Second, it should repeal Pillar Two. After all, there’s no sense implementing a global minimum tax if the world’s two largest economies refuse to play ball (China is also not interested in the deal). Such moves would anger Paris and Berlin, of course, but Britain’s top priority should be shielding its firms and exports from punitive US trade measures or retaliatory taxes. Being left as the last cheerleader for an economically suicidal half-dead global agreement makes little sense when Washington has turned its back.
Finally, Britain should pivot to diplomacy in earnest. If the OECD’s grand bargain is off, there’s still scope for bilateral negotiations or narrower deals. London can point out that the DST was never meant to last forever and is open to forging a custom agreement with Washington that addresses digital trade as part of a broader free trade agreement. Being an early mover to do this may bring good will. And given Pillar Two is tottering, Britain should instead channel its energies unilaterally into creating a simpler, more competitive corporate tax system that lures investment rather than trying to squeeze big companies.
Being located next to Ireland’s 12.5% corporate tax rate, and with Trump planning on a 15% headline corporate rate in the US, Labour must surely rethink its idea to resettle headline corporation tax at 25%. Not only should it introduce full and immediate expensing across the board, but it should cut the headline rate substantially, recognising that higher effective business profit taxes are one of the most economically destructive ways to raise revenue anyway.
Yes, all this will come with an immediate revenue loss too. But Labour’s stated priority is economic growth, not maximising corporate tax receipts. A US trade war and British-based companies following high-net-worth individuals in departing these shores is no route to that goal.
