The global 15% minimum tax on multinational corporations took effect on January 1, 2024, in over 30 developed countries, including tax havens like Luxembourg and Switzerland. While the United States signed the agreement, it was never ratified during Joe Biden’s presidency.

The decision by newly-elected U.S. President Donald Trump to pull the country out of a global agreement that would introduce a 15% minimum tax on multinational corporations’ profits could have negative consequences for African countries. It risks reducing their tax revenues and encouraging capital flight across the continent, according to a report published on January 24 by the Institute for Security Studies (ISS Africa), a think tank based in South Africa.

The report, titled "Trump Attacks Global Minimum Tax," recalls that Trump's withdrawal from the agreement, which was brokered by the Organization for Economic Co-operation and Development (OECD), was formalized through an executive order signed just hours after his inauguration.

In the name of reclaiming "national sovereignty" and "economic competitiveness," Trump declared that the agreement would have "no effect in the United States." He also directed the U.S. Treasury Department to prepare "protective measures" against countries that impose, or plan to impose, taxes that are extraterritorial or disproportionately affect American businesses.

The executive order, which is part of his "America First" trade policy, also mandates an investigation into any foreign country that imposes "discriminatory or extraterritorial taxes on U.S. citizens or businesses."

In 2021, 140 countries within the OECD framework reached an agreement on taxing business profits at a minimum rate of 15%, no matter where those profits are reported.

The global minimum tax is based on the rules of the OECD’s Global Anti-Base Erosion (GloBE) framework. It ensures that large multinational companies pay a minimum level of tax on their earnings in each country where they operate, thus reducing the incentive for profit shifting and setting a floor to curb harmful tax competition. This framework aims to stop the global race to the bottom on corporate tax rates.

The GloBE rules, once integrated into national laws, are designed to coordinate with rules in other jurisdictions to create a global minimum tax system. It imposes an additional tax on profits earned in a jurisdiction when the effective tax rate is lower than the minimum rate.

These rules require multinational corporations, particularly those generating annual revenues of more than €750 million, to calculate their revenues and taxes on those revenues by jurisdiction. When this calculation results in an effective tax rate below 15%, the rules require that the multinational group pay an additional tax that raises the total tax on the group’s excess profits to the 15% level in that low-tax jurisdiction.

According to estimates by the OECD, the revenue generated by the minimum tax could range between $155 billion and $192 billion annually worldwide.

The historic agreement came into effect in January 2024 in the 27 European Union countries, as well as in the United Kingdom, Norway, Australia, South Korea, Japan, Canada, and other jurisdictions that are considered tax havens by multinationals, such as Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados.

Although the United States supported the tax reform during Joe Biden’s presidency, they have not yet passed any laws to implement the agreement into their national legislation.

The ISS Africa report points out that the U.S. withdrawal from the agreement will undermine the OECD’s efforts to put an end to the common practice among multinationals of avoiding their tax obligations by shifting profits from jurisdictions where they make money to those with lower tax rates. This practice, known as tax avoidance, has particularly harmed Africa for several decades. A 2020 study by the United Nations Conference on Trade and Development (UNCTAD) conservatively estimated that illicit financial flows cost Africa $88.6 billion annually.

It is difficult to isolate tax evasion within these illicit financial flows. However, a high-level expert group from the African Union (AU) estimated that 65% of illicit financial flows are linked to business activities, with 30% related to criminal activities and 5% to corruption. The business activities defined by this expert group include non-tax practices such as fraudulent invoicing inaccuracies.

A 2020 report by a network of NGOs, including Tax Justice Network, Global Alliance for Tax Justice, and Public Services International, estimated that tax evasion by multinationals costs Africa $23.2 billion each year.

In a statement to ISS Africa, Alex Cobham, the CEO of Tax Justice Network, remarked that the U.S. withdrawal from the global tax agreement could potentially boost support for negotiations on a United Nations framework convention on international tax cooperation, which will begin next month. The resolution to launch this process was introduced by Nigeria on behalf of the African Group at the multilateral organization. It could lead to a more inclusive and ambitious global tax agreement than the one overseen by the OECD. However, it remains uncertain whether the unilateralist Trump will be more likely to conform to a UN framework than to an OECD agreement.