Global Minimum Tax: Developments Threaten European Competitiveness
Protect the European Economy
March 7, 2025
The current U.S. tax policy under President Donald Trump, in conjunction with the global minimum tax, poses significant risks to the global competitiveness of European companies. Politicymakers must urgently take measures to mitigate imminent burdens on European businesses and offset competitive disadvantages.
Significant Imminent Additional Burdens for European Companies
U.S. President Trump has ruled out U.S. participation in the global minimum tax and is planning additional tax policy measures that will severely disadvantage European companies. These regulations could come into effect as early as this year. Particularly concerning are:
▪ Memorandum of January 20, 2025: Investigation into whether foreign countries are not complying with tax treaties or are extraterritorial or discriminating against American companies. Results and possible countermeasures are to be presented by April 1, 2025. Additionally, another memorandum refers to Section 891 of the U.S. Tax Code, which has existed for decades but has never been applied, allowing for the doubling of tax rates for companies from the aforementioned countries.
▪ Republican Proposal (H.R. 591, Section 899 IRC): This proposal eliminates reduced double taxation agreements withholding tax rates and introduces special tax rates of up to 20 percent on U.S. income of companies from countries with allegedly discriminatory tax practices. This affects permanent establishments, dividends, interest, and licenses. The Undertaxed Profits Rule (UTPR) and Digital Services Taxes (DST) are specifically mentioned as discriminatory tax regimes.
A primary target of U.S. criticism is the UTPR, a key component of the OECD's minimum tax framework. The UTPR aims to ensure that corporate profits of multinational companies from countries without minimum taxation mechanisms (e.g., U.S. corporations) are taxed at a minimum of 15 percent if a business entity of the corporate group is located in a country applying UTPR. Since the U.S. has not
implemented the global minimum tax rules, even U.S. corporations, including their U.S. parent companies, would be subject to German UTPR1
Example Case Germany:
German Companies are a central economic factor in the USA. According to the latest report from the German Federal Ministry for Economic Affairs, German companies were invested in the USA with $ 619 billion in 2023. Assuming a conservative return of 5 %, this results in annual profits of around $ 31 billion under simplified calculations.
Under simplified assumptions, if these profits were distributed to German shareholders and taxed at 35 % instead of the previous 0 %, this would result in an additional tax burden in the billions (at least $ 11 billion in just one year according to this calculation). Additionally, tax burdens on interest and license payments can be expected at a similar level. And this would only account for the USA-Germany relationship.
This example highlights the severe consequences of potential additional U.S. taxes on the U.S. income of German companies: billions in additional tax burdens in the U.S., a corresponding decline in tax revenue in Europe, and massive competitive disadvantages. Such a burdensome development, solely triggered by U.S. countermeasures in response to adherence to an OECD agreement, must be urgently prevented.
Worsening Competitive Disadvantages for EU Companies
The minimum tax (Pillar 2) was initially conceived as a tool to combat aggressive tax avoidance by U.S. corporations and to create a worldwide "level playing field" for corporate taxation Given the latest developments in the U.S., this goal is now explicitly being undermined, resulting in competitive disadvantages for European businesses.
Act Decisively Now: Necessary Responses in Europe
European decision-makers must urgently take action to protect the European economy in light of these new international conditions.
1. Prevent U.S. Retaliatory Measures
A key priority must be to prevent U.S. retaliatory measures to avoid severe competitive disadvantages for the European economy. Two options exist:
Temporarily suspend the minimum tax directive:
To safeguard the European economy, the European minimum tax directive (Council Directive (EU) 2022/2523 of December 14, 2022) should be temporarily put on hold. Such a suspension would restore
1 Nevertheless, in Germany and many other countries, a so-called temporary UTPR Safe Harbor, provided that the nominal corporate tax rate in the respective country is at least 20%. In this case, no additional taxation would apply. This is still the case in the U.S.; however, a tax rate reduction is planned, which would render the Safe Harbor inapplicable and expose German companies to countermeasures.
equality in global tax competition and prevent the consequences of impending retaliatory taxes on European businesses. During this suspension phase, legal uncertainties can be clarified, the lost global consensus can be restored, and amendments to the minimum tax can be examined and implemented.
Mitigate UTPR
Alternatively, if a suspension of the minimum tax directive is not feasible in the short term due to the unanimity requirement among EU member states, other measures must be prioritized to prevent U.S. retaliatory measures. To minimize damage to the European economy, a further mitigation of the UTPR for American companies through an extension of the UTPR Safe Harbor and a constructive dialogue regarding the U.S. GILTI regulation is of utmost urgency. In this case, however, the global minimum tax and other corporate tax regulations must be significantly simplified to reduce the competitive disadvantage of the European economy compared to U.S. competitors.
2. Further Simplify the Minimum Tax
Regardless of current developments, simplifying the highly complex minimum tax regulations must be pursued.
Improve the minimum tax at the OECD level
Political decision-makers should advocate at the OECD level for a further reduction in complexity and critical improvements:
▪ The temporary CbCR Safe Harbor should be improved and established as a permanent simplification measure.
▪ The UTPR Safe Harbor created for the U.S. should also be extended to the IIR.
▪ Deferred taxes should be comprehensively considered in Pillar 2 based on IFRS financial statements (instead of only up to 15 percent and for five-year temporary differences).
▪ Country-specific tax incentives should be integrated into the minimum tax regulations to ensure that policies encouraging investment incentives do not contradict the goal of fair competition.
Create
further simplifications at the European level
At the European level, redundant regulations that impose excessive compliance burdens on businesses must be evaluated and eliminated. This includes, in particular, the simultaneous application of the minimum tax and controlled foreign corporation (CFC) taxation, as well as the elimination of overlaps between the global minimum tax and interest deduction limitations (evaluation of the Anti-Tax Avoidance Directive, ATAD). By specifically and temporarily aligning with the regulations of Pillar 2, these simplifications could already be implemented during a suspension phase. Only through these targeted adjustments can Europe enhance its competitiveness and better prepare for future global economic challenges.
Proposal from the German Economy: Necessary Reactions to the Minimum Tax to Protect the European Economy
European companies are facing significant competitive disadvantages due to the administrative burdens imposed by the minimum tax and additional tax liabilities resulting from U.S. countermeasures. Policymakers must act swiftly:
Prevent U. S. retaliatory measures
▪ Temporarily suspend the minimum tax directive in Europe
▪ Mitigate UTPR
Simplify the minimum tax regulations further
▪ Improve the minimum tax at the OECD level
▪ Implement further simplifications at the European level
Impressum
Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu
T: +49 30 2028-0
German Lobby Register: R000534
EU Transparency Register: 1771817758-48
Redaktion
Dr. Monika Wünnemann Head of Department Tax and Financial Policy m wünnemann@bdi.eu
Nadine Fetzer Senior Manager Tax and Financial Policy n.fetzer@bdi.eu
BDI Document no: D2058