Pillar Two Much Ado About Next to Nothing?

Abstract

The OECD has spent the last fifteen years working on the design and implementation of rules for the taxation of income derived from international transactions, rules that are supposed to both increase corporate tax revenues and minimize “destructive” tax competition. Pillar Two, the second part of the two-part “Inclusive Framework,” was released in July of 2021. It is designed to force countries to impose a minimum tax on income derived by large multinational enterprises. Pillar Two–compliant taxes have been enacted by most of the countries in the European Union, Japan, South Korea and other economically important countries, but not by the United States. Reacting to President Trump’s continued opposition to Pillar Two and the threatened imposition of a retaliatory tax on investors from countries imposing certain elements of the minimum tax regime on U.S. investors, the OECD agreed to exempt U.S.-parented groups from parts of the Pillar Two regime, and instead allow U.S. domestic minimum tax rules to exist on a “side-by-side” basis. However, this concession will not eliminate the economic incentive for the United States to conform many of its tax rules to fit the Pillar Two template. As this Article explains, such conformity could actually advance the President’s and Congress’s nationalist economic and political agenda because in many respects Pillar Two is a “paper tiger.” It leaves plentiful opportunities for countries including the United States to engage in tax and economic competition.