The effects of the Trump administration corporate tax reform on U.S. multinationals that were, as of the end of last year, holding some $1.4 trillion in cash overseas, are largely beneficial: Now these companies finally know how much of that money the U.S. wants — and there’s also some long-awaited clarity on how foreign profits will be taxed going forward. What’s less clear is how the changes will affect European plans to tax U.S. companies’ profits where they’re made. So far, it looks as though the new U.S. rules are a gift to European nations that they should hurry up and use.

Up front, the U.S. government is taxing the accumulated foreign cash at 15.5% to treat it as repatriated. That’s something of a relief to the biggest cash holders. Apple, whose foreign subsidiaries held $252.3 billion in cash and equivalents as of the end of September 2017, had been making provisions for U.S. federal taxes on its foreign profits. At the end of September, the company had on its books a deferred tax liability of $36.4 billion related to foreign subsidiaries’ earnings. That’s about 14.4% of the cash pile, meaning Apple will pay only slightly more than it has budgeted for the formal repatriation of the money (in reality, much of it was already invested in U.S. assets, anyway).

Microsoft, with $127.9 billion of overseas cash as of June 30, 2017, the end of its financial year, reported an unrecognized deferred tax liability of $45 billion on some $142 billion of foreign income. Unlike at Apple, the new taxes will have a negative effect on the bottom line, but Microsoft will still pay only about half as much as it expected.

No longer having to guess about the U.S. government’s claims frees up the companies to invest the cash more productively than by purchasing marketable securities. Expect some bold acquisitions from the U.S. tech and pharma giants, which hold most of the cash. But it’ll be even more interesting to see how the companies change their tax schemes in response to other parts of the U.S. reform, meant to tackle profit shifting. 

Starting this year, the U.S. taxes foreign income above 10% of revenue — deemed to be the normal rate of return on tangible assets — at 10.5%. This rate will go up to 13.125% in 2026. Companies will only get an 80% credit for foreign taxes paid. A 13.125% tax effective tax rate applies to income from licensing U.S. parents and other intellectual property to foreign companies. These measures are specifically meant to eliminate tech companies’ favorite scheme: booking all the non-U.S. revenues in a low-tax country such as Ireland, with its 12.5% corporate tax rate, and then paying almost all the profit to a company in, say, the Cayman Islands, as royalties for the use of intellectual property. Some companies — Google is one example — ended up paying almost no tax on their non-U.S. profits thanks to the scheme.

Now, the no-tax Cayman Islands part makes little sense, since the U.S. will be taxing the intellectual property-related profits anyway. The Irish part still looks good, though. As the auditing firm KPMG pointed out in a December note, Ireland’s corporate tax remains attractive compared with the average combined federal and state tax rate a company would pay if it booked international income in the U.S. So the Irish authorities hope the U.S. tax reform won’t hurt investment. Martin Shanahan, the chief executive of Ireland’s investment promotion authority, said earlier this month that U.S. companies expanded their Irish presence throughout 2017, even though they knew all about the reform plans.

But the new U.S. tax structure doesn’t just mean multinationals will want to stay in low-tax European jurisdictions. It also gives these countries a potentially bigger revenue stream since it no longer makes sense to use royalty payments to erase non-U.S. profits — and an opportunity to be bolder in taxing U.S. companies. Given the same tax base as in the U.S. (which, of course, is a simplification), they can raise their corporate tax rates for multinationals by a few percentage points with no fear that the U.S. will do anything further to outcompete them or that the firms will leave. The new U.S. statutory rate of 21 percent provides a comfortable upper bound — and, given how difficult it will be for the U.S. to compensate for the loss of revenue, it’s unlikely to go down in the foreseeable future.

Essentially, U.S. legislators have done what France and Germany have long tried and failed to do — establish a common corporate tax “floor” for the European Union. If European countries charge less than 13.125% on the multinationals’ profits, the U.S. will still take the money. Before, the low-tax countries always thwarted the Franco-German demands. Now, it no longer makes any sense for them to do so.

Big European countries must thank U.S. legislators for this gift. But they cannot expect the U.S. to do all their work for them. It’s still up to the EU member states to make sure the U.S. tech firms pay a fair share of taxes in each of the markets where they operate. It still doesn’t make sense that profits made in France and Germany are being booked in Ireland — and that can only stop if EU members agree among themselves about how they stop the practice without doing too much damage to Ireland. Trying to impose revenue-based taxes on the multinationals, as a group of bigger EU members proposed last year, is not the answer: The U.S. has proved that it’s possible to set up a sensible system of incentives without resorting to such unsubtle measures.

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