OECD Pillar Two (Global Minimum Tax)

Pillar Two, the second element of the Organisation for Economic Co-operation and Development’s (OECD) two-part global tax deal, promotes a global minimum corporate income tax rate of 15 percent for multinational corporations with a “significant economic footprint.” The OECD hopes to achieve this aim through widespread adoption of a series of three taxes that serve as backstops to establish the minimum rate: the qualified domestic minimum top-up tax (QDMTT), the income inclusion rule (IIR), and the undertaxed profits rule (UTPR). The goal of this project is to reduce global tax competition and help ensure corporations pay tax where they produce value.

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What Is the OECD Global Tax Deal?

The global tax deal is a significant shift in international tax rules. It is one of the most ambitious products of the Base Erosion and Profit Shifting (BEPS) project. BEPS began in 2015 and attempted to establish template action items that countries could adopt voluntarily to harmonize some definitions, speed dispute resolution, and increase data collection. However, this came with additional compliance costs.

The OECD’s newer plan, decided as part of the OECD/G20 Inclusive Framework, aims to reduce incentives for tax planning and avoidance by multinational companies by limiting tax competition and changing where companies pay taxes through two independent plans: Pillar One and Pillar Two.

What Is the Aim of OECD Pillar Two?

In the last few years, the OECD has discussed a more permanent and effective plan to change tax rules for large companies and continue to limit tax planning by multinationals. This plan was broken into two pillars: Pillar One focuses on changing where companies pay taxes, and Pillar Two seeks to establish a global minimum tax.

Specifically, Pillar Two sets a minimum effective tax rate of 15 percent applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world. Pillar Two includes three main taxes that apply to companies with more than €750 million in revenues.

• QDMTTs identify corporations paying less than 15 percent on domestic income for a fiscal year and increase (“top up”) the tax burden to 15 percent. In some cases, through the subject-to-tax rule (STTR), a country where economic activity takes place can also top up some outbound payments to other countries.
• IIRs determine when a company’s foreign income should be included in the parent (main) company’s taxable income at a minimum 15 percent rate. This minimum tax calculation is done on a country-by-country basis and includes foreign tax crediting.
• UTPRs allow countries to increase taxes on a business if that business is part of a larger company that pays less than 15 percent in another jurisdiction, even if the group is not headquartered in the country assessing the UTPR, and even if the profits are not in that country either. This is unprecedented relative to the usual international understanding of what income countries are allowed to tax.

How Could This Impact US and Foreign Multinationals?

Pillar Two may have only small effects on US multinationals; a recent G7 tax deal determined that the US system would exist “side by side” with Pillar Two, meaning that US multinationals would simply be subject to the United States’ international tax regime without any additional Pillar Two top-ups. However, the details of this system for coexistence remain to be determined.

Pillar Two and the broader global tax deal will ultimately impact US and foreign interests by increasing effective tax rates on cross-border investment, especially by increasing taxes on earnings in low-tax jurisdictions. This will impact where companies hire and invest globally, potentially discouraging foreign direct investment (FDI). It will also introduce additional tax complexity, especially through the IIR’s country-by-country design.

Pillar Two may struggle to achieve all of its aims, though; jurisdictions and companies may devise new strategies to exploit flaws in its design and continue pursuing low-tax strategies.

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