When a handful of economists met over a century ago in Geneva to deliver a report to the League of Nations, their aim was to establish the foundation of the modern international tax system, and to decide which country has the right to tax the income of multinationals. In their report on double taxation, they recommended a balance between residence-based and source-based taxation in order to prevent double taxation (the imposition of taxes twice on the same source of income).

How exactly to strike that balance was left unanswered, as the authors recognised that where the ultimate profit is made is dependent upon a series of operations in different countries. As a result, in the report, the allocation of profit to the different stages was described as “to baffle analysis” and “it is difficult to establish that such an analysis can have great practical value”.

With no clear rules, taxing rights over multinationals’ profits were allocated to reflect the balance of power between countries. Over the years, developing countries – many former colonies finding their footing in the decades after independence – accepted tax treaties that lowered withholding taxes, thus limiting their ability to tax foreign direct investment.

Transfer pricing rules were developed in the 1990s by the OECD – the club of rich countries – to determine the amount of a multinational’s profit that each country was entitled to tax. These rules are inherently subjective and therefore problematic because they rely on applying the ‘arm’s length principle’ – a benchmark requiring transactions between related parties to be priced as if they were conducted between independent, unrelated parties. In fact, comparable, independent transactions are rare, forcing tax authorities and companies to exercise significant judgment. Multinationals have exploited the subjectivity embedded in the rules to cherry-pick where to allocate their profits. As a result, in 2022, around 40 per cent of their profits (over €840 billion) were allocated to tax havens like Ireland and Switzerland. Due to this tax avoidance, every year, over €200 billion of revenues worldwide are lost. Developing countries, which have a more limited tax base and rely more on corporate tax revenues than rich countries to fund their spending, bear the brunt of this arrangement.

Since 2021, a global minimum tax of 15 per cent, agreed at the OECD/G20 Inclusive Framework, is meant to limit this tax avoidance, by ensuring that multinationals pay a minimum level of taxation in every country they operate in, thus reducing the incentives to shift profits into tax havens. This rate – 15 per cent – is too low (in our view, it should be 25 per cent, in line with the OECD average of 26.59 per cent). It carries the risk that this minimum will, over time, become the maximum. It also included a number of exemptions, reducing the effective minimum tax to below 15 per cent and, in certain circumstances, even close to zero. Nevertheless, its introduction in 2024 in the European Union through a directive was a step forward and a signal that perhaps unfettered tax competition was no longer politically acceptable. European finance ministers stated that “like any other company, multinationals should pay their fair share to fund the public good, at a level commensurate with their success” and that profit shifting is “not something the public will continue to accept. Fiscal dumping cannot be an option for Europe, nor can it be for the rest of the world“.

It took less than six months for US President Donald Trump’s administration to flip this newfound social conscience among European leaders, by demanding that US multinationals be exempt from the global minimum tax. The evident desire to avoid a further escalation in the trade war between the EU and the US led France, Germany and Italy to agree at the July 2025 G7 meeting to exempt US multinationals to follow Trump’s wish. This was formalised early in 2026 at the OECD/G20 Inclusive Framework. In a new world, governed only by strength and power, the US administration got what it wanted without much resistance.

As the exemption makes US multinationals subject to lower taxation than European companies, which are still subject to the global minimum tax, many countries saw this free pass to US companies as an opportunity to weaken the global minimum tax further by pushing for more generous exemptions. New research shows that among the countries that stand to benefit the most from this relaxation of rules are the tax havens in Europe: Belgium, Cyprus, Luxembourg, Ireland, Malta and the Netherlands. 

Overall, whilst the minimum is no longer zero, the agreed minimum of 15 per cent is now a minimum in name only. If European countries have been happy to grant additional gifts to their own multinationals, they seem hell-bent on blocking any further changes to the status quo. In the current negotiations for a United Nations framework convention on international tax, EU member states are doing their best to ensure that the current rules, which prioritise residence-based taxation – notably by allocating more taxing rights to the countries where EU multinationals are headquartered – remain unchanged. 

Developing countries, and the African countries in particular, are calling for greater rights to tax multinationals’ profits at source, particularly in market jurisdictions and without requiring multinationals to have a physical presence. This is an outdated concept that has ruled international taxation for the last century, but it is clearly unfit in today’s digital economy. Several EU countries oppose this change, as they fear this will lead their multinationals to pay more taxes abroad.

A change of course is still possible. The current rules enable multinationals to shift profits from EU countries where customers are located into tax havens like Ireland, and to limit the amount of profits multinationals record in most EU countries by locating activities such as global procurement/marketing in tax havens, from Switzerland to Singapore. Until rules are changed, all countries – apart from the tax havens – are losing out from today’s rules.

Since the US has withdrawn from these negotiations altogether, there may be an opportunity for EU member states to build a coalition with partners who “share enough common ground to act together”, as the Canadian Prime Minister Mark Carney said in his Davos speech.

Countries in the Global South are leading this process, with a clear perception that current rules are unfair to them. At the same time, trust in EU member states is much lower, as traditional alliances are being questioned due to perceived political interference, economic exploitation and unresolved historical grievances. 

For the EU, the UN negotiations are a win-win situation: an opportunity to shape new international tax rules that are fair and that ensure multinationals pay their fair share in all countries, as well as to rebuild trust with countries in the Global South. In a world of great-power rivalry, where the most powerful pursue their own interests only, it would be foolish for the EU not to grasp this opportunity.

Photo credits: UN Photo/Manuel Elías