Pillar 2 in Peril: US Exemption Sparks German Demand for EU Suspension (July 2025)
Manpreet Singh Duggal
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8-1Sarah: You know, when you hear the term 'global agreement,' you sort of picture everyone holding hands and singing from the same hymn sheet. But it seems the new global minimum tax plan has hit a major snag almost immediately.
Michael: Well, that's putting it mildly. What we're seeing is a fundamental challenge to the entire concept. In late June 2025, the G7 nations basically gave US multinational companies a pass on the key parts of the Pillar 2 tax rules.
Sarah: A pass? What does that mean exactly?
Michael: It means they're exempt from the Income Inclusion Rule and the Undertaxed Profits Rule. Essentially, the US gets to tax its own companies under its existing system, and the rest of the world has to be okay with that. The US Treasury Secretary even framed it as a major win, saying Pillar 2 taxes just wouldn't apply to American businesses.
Sarah: I see. So one set of rules for the US, and another for everyone else. I can't imagine that went down well in Europe.
Michael: It absolutely did not. The reaction was immediate and fierce. By mid-July, German Chancellor Friedrich Merz was publicly calling for the EU to just suspend the whole thing. His argument was pretty simple: if the US isn't fully playing along, forcing this on European businesses puts them at a huge competitive disadvantage.
Sarah: So the very idea of a global tax is already being undermined because arguably the most important global player got a special carve-out.
Michael: Exactly. It creates what some are calling a side-by-side system, not a unified one. The whole point of Pillar 2, which came out of the OECD's big push to stop companies from shifting profits to low-tax havens, was to create a level playing field with a 15% minimum tax everywhere.
Sarah: Right, a universal standard. But if the US isn't held to that same standard, what's to stop other countries from demanding their own exemptions?
Michael: That's the million-dollar question. Experts are worried this could be the first domino to fall. It risks the complete fragmentation of the system. If you're another country, you're now looking at this and thinking, Why should we stick to the rules if the US doesn't have to? It could open up a whole new set of loopholes.
Sarah: And I heard Germany has its own internal issues that complicate this even further?
Michael: Oh, definitely. On one hand, you have the Chancellor demanding the EU suspend Pillar 2. On the other hand, Germany is simultaneously planning its own corporate tax cuts starting in 2028. So they're trying to protect their businesses from the US exemption while also making their own country more competitive, which creates this incredible tension.
Sarah: It sounds like a policy nightmare. You're trying to build a global system, but national interests keep pulling it apart at the seams.
Michael: It really boils down to a few critical points. First, the G7 deal for US companies has seriously damaged the global credibility of Pillar 2. Second, Germany's call to suspend the rules highlights the real fear of competitive disadvantage in Europe. And finally, this whole episode shows that building a truly global tax system is less of a finished product and more of a constant, messy negotiation. The whole initiative feels like it's in peril.