Safeguarding the Fragile Future of International Tax Cooperation
The international tax landscape stands at a critical juncture. After years of multilateral cooperation through the OECD/G20 frameworks to create a more equitable global tax system, we now face uncertainty and potential fragmentation. For tax policy experts, financial diplomats, and international policymakers concerned with global tax governance, particularly those navigating cross-border taxation in Europe, the Trump administration’s recent withdrawal from the OECD global tax deal marks a troubling shift from multilateralism towards unilateral approaches that threatens to undermine decades of progress.
The global tax deal, structured around two pillars, represented an ambitious effort to address challenges arising from the digitalisation of the global economy. Pillar One sought to reallocate taxing rights to market jurisdictions where economic activity occurs, while Pillar Two established a global minimum corporate tax rate of 15%. This framework emerged from extensive negotiations and represented a delicate balance of competing interests.
USA’s decision undermines decades of progress
However, the withdrawal of US support has thrown this carefully constructed framework into disarray. The Trump memoranda directing the Treasury to review ‘discriminatory’ and ‘extraterritorial’ tax measures signals a fundamental shift away from cooperative approaches. The memoranda specifically target Digital Services Taxes (DSTs) implemented by several countries and potentially the Undertaxed Profits Rule (UTPR) that served as Pillar Two’s backstop. To appreciate the significance of this potential impact, it is important to understand the rationale of the UTPR and how it works.
In plain terms, the UTPR is a backup mechanism within the global Pillar Two tax framework. Here’s a simplified explanation: When a multinational company isn’t paying at least 15% tax somewhere in the world, the UTPR kicks in. It allows other countries where the company operates to collect additional tax to reach that 15% minimum. Think of it as a safety net that prevents large companies from avoiding taxes by shifting profits to low-tax jurisdictions. The UTPR works like this: If Country A doesn’t tax a company enough, then Countries B, C, and D, where the company also operates, can collect the ‘missing’ tax. This encourages all countries to apply the minimum tax rate and ensures companies pay their fair share somewhere.
This shift raises profound questions about the future of international taxation. Can the global minimum tax survive without its backstop? Will we see a return to uncoordinated national measures that create barriers to cross-border investment and increase compliance costs? Most importantly, what does this mean for efforts to ensure multinational corporations pay their fair share?
The historical context makes this regression particularly disappointing. The OECD/G20 inclusive framework represented the first truly global tax initiative with broad participation—bringing together over 140 countries, including traditionally marginalised developing economies. While imperfect, this democratisation of global tax governance signalled recognition that the challenges of the global digital economy require collective solutions transcending traditional power dynamics.
The potential consequences extend beyond technical tax matters. As countries respond to US pressure by withdrawing or modifying their tax policies, we risk entering a new era of tax competition—precisely the ‘race to the bottom’ that the OECD framework sought to prevent. This undermines fiscal sustainability and public trust in our economic systems. Now more than ever, we need policymakers to advocate for preserving elements of the OECD framework while developing pragmatic interim solutions that protect fiscal sovereignty and revenue bases.
The situation is particularly challenging for European nations. The EU has been at the forefront of digital tax initiatives, with several member states implementing DSTs while awaiting the promised global solution. Now, these countries face the prospect of US retaliatory measures, including potential tariffs. This creates a dilemma: maintain their tax sovereignty and risk trade conflicts or abandon legitimate revenue measures to appease a powerful trading partner.
For developing nations, the stakes are even higher. Their participation in the inclusive framework represented an unprecedented opportunity to address historical inequities in allocating taxing rights. Without a functioning global system, these countries may be unable to effectively tax economic activity within their borders, further entrenching global inequality. The alternative—unilateral measures—may lead to double taxation scenarios that inhibit investment precisely when these economies need it most.
A possible way forward
What path forward remains? The global community must consider both short-term pragmatism and long-term vision. In the immediate future, countries with DSTs must carefully weigh their response to potential US actions. The qualified domestic minimum top-up tax (QDMTT) may offer a more defensible approach that aligns with traditional tax allocation principles while ensuring a minimum level of taxation.
The QDMTT is essentially a ‘home-first’ approach within the global minimum tax framework. It allows countries to collect additional tax from multinational companies operating within their borders before other countries can do so. When a multinational company’s effective tax rate in a country falls below the 15% global minimum, the QDMTT enables that country to impose a top-up tax to reach the 15% threshold. This gives the host country priority in collecting additional tax rather than letting that revenue go to foreign governments. Think of it as countries saying: “If someone’s going to collect extra tax from companies in our territory, it should be us first.” It preserves tax sovereignty while ensuring companies meet the global minimum tax standard.
In the medium term, the global community should explore whether a modified version of the global minimum tax can survive without its underlying global agreement. This requires careful assessment of early adopters’ implementation experiences, revenue data, and willingness to adapt the framework to new political realities. Regional cooperation—particularly within the European Union—may provide an intermediate solution that preserves some benefits of coordination while acknowledging the limitations of the current global environment.
In the long term, the world needs a holistic approach that recognises the fundamental changes in business models and society generated by technological advancement. This means rethinking optimal tax mixes and exploring how new technologies can support more effective tax systems. For instance, smart contracts on digital currencies could revolutionise tax compliance by automating collection at the point of transaction. Similarly, AI-enhanced data analytics could dramatically improve tax administration efficiency while reducing business compliance costs. These technological innovations create opportunities for partnerships between policymakers and solution providers to develop the next generation of tax administration tools.
The global community must also acknowledge that the challenges facing the international tax system reflect broader tensions in global governance. The backlash against multilateralism is not isolated to taxation but represents a deeper questioning of institutional frameworks established in the post-war era. Any sustainable solution must address these underlying concerns about sovereignty, democratic accountability, and equitable representation.
What can academics do?
As the world navigates these challenges, the European academic community has a vital role to play. We must provide evidence-based analysis that informs policy decisions, bridges divides between competing perspectives, and articulates a vision for sustainable taxation in a digital age. This means crossing traditional disciplinary boundaries to integrate insights from law, economics, political science, and technology studies.
There is also a need to facilitate dialogue between stakeholders with divergent interests—tax authorities, businesses, civil society, and citizens. Only through inclusive conversations can solutions that balance competing values of efficiency, equity, simplicity, and sovereignty be developed. Universities and research institutions can serve as neutral forums for these critical discussions, creating opportunities for specialised workshops that bring together key stakeholders to forge consensus. In short, the role of academia, in this regard, as a safe space for thought leadership and strategic value creation cannot be overemphasised.
The breakdown of multilateral tax cooperation threatens fiscal sustainability and equitable burden-sharing. Yet, within this crisis lies an opportunity to build something more resilient. By engaging constructively across ideological divides and national borders, the global community can work toward a tax system that supports economic growth, addresses inequalities, and ensures fiscal stability—values that transcend political cycles and national interests. For policymakers and tax experts alike, the path forward requires both technical expertise and moral courage to defend principles of cooperation in an increasingly fragmented world. Those who can provide guidance through this complexity—through advisory roles with governments and multinational corporations navigating compliance challenges—will shape the future of international taxation for decades to come.
