Donald Trump – the end of Pillar 2?

This article was written by our experts Alexander Göbel, Malte Bredick and Lukas Kawka

Impacts of Donald Trump's US Tax Policy on Global Minimum Taxation

On his first day in office, President Trump issued a memorandum announcing the United States' withdrawal from the global minimum tax initiative (Pillar 2). At the same time, he directed the Treasury Secretary to review the tax policies of other countries to determine whether they discriminate against U.S. companies. During his election campaign, Trump pledged tax cuts for businesses, and in his recent speech at the World Economic Forum in Davos, he promoted the U.S. as an investment destination with the “lowest taxes in the world.

The global minimum tax, adopted by the OECD in 2021 and widely known as the Global Tax Deal or Pillar 2, establishes a minimum effective tax rate of 15% on corporate profits worldwide. It is based on the OECD’s Model Rules and must be implemented into national law by participating countries. In Germany, Pillar 2 has been transposed into national legislation through the Minimum Tax Act (Mindeststeuergesetz), which took effect starting with the 2024 financial year. A total of 147 countries have signed onto the OECD’s Global Tax Deal. However, apart from the EU, only a few countries have actually implemented the global minimum tax to date.

In his memorandum, the new U.S. president makes it clear that the Global Tax Deal rules do not have any legal force or effect in the United States unless Congress enacts legislation to implement them. The previous Biden administration also did not incorporate the Global Tax Deal into U.S. law but merely issued a letter of intent to join the agreement at a later date. As a result, the latest statements from the White House do not, for the time being, affect the legal status of Pillar 2 in the U.S. The functional mechanism of the global minimum tax was deliberately designed to ensure its effectiveness regardless of implementation by individual countries.

Therefore, Donald Trump’s statements do not directly impact the German Minimum Tax Act. Rather, it is the potential U.S. countermeasures that could have a significant impact, as they are explicitly aimed at Pillar 2 countries (see more below). Nevertheless, statements from political circles suggest that Germany remains committed to the OECD agreements and intends to uphold the concept of minimum taxation. The abolition of the global minimum tax currently seems politically unlikely. As a result, affected companies continue to face the challenges posed by Pillar 2.

Potential U.S. Countermeasures and OECD Concessions in the Pillar 2 System

Addressing the international community, Trump has threatened to impose “countermeasures” if other countries enact “discriminatory” and “extraterritorial” tax rules that disadvantage U.S. companies. This primarily refers to cases where, in addition to withholding taxes, foreign countries impose additional taxes on U.S. businesses under the minimum taxation rules, should their profits otherwise be subject to an effective tax rate of less than 15%.

Possible measures could include the gradual increase of the U.S. corporate tax rate, as proposed by the House Committee on Ways and Means on January 22, 2025, as well as the denial of treaty-based withholding tax benefits for companies based in Pillar 2 jurisdictions. In extreme cases, this could result in an additional corporate tax burden of between 5% and up to 20% for German companies, as well as a 30% withholding tax on profit distributions.

Going forward, it is likely that the Pillar 2 rules will be adjusted in favor of U.S. companies. Under the current legislative framework, there are certain scenarios where low-taxed income of U.S. corporations could be subject to double taxation due to the simultaneous application of Pillar 2 and the U.S. controlled foreign corporation (CFC) rules. To address this issue, the previous U.S. administration under President Joe Biden had already introduced certain transitional measures for the CFC rules. In our view, a potential compromise could include the following elements:

• Existing transitional allocation mechanisms for taxes arising from CFC rules could be applied permanently to avoid double taxation.
• The UTPR safe harbour for ultimate parent entities based in jurisdictions with a nominal corporate income tax rate of at least 20% could be permanently implemented, with the threshold potentially lowered to 15%.
• U.S. tax credits for research and development could be classified as qualified tax credits under the minimum tax framework, ensuring they are not deducted from total taxes paid when calculating the effective tax rate.

How Are German Companies Affected?

The specific details of the U.S. “countermeasures” are set to be developed by the U.S. Treasury Department in the coming weeks, as directed by Trump. A precise assessment of their impact, as well as potential countermeasures or concessions from Pillar 2 countries, will only be possible once concrete measures have been presented.

However, we caution against a potential unilateral weakening of the global minimum tax in favour of the U.S. If U.S. corporations are effectively exempted from the rules, European companies could face yet another competitive disadvantage in the international market. They would still be required to navigate the high administrative burden imposed by Pillar 2—while foreign multinational groups might not be affected to the same extent. In our view, permanent safe harbour rules could play a key role in the further development of Pillar 2 regulations. The OECD is expected to release a first draft on this topic shortly.

Companies affected by Pillar 2 should closely monitor these developments. We will keep you informed and are happy to provide pragmatic support in managing the associated challenges.