UPDATE 2-U.S. drops 'safe harbor' demand, raising hopes for global tax deal

(Adds details, quote from French finance minister)

By Andrea Shalal, Michael Nienaber and Leigh Thomas

WASHINGTON, Feb 26 (Reuters) - U.S. Treasury Secretary Janet Yellen told G20 officials that Washington had dropped the Trump administration's proposal to let some companies opt out of new global digital tax rules, U.S. and European officials said on Friday, raising hopes for an agreement by summer.

Nearly 140 countries have set a mid-2021 deadline to wrap up talks to modernize outdated rules on how much governments can tax cross-border commerce and set a global minimum corporate tax rate after negotiations nearly ground to a halt last year due to the U.S. proposal.

"Secretary Yellen announced that we will engage robustly to address both Pillars of the OECD project, and that the United States is no longer advocating for 'safe harbor' implementation of Pillar 1," a U.S. Treasury official said.

Already challenging multilateral talks to reform global taxation under the Organization for Economic Cooperation and Development stalled after former Treasury Secretary Steven Mnuchin insisted on the contentious measure in late 2019.

Tax experts and finance officials around the world had warned that the U.S. proposal could have allowed big U.S. companies like Amazon, Alphabet's Google and Facebook to opt out of whatever was agreed internationally.

Yellen's statement to G20 finance ministers and central bankers was widely welcomed by European officials.

German Finance Minister Olaf Scholz described the U.S. move as a major breakthrough that could pave the way for a broader deal.

"My U.S. colleague Janet Yellen told G20 finance ministers today that the United States would participate, and that the new regulations for fair international taxation should be binding for all companies," he said in a statement after the meeting.

He said Yellen told the G20 officials that Washington also planned to reform U.S. minimum tax regulations in line with an OECD proposal for a global effective minimum tax.

French Finance Minister Bruno Le Maire, one of the most outspoken critics of the U.S. safe harbor proposal, echoed his praise.

"Finding an agreement by summer is within reach, especially now that the United States have confirmed they are dropping the safe harbor principle," Le Maire said after the meeting.

In a letter to G20 officials released Thursday, Yellen underscored the Biden administration's commitment to multilateral discussions on the global taxation issue, "overcoming disagreements, and finding workable solutions in a fair and judicious manner." (Reporting by Andrea Shalal in Washington, Michael Nienaber in Berlin, Leigh Thomas in Paris and Jan Strupczewski in Brussels; Editing by Jonathan Oatis and Andrea Ricci)