This year, policymakers in Brussels have been monitoring shifting dynamics in Washington, DC. Fiscal pressures are rising, and growth is scarce for European economies. Instead of spectating, policymakers in EU institutions and in national capitals should chart the most productive way forward.
While US policy shouldn’t be ignored, European leaders set to gather in Brussels today to discuss tax implications of US policies can look to foster a more competitive economy by leveraging strategic takeaways from their American counterparts.
Three lessons from the US should be clear. First, tax certainty matters. Second, protectionism is a dangerous game. And third, multilateral work requires pragmatism, not idealism.
With all its quirks, recent US tax legislation created certainty for US taxpayers, namely by making permanent many expiring tax cuts from President Donald Trump’s first term in office. This new law also prioritizes policies that are growth-oriented, including full, immediate expensing for short-lived assets and research and development.
European countries would benefit from similar policies. While the European Commission recommended the same approach for green investments in July, the red tape required to limit the scope of the policy would undermine the economic impact of the tax change.
Unfortunately, the new US tax law comes alongside Trump’s ever-escalating trade war. Even though some of his tariffs are being challenged in US courts, the president has made clear that his efforts to impose new tariffs under any means necessary aren’t going anywhere. In fact, European digital services taxes may be his next target as he continues to identify grievances with European policies.
Trump’s approach has strained diplomatic relationships around the world, and what were once stable trading relationships between nations are now unsteady. But European policymakers should avoid making similar mistakes to Trump and instead lean into creating stronger trade relationships around the world.
While the US has turned its back on multilateralism in trade, it has shown a willingness to continue the work at the Organization for Economic Cooperation and Development and has proposed a way forward.
That G7 agreement, a byproduct of negotiations on OECD proposals earlier this year, suggests an alternate future for the global minimum tax that would allow the US approach to run parallel to rules developed at the OECD (and implemented already by several dozen countries).
US policymakers laid the groundwork for this method by broadening the US anti-avoidance package in their recent legislation, by applying a 14% rate and removing a substance carveout.
There are two ways to think about this. The first would be to focus on the differences between the two systems. The US no longer has a substance carveout, allows high- and low-tax blending between countries, and disallows some foreign tax credits.
By contrast, the OECD policies prescribe a substance carveout, apply to every jurisdiction individually, and provide full crediting. Policymakers could look at these differences and argue that the model rules should be followed to the letter.
The second, more pragmatic view is to focus on outcomes. EU policymakers can be content that the new US track record closely aligns with the outcomes modeled by the OECD. Since 2017, the minimum tax regime in the US has been effective. Recent data from PwC takes into account both foreign and domestic taxes and shows that US multinationals pay average rates comfortably above the global minimum tax rate of 15%.
Other research by academic accountants confirms that average tax burdens on the foreign income of US multinationals have been north of 20% following the 2017 reforms. By recognizing that the outcomes generally align with the global minimum tax, EU policymakers can work with the US to advance the side-by-side approach.
Even if European lawmakers’ goal is to fully eliminate all tax advantages, disregarding costs to compliance and competitiveness, the US shouldn’t be in the crosshairs.
The global minimum tax rules are incredibly complex, and EU policymakers should use this discussion as an opportunity to simplify them and create meaningful safe harbors that mitigate the worst of the administrative burdens.
So, while US domestic tax policies have created some certainty, tariffs and cross-border rules are still in uncharted territory. The protectionist agenda for tariffs has been harmful, and policymakers on both sides of the Atlantic should prioritize pragmatic solutions that reduce barriers to trade and support dialogue on cross-border rules.
Instead of getting stuck in a reactionary posture, European countries should aim for competitiveness, and the EU can support that work with stronger, more stable trade relationships.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Daniel Bunn is president and CEO of the Tax Foundation, a think tank in Washington, DC.
Write for Us: Author Guidelines
To contact the editors responsible for this story: