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1 Sean Bray, et al., QDMTTs Leave Geographic Disparity between Increased Pillar Two Costs and Revenues 1 (2025)

handle is hein.taxfoundation/qdmttlve0001 and id is 1 raw text is: ZEWpoticybrief // NO.13 I NOVEMBER 2025 Sean Bray (Tax Foundation Europe), Daniel Bunn (Tax Foundation Europe), Johannes J. Gaul (ZEW, University of Mannheim), Christoph Spengel (University of Mannheim) QDMTTs Leave Geographic Disparity Between Increased Pillar Two Costs and Revenues For the better part of the last decade, the global minimum tax, or PillarTwo, has dominated international tax policy discussions. Developing out of the Base Erosion and Profit Shifting (BEPS) Project at the Organisation for Economic Co-operation and Devel- opment (OECD), PillarTwo's main objective is to ensure that multinational enterprises (MNEs) with a consolidated group revenue of over EUR 750 million pay an effective tax rate of at least 15 percent in each jurisdiction where they earn profit. Some portion of the Pillar Two model rules have been adopted by several dozen countries around the world, but, importantly, not by other large economies such as the United States, India, or China. This especially puts European MNEs at a competitive disadvantage vis-h- vis jurisdictions without a domestic minimum tax system. Our estimates show that the additional compliance costs for affected European MNEs amountto EUR1.2 billion (up to EUR 2.0 billion) and total recurring costs amountto EUR 517 million p.a. (up to EUR 865 million p.a.). Due to the incentive for jurisdictions to implement a qualified domestic minimum top-up tax (QDMTT), Pil- larTwo leaves a geographic asymmetry. Additional tax revenues would predominantly accrue to low-tax jurisdictions, with high- tax jurisdictions receiving little to no increase. At the same time, it is likely that MNEs expense compliance costs in the jurisdic- tions where they are headquartered, often high-tax jurisdictions. Furthermore, PillarTwo incentivizes jurisdictions to move from competition on tax rates to less transparent subsidies, which could also result in less disposable tax revenue. The combination of losing international competitiveness, increasing compliance costs for firms and tax authorities, and the lack of significantly more revenue is forcing some Member States to reconsider the policy altogether. KEY MESSAGES The global minimum tax will only work if it is truly international. However, the EU remains the only large economy to imple- ment the rules, putting its firms at a competitive disadvantage. Therefore, the EU should suspend the application of the rules and reconsider the policy as part of the Commission's 2026 simplification package. C Agreeing to a G7 side-by-side agreement with the United States, simplifying the rules through the OECD, and implementing permanent safe harbors should all be seen as second-best options. These solutions are required to reduce the negative im- pact of Pillar Two on European MNEs; however, there are more efficient options to reduce harmful profit shifting without com- pounding taxation costs (e.g., relying on existing ATAD regulation). * The EU should focus on the simplification of its direct tax systems (something it does not currently have a mandate for) to foster European integration and strengthen the Single Market. The EU should focus on measures it can implement without relying on regulatory support by any foreign administration (i.e., outside the EU), to increase democratic legitimacy. To the Discussion Paper: https://ftp.zew.de/pub/zew-docs/dp/dp25053.pdf