Donald Trump has declared that the USA will pull out of the global minimum tax scheme. Although the deal had not been implemented under the Biden administration either, the government had at least stated its intent to accede it at a later stage. What are the implications of the USA’s rejection of international tax cooperation for the minimum tax in Europe and Germany? Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“At first glance it appears feasible to enforce global minimum tax in Europe despite the USA’s withdrawal from the international tax agreement, even in the long run. EU countries could ask subsidiaries of US companies to disclose information on global tax payments made by their groups and impose the tax if necessary. But it is not clear how Trump’s rejection of the global minimum tax deal should be interpreted. If US companies are not allowed to cooperate, their subsidiaries at European locations will not be able to comply with European minimum tax provisions as they would not be provided with the necessary information by their parent companies or would not be allowed to pass on this information. A conflict between tax authorities would be the result, leading to considerable new uncertainty about taxation.

Apart from these theoretical questions regarding taxation, it is clear that the US position on international tax cooperation will have major consequences. If the largest economy worldwide is permanently absent from the global minimum tax scheme, this tax will no longer be global. It is also to be expected that other countries are going to follow the example of the USA. Besides the EU countries, there are only few nations which have as yet adopted the minimum tax. In the countries pursuing a wait-and-see policy, scepticism about implementation in their own jurisdiction is likely to rise, not least because the project might be perceived to make little sense if there are no prospects for including the US market and US multinationals.

Given their pioneering role in international tax coordination, the EU Member States and the EU are now in a difficult position. Besides, the cost-benefit analysis of the minimum tax is disappointing. Due to the comprehensive reporting requirements, compliance costs are very high and current estimates of tax revenue are considerably lower than the initially optimistic expectations. In addition, important EU locations like Germany are already high-tax countries in the area of corporate tax. From a global investors’ perspective, these countries will now have the additional drawback that the minimum tax will be enforced there. This burden will not exist at locations in the US, and this may be decisive when it comes to decisions on where to set up business and may put EU countries at a disadvantage. Because the minimum tax is set by EU directives, the member states cannot respond to the new situation on their own: An amendment would require all member states to vote unanimously in favour of a new provision.

However, the EU could use its leverage.  Digital taxes, which are imposed on the digital revenues generated by tech multinationals in the market states, can be levied without cooperation by the countries in which these companies are based and could be introduced without US cooperation. But the introduction of new or additional digital taxes is also directly related to the planned implementation of Pillar 1 of the OECD agreement. It envisages a redistribution of taxation rights in respect of digital revenues. Digital taxes have already been regarded as an unfriendly act by the previous US administration; so, using this means of exerting pressure could intensify the upcoming trade disputes.

Overall, by pulling out of global cooperation on corporate taxation, the US has very much dampened the prospects of success for the global minimum tax, which was originally conceived as a global scheme. If it were to degenerate into a European minimum tax, it would do more harm than good for Europe. In this scenario, and in view of the very high administrative costs, it would be better to put it on hold until trustful cooperation with the US is possible again.”