International Tax ♦ Online 64 Va. J. Int’l L. Online 1 (2023)

Ending the Vicious Cycle: Understanding “Pillar Two” and the Uncertain Progress Towards a Harmonized Global Minimum Tax

BRENDAN BARGMANN

In recent years, the international community has acted with unprecedented cooperation to rationalize, reform, and empower the international tax regime. Paramount among these reforms is broad international agreement on a global minimum corporate tax to end the vicious cycle of competitive tax cuts for the attraction of foreign capital. This agreement has the potential to revolutionize the international tax system and to truly reshape the power dynamics between states and the major multinational corporations who have until now been able to exempt ever-increasing proportions of their activities from state control.

In 2016, the Organization for Economic Co-operation and Development (OECD) established a working group—“framework”—with over 135 participating countries known as the OECD/G20 Inclusive Framework On BEPS (BEPS 2.0). “BEPS” is an acronym for Base Erosion and Profit Sharing, which

refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to locations with no/low tax rates and no/little economic activity, resulting in: little or no corporate tax being paid [and] annual revenue losses for governments of at least $100 – 240 billion USD, equivalent to 4 – 10% of global corporate income tax revenue.

These countries have collaboratively produced a “historic” international tax package, agreed to by over 135 countries, to place multilaterally agreed limits on tax competition. The key component to this reform is so-called “Pillar Two,” an agreement that when a multinational enterprise’s effective tax rate in a jurisdiction drops below 15%, the entity would potentially be subject to “top-up” tax liability, thereby discouraging the use of damaging tax incentive policy. However, the OECD framework is a nonbinding technical agreement; actual implementation is left to the constituent states. Implementation has been varied and remains technically and politically challenging (though more so the latter).

This paper will examine the policy itself, its background, and the pending implementation thereof. Part 1 of this paper will examine the underlying issue which necessitates this policy, which is the vicious, counterproductive cycle of countries competing for foreign capital via tax policy. Part 2 will examine the theoretical and historical basis for the reform, namely the single tax policy, in which all aspects of the revenue of multinational corporations are taxed once at internationally consistent real rates. Part 3 of this paper will explore the “Pillar Two” legal and policy framework for such international tax liability which were proposed by the OECD’s Framework. Part 4 will explore the prospective and current implementation of the Pillar Two framework.