The United States’ relationship with the OECD’s Pillar 2 efforts has been complicated to say the least. The Obama administration supported the principles of the Base Erosion and Profit Shifting (BEPS) project that began in 2013 and led to the Pillar 2 “agreement” in 2021. Publicly, this support was echoed by the Biden administration, whose Democratic Party held a majority in both the Senate and House of Representatives from 2021-2023. Despite this, no domestic legislation implementing Pillar 2 was passed, and its prospects were all but doomed upon the election of Donald Trump.
In retrospect, it stands to reason that both political parties were skeptical of Pillar 2. Its rules provide for a 15% minimum tax in each individual jurisdiction, while the U.S.’s Net CFC Tested Income (NCTI-formerly GILTI) regime blends income and taxes paid by controlled foreign corporations on a worldwide basis. This mismatch leads to a potentially problematic result where a U.S. taxpayer, despite having a global effective tax rate in excess of 15%, could still have top-up tax due. The U.S.’s effective tax rate on deferred income is less than 15% (10.5%/13.125% under GILTI and 12.6%/14% under NCTI) and domestic law provides no relief comparable to the Substance Based Income Exclusion (SBIE) in Pillar 2. Other domestic backstops like the Corporate Alternative Minimum Tax serve similar aims as the Qualified Domestic Minimum Top-Up Tax (QDMTT), but nonetheless fail to qualify as QDMTTs. In sum, despite its imperfections, the U.S. already has a respectable regime for combatting foreign undertaxed profits, but it falls outside the strictly-defined contours of Pillar 2.
This past June, in response to U.S. concerns over the Pillar 2 rules, the G7 released a statement signaling their openness to a “side-by-side” solution wherein U.S. parented groups would be exempt from the Income Inclusion Rule and Under-Taxed Profits Rule “in recognition of the existing U.S. minimum tax rules to which they are subject.” This “shared understanding” has been met with criticism from a number of jurisdictions, particularly in Europe.
This “side-by-side” proposal comes in the wake of numerous developments that have served to dilute whatever consensus Pillar 2 stood for. The EU Tax Observatory has noted the global minimum tax has been “dramatically weakened by a growing list of loopholes,” including the SBIE (excluding 8% of the value of tangible assets and 10% of payroll expense) and a Transitional Under-Taxed Payments rule. The slow erosion of Pillar 2 can also be seen in the treatment of qualified refundable tax credits, which are not counted as a reduction of tax paid. Many of Switzerland’s cantons that have historically competed with one another on rates have shifted to offering more generous subsidies and refundable credits.
As time goes on, it is likely we will see more measures chip away at Pillar 2. Though this may be invited by the U.S., it leaves multinational taxpayers in the dark over what to expect. The European Union, United Kingdom, South Korea, and many other economic powerhouses have adopted Pillar 2, while the U.S., India, China, and the bulk of the developing world have opted for passivity. Meanwhile Brazil’s approach, which includes the QDMTT, but leaves the remainder of Pillar 2 untouched, appears to be a hybrid. One can’t help but wonder, what “consensus” on global taxation are we working toward?
