After the Pillars: A Call for a European Corporate Tax 2.0

1              Introduction

In the summer of 2025, under American political pressure, the G7 agreed on an exemption for American business from the global 15% minimum tax (Pillar Two). European companies will remain subject to the global minimum tax for the time being, it seems. Other major powers such as China and India, so far, are remaining silent. The G7 agreement represents a sensitive defeat for the European ideals of fiscal multilateralism. The Chancellor of Germany has called a suspension of Pillar Two in Europe. The German Finance Minister stated that the Berlin government remains committed to the global minimum tax. What next? This is a call for a competitive European business tax: a European corporate tax 2.0.

2              After the Pillars

2.1          G7 agreement Global Minimum Tax; US exemption

On 28 June 2025, the Group of Seven (G7) reached an agreement on the Global Minimum Tax (G7 Statement on Global Minimum Tax | U.S. Department of the Treasury). Under threat of US retaliation, the global 15% minimum tax (Pillar Two) from the 2021 Global Tax Deal agreed a carve-out policy for corporate America. The communicated basis for the political agreement lies in the consideration that these American companies are already subject to US minimum tax rules (Global Intangible Low-Taxed Income, GILTI; Base Erosion and Anti-Abuse Tax, BEAT, Corporate Alternative Minimum Tax (CAMT)). Therefore, they should not also be subject to minimum taxation under Pillar Two. GILTI-co-existence is the term used here. As of the manuscript’s completion on July 5, 2025, the technical details of the agreement had yet to be finalized.

In the lead-up to the G7 agreement on the US Pillar Two exemption, the discussion focused on the business and political discomfort in the US caused by Pillar Two top-up taxation on low-taxed US business profits (at least for Pillar Two purposes). That was, in itself, a fairly understandable reason why the United States withdrew from the 2021 Global Tax Deal in early 2025, of which the Global Minimum Tax (Pillar Two) is a part. The 2021 agreement is also sometimes referred to as BEPS 2.0. This agreement is the successor to the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, which was completed in 2015. That earlier project is also known as BEPS 1.0. In the lead-up to the G7 agreement, there was less discussion about American GILTI top-up taxation on low-taxed European profits (for GILTI purposes). Apparently that is less of an issue, at least politically.

If Europe were to impose additional taxes primarily on low-taxed American profits, while the United States either does not impose or imposes fewer top-up taxes on low-taxed European profits, then the American minimum tax rules would appear more favorable to American companies in terms of tax burden than the European minimum tax rules are to European companies. This is especially true when it comes to the taxation of domestic investment returns. Viewed in this light, it is perhaps not surprising that the United States, in particular, have more issues with the European Pillar Two rules than Europe has with the American GILTI rules. Pillar Two costs American business money. This occurs through taxation in Europe, and on American profits. Of course, Pillar Two is equally costly for European businesses. However, people within the EU seem to have less political difficulty with this. At least, that appears to be the case for now. Perhaps Europe can afford it—or perhaps not?

There are some significant differences between the US minimum tax rules and the Pillar Two rules. For example, the minimum effective tax rate under US rules—10.5% until the end of 2025 and 14% thereafter, if I’m not mistaken—is calculated on a global basis (global blending). Under Pillar Two, however, the minimum effective tax rate is determined separately for each country (jurisdictional blending). This makes the Pillar Two rules comparatively stricter. Reportedly, international discussions are underway regarding a Global ETR Safe Harbour, which could potentially convert Pillar Two into a global blending system. Whether this will happen remains to be seen. It is also important to note that US tax incentives are excluded from the effective tax rate calculations under the US minimum tax rules for domestic investment returns, known as the Corporate Alternative Minimum Tax (CAMT). The GILTI rules apply additional taxation only to the foreign investment returns of US multinationals. Matters are different for tax incentives in the EU Member States where Pillar Two is applied. Within the EU, investment returns are subject to top-up taxation also if they are considered low-taxed under Pillar Two, for instance in view of the application of tax incentives by EU Member States. This makes the American rules comparatively more lenient—at least with respect to domestic investments by American companies.

Perhaps this explains some of the tension between the United States and Europe. If applied and functioning as intended, Pillar Two limits the United States’ ability to stimulate domestic business through company taxation (which, in fact, was the original intention of the global minimum tax). Previously, fiscal stimulus in the US was delivered through the Inflation Reduction Act under the prior administration. Now, under the current US administration, this is being done through the One Big Beautiful Bill, passed in the United States early July, 2025. Of course, top-up taxation to the minimum level under Pillar Two standards also applies to EU Member States. As previously noted, local tax incentives offered by individual EU Member States are effectively neutralized up to the minimum tax level. But politically, that seems to be viewed differently—at least for now.

2.2          The G7-agreement as a reflection of a world order in transition

The G7-agreement can be seen as a particularly sensitive defeat for the EU and other G7 countries that have adopted Pillar Two. Europe was forced to yield to American threats of retaliation. This reflects the current realities of the international geopolitical landscape, where Europe appears to be losing ground in various areas. To be honest, I fear that for similar reasons, the EU will struggle to gain traction with any renewed plans for a European digital services tax (DST). A DST is essentially a modernized version of the distortive cumulative cascading sales taxes that European countries used before the introduction of VAT in the mid-1960s, now specifically tailored to target internet companies—often of American origin. I expect that any European ambitions for a DST will be quashed by American tariffs and other retaliatory measures—or even just the threat of them—if necessary.

The defeat becomes even more pronounced if it is indeed true that the tax burden for US companies under the US minimum tax rules is lower than that for European companies under the European Pillar Two rules. If this is truly the case, then European companies will face a higher tax cost than their American counterparts. This raises questions about the renewed ambition—since the Draghi report of September 2024—to strengthen European competitiveness through initiatives like the Competitive Compasses, Omnibus packages, and the Unshell directive proposal (which was withdrawn recently for simplification purposes, or “decluttering”). Europe also aims to stimulate investment through company taxation. The EU State aid framework is being expanded to this end. On 2 July 2025, the European Commission issued a recommendation for tax incentives aimed at accelerating the Clean Industrial Transition. However, Pillar Two’s minimum tax requirements appear to stand in the way. Will the fiscal pendulum soon swing back in Europe? The recommendation offers little more than the suggestion that such tax incentives must be structured as qualified refundable tax credits—to fit within the work around within the Pillar Two rules originally developed to accommodate the United States.

It will be interesting to see how China and India respond. The G7 consists of Canada, Germany, France, Italy, Japan, the United Kingdom, and the United States. The European Union also participates but is not a G7 member, as it is not a sovereign state. China and India are not part of the G7. Neither country has implemented Pillar Two. Perhaps we may soon see some interventions from these countries as well. They may also see potential in securing a top-up tax-free status for Indian and Chinese businesses under European Pillar Two rules. If Europe refrains from taxing low-taxed American profits, why, then, should it tax low-taxed profits of Chinese and Indian companies under its top-up tax rules? At the very least, one can imagine that people in those countries will have some opinions on the matter. And if I understand correctly, China holds the power to control exports of critical rare earth elements—resources they uniquely possess and that are essential to our industries. Time will tell. Yesterday, the German Chancellor has called for a suspension of Pillar Two in Europe. Today, the German Finance Minister stated that the German government remains committed to the global minimum tax.

Given the G7’s concession to the United States during this turbulent era of international politics—including in the area of corporate taxation—the question arises: what is the future of the two-pillar solution? The Pillar One project came to a standstill last summer—a fact that still needs to be stated plainly. As for Pillar Two, it remains to be seen what will survive, given the tax competition pressures from the United States in the west and China and India in the east. Reopening the EU Pillar Two Directive could prompt individual Member States to use their veto power in the Council to pursue national political interests. Confronted with both internal divisions and external pressures, the EU will need to reposition itself on the global minimum tax—striking a delicate balance between political determination and institutional fragility. It is rumoured in the corridors that the European Commission believes that the Pillar Two Directive—formally hard law—can be effectively adjusted through guidance, or soft law, to align with international political developments. Naturally.

The success story of multilateral tax cooperation from 2021 appears to have lost some of its luster in 2025. The Global Tax Deal is now overshadowed by the realism of unilateral self-interest and a shift back toward regionalism—and even isolationism. It seems that international tax cooperation—the ambition to establish a minimum threshold in tax competition between countries—is only as strong as the geopolitical will that supports it. It turns out that, in reality, we prefer international competition over international cooperation. This preference also extends, it seems, to international corporate taxation. And with that, the two-pillar agreement serves as yet another reflection of a world order in transition.

3              A Call for a European Corporate Tax 2.0

3.1          What about the EU? Failing company tax initiatives

And what about the EU? In 2011, the European Commission launched plans for corporate tax harmonization. These ambitions date back to the 1960s. Through the reports of Van den Tempel (1962) and Ruding (1992), the plans came to light in 2001 in the Bolkestein report, “Towards an Internal Market without Tax Obstacles.” Initially, the initiative was known as the Common Consolidated Corporate Tax Base (CCCTB). It is now about BEFIT—Business in Europe: Framework for Income Taxation. In 2011, the CCCTB ambitions failed. The EU Member States showed little interest, preferring to retain their fiscal autonomy.

In 2016, the initiative was revived, this time riding the momentum of the G20/OECD BEPS project results from 2015. However, the relaunch of the CCCTB also failed. Once again, EU Member States showed little interest in harmonizing corporate taxation at the European level. What ultimately remained was an EU directive that organized the international aspects of the CCCTB, the Anti Tax Avoidance Directive (ATAD). This was accompanied by the rollout of transparency measures from the BEPS project via the Directive on Administrative Cooperation (DAC). What may have helped was that three out of the five measures in ATAD were derived from the 2015 BEPS project: the anti-mismatch rules (BEPS Action 2), the controlled foreign company (CFC) rules (BEPS Action 3), and the EBITDA limitation (BEPS Action 4). This allowed stakeholders to frame the directive not as European corporate tax harmonization, but rather as the implementation of the 2015 BEPS action reports by the EU Member States.

The 2023 plans for BEFIT, riding the momentum of the two-pillar agreement, also appear to be failing. At least, there seems to be little traction within the Council. Time and again, we hear that EU Member States wish to retain their autonomy in company tax matters. This is somewhat peculiar, considering that EU Member States have already ceded some, if not much or perhaps even all, of their tax autonomy with the adoption of the 15% Global Minimum Tax—though it remains unclear whether this authority was transferred to the OECD or to the EU (legally, the latter; in practice, perhaps the former—at least until the Court of Justice of the EU rules otherwise). It is likely no coincidence that this is precisely why the United States withdrew from the OECD BEPS 2.0 project—or perhaps never fully committed to it, much like China and India, perhaps. Pillar Two effectively establishes a global corporate tax system with a 15% minimum rate. Domestic corporate taxes are, in practice, the additional levies on top of that minimum tax level—despite the common narrative suggesting the opposite. Up to the 15% threshold, countries have effectively lost their fiscal policy space wherever Pillar Two applies. That’s the core of the issue. The same limitation notably holds for the developing countries. Their ability to compete through tax policy has likewise been significantly constrained. Yet, this seems to be considered less important.

If the race-to-the-bottom hypothesis holds true, and assuming the Pillar Two system functions as intended, then countries and regions applying Pillar Two will see their corporate tax frameworks converge toward the minimum rate, driven by international tax competition. This convergence would occur downward—at the cost of national corporate tax revenues. And upward—at the expense of national fiscal stimulus capacity. What would remain is a globally harmonized corporate tax system at a 15% rate, leaving no room for individual countries to maneuver fiscally. And as it turns out, the Americans, Chinese, and Indians—among others—are not interested in such a system.

The EU Member States, however, appear to be on board—at least as long as the levy is branded as a Global Minimum Tax and originates from the OECD. In that case, everything seems acceptable. But if it’s called BEFIT, originates from Brussels, and applies solely to EU Member States, then resistance resurfaces. In that case, EU Member States insist on preserving their tax autonomy. It seems that this is the illusion we continue to uphold. For now, Europe remains committed to taxing business income globally at the minimum level—except, notably, when it concerns the United States. This approach comes at the expense of Europe’s investment climate. Meanwhile, if Europe is not cautious, it risks relegating itself to the rear guard in both economic and geopolitical terms. I believe the German Chancellor is right in pointing out that continuing with the 15% minimum tax in Europe would put the continent’s economy at a disadvantage.

3.2          Opportunity is here

Still, I believe there is an opportunity here. Across Europe, we hear growing calls for strategic autonomy—whether in critical medicines, rare minerals and metals, advanced technology and innovation, energy independence, the capital markets union, clean industry, or the mobilization of financial resources to support Europe’s renewed ambitions. There is a growing consensus that Europe must reduce its dependence not only on rivals from the East, but—more recently revealed—also on those from the West. I believe that is achievable. Europe remains an economic superpower, and if EU Member States can unite and maintain cohesion, the EU is capable of accomplishing a great deal. Perhaps even more than many currently imagine. If the political will exists, the ambition can be made a reality. And if that is possible, then so too is the creation of a competitive, EU-wide corporate tax framework to support the broader strategic objectives we so often discuss.

In recent years, the EU’s narrative has become even more distinctly European than before. The individual EU Member States—once imperial powers during the romantic 19th century, the Belle Époque, and the Pax Britannica, up until the last golden summer of 1913—have long ceased to be powerful enough on their own to serve as meaningful counterweights on the global stage. By 2025, the European nation-states appear to have become fragmented actors—mere playthings in the shifting dynamics of global power politics. Leverage—that seems to be how the game is played. And to place your own bets, you need leverage of your own. International taxation has now become part of the broader escalation model in global relations—including corporate taxation. To gain such leverage, the EU must act collectively. There is no alternative—it must be done together. This demands realism, ingenuity, and a willingness to invest both effort and resources—including public funds. And that public funding ultimately stems from taxation—bringing corporate tax policy back into sharp focus. EU Member States will need to engage in this conversation—even if it leads to difficult debates, such as whether to establish a corporate tax framework at the European level, potentially including an own-resources component to help finance the EU budget.

Well, in the end, my expertise lies in corporate taxation. Personally, I’ve never placed much faith in multilateralism or international tax cooperation to be honest. Anyone familiar with my writings on international taxation—such as those shared on this forum—may already know this. History shows that the kingdoms and empires of the past—today’s nation-states led by presidents and prime ministers—ultimately pursue their own interests. A balance is maintained, but only as long as it’s clear who holds dominance. Or when dominant powers counterbalance one another just enough to maintain broader stability—something we all instinctively know not to disrupt. That was already true during the Belle Époque. It was true in the centuries before, and it has remained so in the centuries since—let us refrain from going into the interruptions. And it continues to be true today.

And then there’s the matter of international corporate tax reform. The two-pillar agreement increasingly appears to be a stop along the route rather than the final destination. This is happening in a world where tax rules are increasingly being used as instruments of geopolitical strategy by major powers. So where should we go from here? What’s next for the taxation of business income in Europe? Some years ago, during my PhD research (Sharing the Pie, 2010–2015, available on SSRN), I developed a blueprint for a new prototype corporate tax: Corporate Tax 2.0. At the time, I placed the concept within the context of the pre-BEPS 1.0 era. In my 2019 inaugural lecture, On the Future of Business Income Taxation in Europe, I expanded on the idea and situated it within the BEPS era (2015–2020). The idea appeared in World Tax Journal in 2020. We have now moved beyond the post-BEPS 1.0 period and currently find ourselves in the BEPS 2.0 era (2020–2025). Following last week’s G7 agreement, developments appear to be shifting toward a post-BEPS 2.0 era (2025–…). We may be on the verge of entering yet another phase of international corporate taxation—one without the Two Pillars from the Global Tax Deal 2021, perhaps. Or perhaps we are heading toward a fragmented landscape of national mini-pillars and growing controversy. What comes next remains to be seen.

3.3          A European Corporate Tax 2.0

In this piece, I once again make a case for the idea of a corporate tax 2.0. This time against the background of the post-BEPS 2.0 period, the post-pillars era. If the two-pillar solution were to disappear, the social problem of the inadequately functioning international company tax framework would not suddenly be solved – incidentally, the same would hold were the pillars not to disappear either, for that matter, but let’s leave that aside. On the contrary. The societal problem is as big as ever. Maybe even bigger than it was until about 5 years ago. What we do know by now, however, is that the idea of global tax harmonisation through multilateral cooperation does not seem to be working. My fear is that we will also discover this within the United Nations. There people are trying to arrive at a Framework Convention for international tax cooperation. The United States no longer participates in that project either. Neither do the EU Member States and other developed countries, if we are honest. This cooperation project too has become a backdrop of diplomatic courtesy where the true dynamics take place in the undercurrents of national interests. And then what?

The Corporate Tax 2.0 model treats the multinational group as a single tax subject—a unified taxpayer. It envisions global tax consolidation, similar to the approach used in financial accounting. At the time when I was working on my dissertation, this may have seemed like a rather radical idea. However, with Pillar One and Pillar Two implementing aspects of this approach, the concept has become significantly more mainstream. The tax base is tied to a conventional corporate tax base—either derived from financial accounting rules or, preferably perhaps, determined independently, as was done in the CCCTB framework. It includes a distinctive feature: a capital deduction—specifically, a hard Allowance for Corporate Equity (ACE)—which transforms the tax base into a substantial economic profit tax, addressing the debt equity bias and reducing the marginal effective tax rate to zero. This too seemed like a bold and unconventional idea at the time. Since then, notional interest deductions in various countries, the Allowance for Growth and Investment (AGI) from the CCCTB, and the European Commission’s proposal for a Debt-Equity Bias Reduction Allowance (DEBRA) have all become more widely accepted. The model also includes a fractional tax base allocation mechanism, linked to turnover ratios. This allows for the allocation of the corporate tax base to the market—or destination—country. This approach builds on an evolved version of the EU VAT’s place-of-supply rules. At the time an even more radical idea. Today, with the introduction of Amount A under Pillar One, this thinking has become far less unconventional—though in the context of a corporate tax 2.0 envisioned not as a supplementary layer, as in Pillar One, but as the default system. The system must, of course, be solidly designed. It should avoid excessive reliance on existing materials to prevent repeating the overly complex and problematic rule frameworks of the past. EU Member States would retain the authority to set their own tax rates. Perhaps, a rate bandwidth could be considered to nip any cross-border shopping issues in the bud.

And what about the rest? Current corporate taxes, tax treaties, Pillar One, Pillar Two, withholding taxes, the arm’s length principle—you name it—could all be phased out. The motto of my research at the time was: ‘most stuff from the 1920s sits in museums, the exception is the international tax regime’. That made the point immediately clear.

3.4          Why move? It would serve EU’s own interest

And finally, the key question arises. Why should the EU take such a step? The answer is simple: it would serve the EU’s own interests. And moreover, any individual EU Member States is unlikely to generate sufficient momentum on its own.

In my inaugural lecture at the time, I wrote that such a tax model:

"... would take tax out of the equation in the case of marginal financing and investment decisions, while also curtailing its influence on investment location decisions and, at the same time, making “gaming the system” more difficult. EU Member States would, in turn, regain their autonomy to set their corporate tax rates at the levels they regard as appropriate, while the proposed model would also end the “race to the bottom” within the European Union.

If the European Union were to be the first mover, self-interest would prompt other countries and regions to follow its lead. The resulting production location neutrality would encourage international businesses to embrace the model and lobby for transition as rapidly as possible. Driven by self-interest and competitive responses, such a move could initiate a transition to the worldwide adoption of destination-based taxation of excess earnings – in other words, harmonization through competition.

As the innovator, the European Union would enjoy the greatest economic benefit during the transitional period, when countries’ profit tax systems would be evolving towards an equilibrium in which destination-based tax would become the new global standard. The final destination would be a new destination-based company tax paradigm operating both neutrally and non-discriminatorily on the supply side. That would produce a result that would not only be fair, but would also – and primarily – provide a systemic and economically efficient solution for the international problem of BEPS.”

In short, it would render the corporate tax system neutral and inelastic. Moreover, transitioning to this model serves the self-interest of the state or region that adopts it first. It attracts investment, fosters job creation, and promotes growth and prosperity. It would also result in an equitable and adequately functioning corporate tax.

It is possible. In fact, it has happened before. In US state taxation, business income taxes are now largely apportioned by reference to the demand side. Traditionally, US states used a formula based on wage costs, tangible fixed assets, and turnover—known as the Massachusetts formula from the 1950s. The CCCTB allocation formula from 2011 and 2016 was modelled on this approach. Each US state adopted its own variation of the distribution formula. They were unable to agree on a harmonized apportionment formula at the start of the 20th century. When Iowa became the first state to adopt demand-side tax base apportionment some decades ago—and the U.S. Supreme Court upheld it—this triggered a wave of adoption, as other states followed suit out of self-interest. That transition continues to this day. The end of that transition period now appears to be in sight. Today, nearly all US states apportion the tax base using a sales-only formula. Why? Because it serves their self-interest. The same approach could be applied internationally—I see no reason why it couldn’t. In fact, my estimate would be that the process would progress even more quickly on an international scale. The stakes are simply higher.

It’s worth noting that during the first term of the current US president, the idea of a destination-based cash flow tax (DBCFT) was floated in the United States. If I recall correctly, this was in 2017 and was known as the Ryan proposal, named after Republican politician Paul Ryan. Ultimately, the DBCFT failed to gain political traction, partly due to concerns about its implications for foreign exchange rate fluctuations. It was followed by the Tax Cuts and Jobs Act (TCJA), which included the GILTI provisions. (I sometimes wonder what might have happened in international company taxation if the DBCFT had actually been implemented in the US). The Corporate Tax 2.0 that emerged from my studies can be seen as a variation of the DBCFT—now designed as an excess profit tax (instead of a cash flow tax), but without the exchange rate complications (see Sharing the Pie, section 6.4.5.3: “The Effects of Currency Exchange Results under the Advocated System”).

4              Final remarks

The G7 agreement has revealed that company tax rules have increasingly become an extension of geopolitical strategy. The real question, I believe, is not whether a new global tax order will emerge. I believe that is inevitable—it is already underway. The real question is who will shape it—and at what cost.

The EU has an opportunity, and it’s called Corporate Tax 2.0. And why not? Today, the EU is an economic superpower. If Europe aims to regain its competitiveness—and considering company taxation proving to be a geopolitical tool—then my thought would be that such a tool should then be used strategically. For the benefit of both the EU Member States and Europe as a whole. If not, one of Europe’s global rivals may seize the opportunity instead. In that case, the EU Member States may find themselves being the ones merely jumping on the bandwagon.

Whether Europe will muster the necessary urgency, political unity, and execution capacity to move forward—particularly in corporate taxation—well, that of course remains to be seen. Alternatively, the EU may choose inaction—and then it will simply have to see how events unfold. Of course, that too could be considered a strategy. We’ll see.