Australia is in the firing line of Trump’s looming ‘revenge tax’. It’s a fight we’re unlikely to win
- Written by: Graeme Cooper, Professor of Taxation Law, University of Sydney
The Australian Labor Party just won an election victory for the ages[1]. Now, it may be forced to walk back one of the key achievements of its first term.
Here’s why: United States President Donald Trump is about to declare an income tax war on much of the world – and we Australians are not on the same side.
Over in the US, the “One Big Beautiful Bill act[2]” – a tax and spending package worth trillions of dollars – has been passed[3] by the House of Representatives. It’s now before the Senate for consideration.
Within it lies a new and highly controversial provision: Section 899[4]. This increases various US tax rates payable by taxpayers from any country the US claims is maintaining an “unfair foreign tax” by five percentage points each year, up to an additional 20% loading.
Having been an integral part of an international effort to create a global 15% minimum tax, Australia now finds itself in the firing line of Trump’s “revenge tax[5]” warfare – and it’s a fight we’re unlikely to win.
A global minimum tax rate
The origins of the looming income tax war started in 2013[6], when the Organisation for Economic Co-operation and Development (OECD[7]) released its plan to stamp out “base erosion and profit shifting”.
This refers to a range of strategies often used by multinational companies to minimise the tax they pay, exploiting differences and gaps in the tax rules of different countries.
The OECD’s first attempt to tackle the problem was a collection of disparate measures directed not only at corporate tax avoidance, but also controlling tax poaching by national governments and “sweetheart deals[8]” negotiated by tax officials.
Under both Labor and the Coalition, Australia was initially an enthusiastic backer of these attempts.
However, the project was not a widespread success. Many countries endorsed the final reports but, unlike Australia, few countries acted on them.
After the failure of this first project, the OECD tried again in 2019. This evolved to encompass two “pillars” to change the global tax rules.
Pillar one[9] would give more tax to countries where a company’s customers are located. Pillar two[10] is a minimum tax of 15% on (a version of) the accounting profits of the largest multinationals earned in each country where the multinational operates.
Labor picked up this project for the 2022 election, promising[11] to support both pillars – and they honoured that promise.
Mixed success
Around the world, the two pillar project had mixed success. Pillar one was dead-on-arrival: most countries did nothing. But Australia and several other countries, mostly in Europe, implemented pillar two – the global minimum tax.
The OECD has always maintained the base erosion and profit shifting (BEPS) project was a coalition of the willing, meant to rebalance the way income tax is allocated between producer and consumer countries, and rid the world of tax havens.
In the US, Republicans did not share that view[13]. For them, BEPS was simply another attempt by foreign countries to get more tax from US companies.
This Republican dissatisfaction with the OECD is now on full display. On the first day of his second term, Trump issued an executive order[14], formally repudiating any OECD commitments the Biden administration might have given.
He also directed his officials to report on options for retaliatory measures the US could take against any foreign countries with income tax rules that are “extraterritorial” or “disproportionately affect American companies”.
Why Australia is so exposed
Australia could find itself in the firing line of Trump’s tax warfare on many fronts. And the US doesn’t lack firepower. Section 899 adds to a number of retaliatory tax provisions[15] the US already had at its disposal.
The increased tax rates would affect Australian super funds and other investors earning dividends, rent, interest, royalties and other income from US companies. Australian super funds in particular are heavily invested in US markets, which have outperformed local stocks in recent years.
It would also affect Australian managed funds owning land and infrastructure assets in the US, as well as Australian entities such as banks that carry on business in the US.
And there are other measures that would expose US subsidiaries of Australian companies to US higher tax.
The bill would even remove the doctrine of sovereign immunity for the governments of “offending” countries. Sovereign immunity[16] refers to a tax exemption on returns that usually applies to governments. This means the Australian government itself could have to pay tax to the US.
There are concerns on Wall Street[17] this will dampen demand for US government bonds from foreign governments, which are big buyers of US Treasuries. The argument may sway some in the Senate – but how many remains to be seen.
What Australia may need to do next
We may be incredulous that anyone would consider our tax system combative, but enacting the OECD pillar two was always known to be risky.
There are other, homegrown Australian tax measures that have drawn American ire.
In 2015, Australia enacted an income tax measure (commonly called the “Google tax[19]”) specifically directed at US tech companies. In 2017, we followed this up with a diverted profits tax[20]. Trump’s bill specifically targets both measures.
Tying ourselves to the OECD’s global minimum tax project might have seemed like a good idea in 2019. In 2025, it looks decidedly unappealing, and not just because of Trump.
First, there is not actually any serious revenue in pillar two for Australia. Treasury’s revenue estimate[21] totalled only $360 million after four years, just slightly more than a rounding error in the federal budget.
Second, we are increasingly alone and vulnerable in this battle. It might feel emotionally satisfying to stand up to the US. If there was a sizeable coalition alongside us, there might be some point.
If Trump’s One Big Beautiful Bill act does pass through the US Senate, the Australian government and business will be left exposed to much higher costs.
Since abandoning the US market is not really an option, it might be time to surrender quietly and gracefully – by reversing, at the very least, the contentious bits of pillar two.
References
- ^ election victory for the ages (theconversation.com)
- ^ One Big Beautiful Bill act (www.congress.gov)
- ^ passed (www.theguardian.com)
- ^ Section 899 (www.axios.com)
- ^ revenge tax (finance.yahoo.com)
- ^ started in 2013 (www.oecd.org)
- ^ OECD (www.oecd.org)
- ^ sweetheart deals (www.theguardian.com)
- ^ Pillar one (www.oecd.org)
- ^ Pillar two (www.oecd.org)
- ^ promising (jimchalmers.org)
- ^ The Washington Post/Getty (www.gettyimages.com.au)
- ^ did not share that view (www.reuters.com)
- ^ executive order (www.whitehouse.gov)
- ^ retaliatory tax provisions (theconversation.com)
- ^ Sovereign immunity (www.ato.gov.au)
- ^ concerns on Wall Street (www.bloomberg.com)
- ^ Francois Mori/AP (photos.aap.com.au)
- ^ Google tax (www.smh.com.au)
- ^ diverted profits tax (www.ato.gov.au)
- ^ revenue estimate (archive.budget.gov.au)
