US Tax Carveout Is a Good Step Toward Needed Cross-Border Work

EU members are beginning to implement the side-by-side agreement reached by the G7 last year—a deal that put the US and OECD global minimum tax frameworks on equal footing. This is an important step in international economic relations, which have been frayed by hostility over discriminatory policies.

However, there is more work to be done on both sides of the Atlantic, such as paring back duplication rules, reducing complexity, and relaxing the use of financial accounting standards in places where they prove inappropriate.

If there’s a downside to the side-by-side agreement, it’s the risk of locking in mediocre tax policy choices for the long run.

A Positive Step

The good news for diplomacy is that side-by-side means what it says: Jurisdictions that haven’t adopted the global minimum tax but otherwise maintain robust tax systems for corporations may continue to operate those tax systems. They won’t be overwritten or preempted by global minimum tax mechanics such as the undertaxed profits rule, or UTPR.

In practice, this agreement is about the US, though it could extend to other countries in the future, especially in Europe. US opposition to the UTPR—an unprecedented and extraterritorial measure—came to a head in 2025 when the House passed legislation in a retaliatory measure. Thankfully, the G7 agreement brought everyone back from the precipice.

Critics may frame side-by-side as a concession to the US or a retreat from multilateral consensus. But this misunderstands the mechanics and political economy of global tax coordination. Side-by-side preserves the policy goal of a minimum level of taxation, as the US already has multiple tax systems functionally equal to or more than the 15% global minimum tax rate.

Applying Pillar Two mechanics to a fundamentally different system would impose enormous compliance costs without economic benefit.

Even with its differences, the US system isn’t more generous than Pillar Two, broadly speaking. For example, it includes a 21% domestic rate, a separate 15% minimum tax on financial income, much less generous treatment of interest expense, and limited crediting and carryforwards.

A full imposition of Pillar Two on US companies would find little “top-up” tax to be had, as US companies already typically exceed Pillar Two minimums.

Weeding the Garden

Adopting side-by-side isn’t the finish line. It’s more like the beginning of weeding the garden—simplifying a system that had become overgrown with a thicket of duplicative minimum taxes.

Rather than creating arbitrary work for the large number of global companies already subject to minimum tax, European and US policymakers should use this moment to tackle the ongoing compliance cost burden that large multinationals face.

While the side-by-side agreement likely is here to stay, forthcoming threats such as a 2029 “stocktake” assume permanence, which is risky. Pillar Two reporting rules remain complex. Country-by-country reporting remains onerous and could be condensed into fewer calculations while keeping the agreement strong.

The global minimum tax and side-by-side agreement threaten to harden a policy mistake into a permanent fixture: Both push a financial accounting book statement income standard that is inappropriate to tax policy.

Although financial income is a central premise to much of Pillar Two’s application, its rules ultimately diverge—often with good reason—from financial accounting (for example, in its treatment of deferred taxes and certain accounting methods for mergers and acquisitions).

In the US, financial statement income is critical to the corporate alternative minimum tax. Much like the Pillar Two agreement, the US found reasons to walk back financial accounting rules, for instance, by rightly preserving faster capital cost recovery schedules.

The experience of both side-by-side frameworks is that financial income isn’t helpful for tax policy. Attempts to adopt a tax based on rules governing public financial disclosures invariably end up with a third system that matches neither financial nor tax income, creating more complexity with minimal policy purpose.

Will the differences between the US system and Pillar Two result in marginal advantages and disadvantages for companies headquartered in the US or elsewhere? It’s possible. But policymakers should focus reforms on flaws shared by both systems.

A well-structured corporate income tax is a worthy policy goal, and both sides of the Atlantic should be commended for taking cross-border policy seriously. The US and Pillar Two systems alike would benefit from further amendment to remove unnecessary or muddled elements.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Daniel Bunn is president and CEO of the Tax Foundation, a think tank in Washington, DC.

Alan Cole is a senior economist at the Tax Foundation, with focus on business taxes, cross-border taxes, and macroeconomics.

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