Why Europe should strategise on the U.S. DBCFT debate, and fast

The United States is once again looking into a Destination‑Based Cash Flow Tax (DBCFT) as a corporate tax reform initiative; a tax system based on cash flows that shifts the geographic allocation of corporate tax base from the investment jurisdiction to the market jurisdiction, combined with border adjustments. Adopting such a model would significantly advantage U.S. domestic production and investment, while disadvantaging foreign businesses, particularly those in countries that maintain a traditional corporate income tax model and Pillar Two minimum taxation. For European countries, this development constitutes both a strategic threat and a strategic opportunity. Remaining on the sidelines would mean falling behind the moment the United States makes the first move. The European Union and its Member States should therefore avoid a reactive posture and develop their own alternative. That alternative lies in a destination‑based excess profits tax for multinational enterprises, equipped with a robust allowance for corporate equity and free of protectionist elements. Such an approach would allow Europe to lead the debate rather than follow it, strengthening both its competitiveness and its resilience in the area of corporate taxation. The time to wake up is now.

1             Introduction

While the ink on the 5 January 2026 Side-by-Side package is drying,1 European Commissioner Hoekstra confidently observes that “the family has been kept together, the tax peace has been preserved, and a more stable global tax system has been maintained.”2 Yet the United States is already preparing new corporate tax reform initiatives aimed at strengthening its competitive position. A hearing is being organised in U.S. Congress by the Joint Economic Committee on the potential advantages of a Destination‑Based Cash Flow Tax (DBCFT).”3 On 11 March 2026, the Committee also released a staff paper ‘Border Tax Adjustment Would Curtail Profit Shifting and Provide Other Benefits, With Limited Transition Effects.’4 Yet despite these developments, the renewed U.S. momentum has so far attracted little attention, it seems, within the international tax community.

The current U.S. discussions on reforming the U.S. corporate tax system toward a DBCFT revive an earlier American reform proposal from 2016, the so-called Ryan proposal.5 That proposal introduced a cash-flow tax that allocates the tax base to the destination jurisdiction, combined with a restriction on the deductibility of imports. The deductibility restriction effectively functions as an import levy. At the same time, under this model, domestic U.S. production for export becomes exempt from taxation, which – within the framework of existing corporate tax systems – operates as an export subsidy.

From the perspective of a traditional corporate income tax and the global minimum tax models, under the transfer-pricing model that is, the renewed U.S. interest in a DBCFT represents both a strategic threat and an opportunity. Developments likewise illustrate that the Pillar Two’s global minimum tax is anything but a settled achievement. This is no time for complacency. Under the traditional transfer-pricing framework, a DBCFT would grant the United States a significantly greater competitive advantage than the one it has already secured through the Side-by-Side package – i.e., the Inclusive Framework mechanism equating U.S. minimum tax rules with Pillar Two. For EU Member States and other affected jurisdictions, it would be unwise to wait for the anticipated 2029 evaluations and to spend the intervening years making only minor adjustments to domestic or European corporate tax rules, for example through some of the various envisaged omnibus initiatives.6 Waiting would mean that should the United States move first and adopt a destination-based corporate tax, other countries will inevitably find themselves forced onto the bandwagon and to follow. Not out of strategic choice but because the competitive landscape will already have been reshaped by the first mover, a much weaker strategic position. At that point, room for manoeuvre will be minimal; something I had already cautioned against in my previous contribution on this blog platform mid-2025.7

The momentum created by this U.S. development offers EU Member States a genuine opportunity to demonstrate assertiveness and leadership, and shape the debate rather than follow it. Acting together, they can develop an alternative that is even more compelling than the emerging United States proposal: a destination‑based excess‑profits tax for multinational enterprises. My suggestion would be that it would be wise to do so, before the moment to act has passed.

2             Why Europe should strategise on the U.S. DBCFT debate, and fast

A cash‑flow tax as a model for corporate tax reform is not new.8 Its strategic implications in today’s geopolitical tax environment, however, are profound. In determining the tax base, cash-flow taxes operate as follows: outflows, whether arising from real or financial transactions, generate a tax refund, while inflows trigger a tax charge. With a tax rate of, for example, 25%, an outgoing cash flow such as a $1,000 investment yields a $250 refund. An incoming cash flow, say, an investment return of $1,100, then results in a $275 tax charge. The firm therefore invests a net amount of $750, and the investment produces $825, yielding a net return of $75, or 10%, both before tax (1,100/1,000) and after tax (825/750). The government effectively co-invests as a silent partner.9 It contributes $250 at the time of the private investment and receives a $275 return, netting $25, likewise earning a 10% return (275/250). The result is an average effective tax rate of zero. At the margin, where marginal revenues equal marginal costs, the tax burden – and thus the effective tax rate – is also zero.

A cash-flow tax promotes tax neutrality, particularly when both real and financial transactions are included in the base-determination mechanism.10 This helps explain why economists generally view it favourably. Politically, however, enthusiasm tends to be more muted, as a cash-flow tax exposes the public treasury to private investor risk. Private investments trigger tax refunds, meaning the government becomes jointly exposed to the aggregate investment risks. When the economy performs well, revenues flow into the treasury. When the economy performs poorly and losses occur, funds flow out. This raises the question whether a levy that produces an average tax rate of zero, essentially because the government functions as a silent equity partner, can still meaningfully be described as a tax. In my own research, I instead arrived at an excess-profits tax implemented through a hard allowance for corporate equity, taxing firms on their economic profits.11 Such a model would not expose treasury to investment risk. In that system the effective average tax rate in the example becomes 25% (25/100*100%), while the marginal effective tax rate remains zero, because of the deduction for the cost of equity.

At the international level, designing a cash‑flow tax requires choosing how the tax base is allocated geographically. Should the tax attach to the supply side, the location of investment (origin)? Or to the demand side, the location of the market (destination)? If tied to the investment location, the system replicates the same distortions as a traditional corporate income tax in the presence of cross‑country tax-rate differentials. Firms will prefer to invest in the lower‑tax jurisdiction, ceteris paribus. The resulting familiar distortions in investment-location decisions, and the associated tax-competition responses by governments, would remain unresolved. This is why the literature proposes destination‑based taxation models.12 As I found in my own research, however, when tax-rate differentials exist, a destination based cash flow tax may create an incentive to invest in the higher-tax jurisdiction, because the corresponding tax refund is larger.13 This effect would need to be addressed it seems. The U.S. DBCFT appears to do this through an import‑deduction disallowance. But that border‑adjustment mechanism effectively introduces an import tariff element, which raises analytical concerns of its own.

In a well-designed corporate tax system that allocates the tax base to the destination jurisdiction, firm’s investment location decisions are no longer distorted. Demand is effectively inelastic across borders, aside from limited cross‑border‑shopping effects. A demand side oriented tax model accordingly avoids supply-side distortions and thereby eliminates the tax-competition dynamics that characterise contemporary corporate taxation systems. This is why the destination principle has such strong economic appeal. In my research, I likewise identified the destination principle as the appropriate anchor for tax base division, precisely because it removes incentives to invest in the comparatively lower-tax jurisdiction. A destination-based excess profits tax also avoids incentives to invest in higher‑tax jurisdictions, as it provides no tax refund on outflows and instead taxes economic profit only once it is actually earned. The treasury is therefore not exposed to investment risk under such a model. It also eliminates timing distortions by neutralising the time value of money, neutralizing the relevance of the timing of income realisation for tax purposes, a well-known issue in any classical income-tax mechanism. A unitary approach to identify tax subjects further reduces the issue of distortions invoked through procurement offices in low-taxing jurisdictions.

The U.S. DBCFT allocates the tax base to the destination jurisdiction, unlike a classical corporate income‑tax systems, including Pillar Two that tie tax base to the supply side.14 Under the U.S. DBCFT model, domestic U.S. production for export becomes untaxed, subsidizing exports from the perspective of a traditional transfer-pricing-based corporate income tax. Imports are subject to border adjustments and thus non-deductible, effectively introducing an import-tariff component.15 Foreign investment returns, however, remain untouched by the DBCFT model. Unlike the current U.S. NCTI rules (previously GILTI), the system contains no top‑up tax on low‑taxed foreign income, thereby resembling a territorial regime from the perspective of traditional corporate income taxation.16

A U.S. shift to a DBCFT would significantly favour investment in the United States over investment elsewhere. Imports into the U.S. would face effective double taxation – classical corporate income tax abroad and non‑deductibility under the DBCFT – while U.S. exports would escape taxation both domestically and in the destination jurisdiction. Such a tax structure accordingly creates a double layered incentive for multinational enterprises to invest in the United States. If Side‑by‑Side coverage remains intact under such a U.S. tax reform – something which may be considered not unlikely given current political realities – this asymmetry becomes even more pronounced. Such would grant the United States a substantial competitive advantage in the corporate tax domain at the expense of countries operating classical corporate tax systems, especially those that also uphold Pillar Two global minimum taxation and the Side-by-Side system (like the EU Member States).

It is striking that the Joint Economic Committee’s staff document has so far generated little reaction, at least so it seems. This is remarkable given the potential implications of the initiative. For countries operating a classical corporate income tax, and especially for those also applying Pillar Two, the U.S. DBCFT initiative represents an almost existential challenge. The challenge it poses would exceed the already significant effect of the comparatively lower U.S. minimum-tax level under the current U.S. minimum-tax framework (CAMT, BEAT, GILTI/NCTI) – instruments that are treated as equivalent to Pillar Two for coverage purposes under the Side-by-Side package. According to the Inclusive Framework the U.S. rules cover a “substantial share” of the business activity that Pillar Two would also capture, while no “material risk” to countries’ competitiveness is considered to arise when comparing the two minimum-tax systems.17

A shift of the U.S. system toward a DBCFT would constitute a substantial change to U.S. tax rules. The geographical allocation of the tax base would, in effect, be reversed. It remains to be seen whether such a reform, should it materialise, would be recognised as ‘substantial’ within the Inclusive Framework agreement, if formally notified under the Side-by-Side framework. And even if it were, it remains to be seen what ‘appropriate solutions’ would follow.18 One could, of course, simply wait for the objective stocktake in 2029. It would be unwise to allow matters to proceed that far. Rather than waiting passively – for instance because of the political capital already invested in Pillar Two over the years – and confront the consequences of such a U.S. move later, it would be far better to consider strategic alternatives now.

The incentives that a DBCFT with border adjustments would create for the United States are clear. The mechanism will encourage firms to shift investment in to the United States rather than produce abroad and export to the U.S. market. Under Side-by-Side coverage, such investment would not trigger Pillar Two top-up taxation elsewhere. In my earlier blog of 17 July 2025 titled ‘After the Pillars’, I already noted the strategic merits of an economic-profit tax that anchors the tax base in the market jurisdiction. Such grants the first mover a competitive advantage over other countries that continue to rely on the classical corporate income-tax model. Once the first country makes the shift, others will likely have to follow, but from a reactive position. A similar dynamic can be observed in U.S. state taxation, where states have shifted en masse toward sales‑only apportionment after Iowa first adopted it.19 Competition and self‑interest drove this process, and a comparable pattern can reasonably be expected internationally if the United States moves toward a DBCFT.

Companies in the United States that rely heavily on imported inputs for domestic sales, such as retailers, may be less enthusiastic about a DBCFT. The border adjustments tax mechanism place imports at a disadvantage. However, today, many of these firms are already subject to a range of import duties and tariffs in the United States. The dynamics accordingly differ markedly from those that prevailed at the time of the Ryan proposal in 2016. The border‑adjustment element would be less disruptive today. This may give the U.S. government some more political space to pursue a DBCFT with border adjustments, particularly if accompanying measures were introduced to soften existing import tariffs.

Europe now faces two options. The first is to do nothing and wait and rely on the political narrative that “the family has been kept together” and that the current minimum‑tax framework provides stability. That would be unwise. Recent developments demonstrate that tax multilateralism, rather than strategic self-interest, offers limited protection in the current geopolitical climate. When it comes to the Side-by-Side package, there is no such thing as “a bit of excessive excitement in Europe on the difference between the two systems,” nor is this a case of “a psychological, natural reaction that the grass is always greener on the other side.”20 The package, as it currently stands, makes a competitive tax advantage available to the U.S.21 A DBCFT with border adjustments, particularly when Side-by-Side coverage remains intact, would significantly amplify this effect. The notion of a large, harmonious international corporate tax family in which everyone wholeheartedly agrees, together with the suggestion of the stability of a global network of equivalent minimum‑tax systems, may turn out rather illusory.

The second option is to act strategically and assume leadership. A European response need not replicate the U.S. DBCFT model with border adjustments. The embedded tariff elements are distortive. And a cash‑flow tax unnecessarily exposes treasuries to investment risk. A European alternative should instead focus on taxing economic profits on a unitary basis at destination. A destination‑based excess‑profits tax, built on a classical tax base and supported by a hard ACE, offers Europe a coherent and neutrality‑enhancing alternative. By allocating the tax base to the market jurisdiction, it avoids the investment‑location distortions inherent in transfer‑pricing‑based systems, while containing no tariff‑like elements (and thus no protectionism). Moving first would strengthen the competitiveness and resilience of the internal market and place Europe in the driver’s seat in shaping the future of international corporate taxation.

Whatever the case, all in all, the above analysis shows that a destination based corporate tax initiative, such as the revival of the debate on a U.S.-style DBCFT, would fundamentally realign competitive incentives. Europe cannot afford to treat any such as a technical curiosity.

3             Final remarks

The revived U.S. debate on a DBCFT shows that the Side‑by‑Side package is not the final destination. If anything, it illustrates how fluid the global tax landscape remains. Recent developments in the U.S. confirm that corporate taxation and competitive dynamics are not static, and that those who wait too long inevitably end up in a reactive position. Europe is not facing a mere technical exercise in implementing the Inclusive Framework’s rules on minimum‑tax equivalency. It faces a strategic choice.

Precisely now, the EU and its Member States have an opportunity to take the initiative and articulate a coherent, economically grounded alternative. Such an approach would not merely preserve the status quo but shape what is required for the future. This would entail moving toward a European corporate tax 2.0 for multinational enterprises: an excess‑profits tax for supported by a hard allowance for corporate equity and allocating the tax base to the destination jurisdiction. As argued above, this model offers a path that is economically rational, politically feasible, and strategically prudent. The time to act is now, not because the United States is moving, but because Europe can no longer afford not to move.

• 1See OECD (2026), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package: Inclusive Framework on BEPS, OECD, available on oecd.org (Side-by-Side Package 2026).
• 2See Closing speech by Commissioner Hoekstra at the 2026 Tax Symposium of 15-16 March 2026 in Brussels, available on https://ec.europa.eu/commission/presscorner/detail/en/speech_26_634.
• 3See Joint Economic Committee, POSTPONED: Evaluating the U.S. Competitiveness and Investment Advantages of a Destination-Based Cash Flow Tax (DBCFT),
• 4See Joint Economic Committee, Issue Brief, ‘Border Tax Adjustment Would Curtail Profit Shifting and Provide Other Benefits, With Limited Transition Effects’, March 11, 2026, available on https://www.jec.senate.gov/public/vendor/_accounts/JEC-R/issue-briefs/Border%20Tax%20Adjustment%20Would%20Curtail%20Profit%20Shifting%20and%20Provide%20Other%20Benefits.pdf (JEC 2026).
• 5See the document ‘A Better Way: Our Vision for a Confident America’, June 24, 2016, better.gop, available on https://www.novoco.com/public-media/documents/ryan_a_better_way_policy_paper_062416.pdf.
• 6See the legislative train schedule Omnibus – Taxation, “A new plan for Europe's sustainable prosperity and competitiveness”, available on https://www.europarl.europa.eu/legislative-train/theme-a-new-plan-for-europe-s-sustainable-prosperity-and-competitiveness/file-omnibus-taxation.
• 7See Maarten de Wilde, ‘After the Pillars: A Call for a European Corporate Tax 2.0’, Kluwer International Tax Blog, July 17, 2025, available on https://legalblogs.wolterskluwer.com/international-tax-law-blog/after-the-pillars-a-call-for-a-european-corporate-tax-20/.
• 8See, for instance, Howell H. Zee, ‘Reforming the Corporate Income Tax: The Case for a Hybrid Cash-Flow Tax’, 155 De Economist 417 (2007) (Zee 2017) and, for instance, Alan Auerbach, Michael P. Devereux, Michael Keen, John Vella, ‘Destination-Based Cash Flow  Taxation’, WP 17/01, January 2017, available on https://oxfordtax.sbs.ox.ac.uk/files/wp17-01pdf (Auerbach et al 2017).
• 9See Zee 2017, supra note 8.
• 10Ibidem.
• 11See Maarten Floris de Wilde, Sharing the Pie - Taxing Multinationals in a Global Market, IBFD, Amsterdam. The book is based on my PhD thesis having the same title, which I defended at Erasmus University Rotterdam on 15 January 2015 (cum laude).
• 12See Auerbach et al 2017, supra note 8.
• 13Maarten Floris de Wilde, ‘The CCCTB Relaunch: A Critical Assessment and Some Suggestions for Modification’, in Pasquale Pistone (Ed.), European Tax Integration: Law, Policy and Politics, IBFD, Amsterdam, 2018, at 35-84, particularly Section 4.1 Towards an equilibrium though competition: taxation of global excess earnings at destination.
• 14See JEC 2026, supra note 4.
• 15Ibidem.
• 16Ibidem.
• 17See Side-by-Side Package 2026, supra note 1.
• 18Ibidem.
• 19See Jeanette Moffa, From Cost-of-Performance to Market-Based Sourcing: State Apportionment Shifts in 2025, July 28, 2025, available on https://moffataxlaw.com/from-cost-of-performance-to-market-based-sourcing-state-apportionment-shifts-in-2025/. See also Federation of Tax Administrators, State Apportionment of Corporate Income (Formulas for tax year 2023 -- as of January 1, 2023), available on https://taxadmin.org/wp-content/uploads/resources/tax_rates/apport.pdf.
• 20See Sarah Paez, ‘EU Commission Dismisses Pillar 2 Side-by-Side Concerns’, Tax Notes International, 12 March 2026, available on taxnotes.com.
• 21In November 2025 Tax Watch UK published a briefing note in which they write that: “[w]e estimate that under the G7 ‘carve out’, US multinationals could be exempted from around $40.5 billion of ‘top up’ taxes annually by 2026. Using the proportion of US firms’ foreign revenues and profits accounted for by Big Tech firms, we estimate that for this small group of firms alone, the G7 exemption could be worth around $6 billion a year by 2026 – approximately 11% of these tech firms’ total non-US tax bills.” The report titled ‘A Blank Cheque? Estimating the impact for Big Tech of exempting US-headed groups from Pillar 2 taxes’ is available on https://www.taxwatchuk.org/pillar-2-tax-break/.