EU governments consider appeasing Trump on global minimum tax

BRUSSELS — EU governments are considering appeasing Donald Trump's U.S. administration by changing European rules on taxing multinational corporations to exempt America from a crucial provision of a landmark global tax deal.

Under the deal, negotiated within the Organization for Economic Cooperation and Development (OECD), almost 140 countries in 2021 agreed on setting a minimum tax rate of 15 percent on multinational corporations with financial revenues of more than €750 million a year. It was seen as a critical step in fighting tax avoidance.

Around 40 countries have implemented the minimum tax so far, including a majority of members of the EU, which translated the agreement into its domestic rules and presented it as  “a new dawn for the taxation of large multinationals.”

The U.S. negotiated the 2021 deal, which includes a minimum tax that countries can introduce unilaterally and new rules on how large corporations should be taxed country by country. But Washington has never implemented it.

The day he officially kicked off his second term, Trump announced the U.S. withdrawal from the agreement and  tasked U.S. Treasury Secretary Scott Bessent with investigating if foreign countries have in place or are planning to put in place tax rules “that are extraterritorial or disproportionately affect American companies.”

Specifically, the U.S. administration criticized a key provision of the OECD agreement that allows a country to increase taxes on multinational corporations that other countries do not impose the minimum tax on, to make up the shortfall.

“If you take the example of a U.S. pharmaceutical company, selling medicines in Italy and shifting profits in Ireland … theoretically, with the global minimum tax, what would happen is that Ireland would have to tax 15 percent minimum; and if it didn't, then the U.S. would; and if the U.S. wouldn't, then Italy would,” Quentin Parrinello, policy director at the Paris-based EU Tax Observatory, told POLITICO. 

The mechanism, called the "undertaxed profits rule," is designed to incentivize countries to compete in collecting a minimum tax, instead of the competition to attract corporations with low taxes that the world has experienced for decades. It should be applied for the first time next year.

“So what [the U.S. authorities]  are doing, basically, is trying to undermine the whole structure [of the global deal],” Parrinello said. “They want to destroy a global tax deal that would enable other countries to set up any minimum tax that is not aligned with their interest.”

According to an EU Council document seen by POLITICO, the EU is now considering “limiting the application” of the undertaxed profits rule. That could be made by extending beyond 2026 a current exemption on corporations whose parent companies are in countries with a 20 percent (or higher) tax rate, or creating a new tailored one, or even by changing the rules “to remove this mechanism entirely.”

Ready to talk

In an OECD meeting earlier this month, the U.S. reportedly said it was eager to negotiate on the matter.

According to the document seen by POLITICO, Washington said it wants to find a compromise “that respects U.S. sovereign powers” and that “all other major economies" indicated they would be open to discuss the issue.

The document touches on potential developments in the ongoing negotiations and on ideas about how to deal with the U.S. concerns and it is meant to feed into a discussion top EU government officials will hold on Tuesday.

The document warns that applying the rule “could lead to retaliatory measures” by Washington, including moves against EU firms.

Trump has already displayed his aggressive economic approach by brandishing tariffs and triggering a chaotic trade war. The EU is currently trying to negotiate with Washington to avoid a further 20 percent tariff on all its imports. EU countries seem open to concessions on the tax front in order not to exacerbate the existing transatlantic tensions.

But the Council paper also stressed that further exemptions “could” disadvantage EU firms that would continue to face the minimum taxation.

Other ideas listed in the document include changing the global rules by calculating tax credits less strictly, in a way that would would increase the U.S. effective tax rate and decrease the tax that other countries can impose on U.S. subsidiaries or, even, aligning the tax rate accounting method of the EU rules and the U.S. rules.

A tax reform the U.S. Congress passed under the first Trump administration imposed a lower minimum tax rate on multinational firms than the OECD deal does and calculated it only on a worldwide base.

“The question is whether Europe will bow to the pressure of the U.S. and allow the global agreement to be changed,” Parrinello said. A potential exemption for American firms would give an incentive for European businesses to move to the U.S.: “This is self-defeating for the European Union," he said.

The risk, Parrinello added, is going back “to the decade of race to the bottom in corporate income tax. ... That means that countries will have to look for other sources of revenues, which means spending cuts or increasing taxes on other people.”

European Economy Commissioner Valdis Dombrovskis said EU countries “are committed to this OECD global tax deal.” He told a Council on Foreign Relations event on Monday that in the absence of a deal on fair allocation of taxation rights globally, the topic of EU digital taxes will likely return. He did not talk about the corporate minimum tax issue, however.