Pillar Two without the US

Albeit one could say that Pillar Two is all about ending unfair international tax competition, the fact the US is poised to lose as much as USD 122 billion in tax revenue if the rest of the world implements the birthchild of the OECD fathered by the Inclusive Framework, might lead one to question its true intent.

It is true that tax competition, more often than not, ends up benefiting corporations more than many of the jurisdictions forced to offer tax incentives. Then again, that is a prerogative of tax sovereignty, even if such a concept feels old-fashioned to the staunchest activists promoting a new global international tax order, maybe out of nostalgia for the good old colonial days.

It is also true, as some have noticed, that when the US competes on equal terms, it might often win, which explains some of the US's frustration with China.

Nonetheless, it might also be argued that Pillar Two is nothing but a compromise for the global failure to reach an actionable agreement on Pillar One, which would create new rules of nexus and thus drive tax revenue away from the US and into market jurisdictions (and many in between).

With that in mind, it is unsurprising that certain members of the Ways and Means Committee of the US Senate have gone above and beyond to let everyone willing to listen know that the US's adoption of Pillar Two is unlikely.

Not only have the Republicans of the House of Representatives toured Europe expressing their discontent with Pillar Two, but they have also proposed retaliatory withholding taxes of up to 20% against residents of countries that implement what are deemed extraterritorial and discriminatory taxes against US interests.

With that background, where does the rest of the world stand?

We know the EU, UK, Japan, Canada, Switzerland, and South Korea are well underway to roll out Pillar Two legislation if not ready to implement it as early as 2024.

In the hopes of the early adopters, if there is a critical mass of countries willing to adopt Pillar Two, having China or the US join might become irrelevant and, to a certain extent, desirable given that if the US and China end up foregoing tax revenue, such revenue will end up being collected elsewhere.

Other countries are OK getting to a similar result and protecting their tax base from foreign depravation with local rules. For instance, countries like Colombia or India already have in place local regulations to secure a 15% minimum tax, albeit in a much broader way than the 15% tax proposed under the GloBE rules, and with no current legislative action to implement the latter. This approach might not be what the architects of the Qualified Domestic Top-Up Tax (QDMTT) had in mind, but it does the job for the most part, and its implementation seems remarkably more straightforward.

With a different take, Bermuda sees itself forced to create a corporate income tax of 15% that would make such tax a covered tax under GloBE. The reason? Nothing else but to avoid MNEs from suffering double taxation at the hands of countries adopting Pillar Two.

Barbados, on the other hand, has opted for a QDMTT and an attractive set of what they expect to be Qualifying Refundable Tax Credits, indulging a Jobs Credit up to 475% on the average payroll cost and an R&D credit of 50% on certain expenses. ?

Last, Brazil, a country that, during the first quarter of 2023, received as much foreign direct investment as China, seems close to making an announcement on Pillar Two. Then again, given that the country has a corporate tax burden (made of two components) reaching the nominal value of 34% and that it is currently dealing with the most significant VAT and transfer pricing reforms of its history, having to deal with the headache of GloBE might not at the top of their priority.

What are multinationals supposed to do?

With the top 10 economies in the world heading in different directions concerning Pillar Two, and assuming that between China and the US, they have roughly 60% of the world's MNEs, the chaos that thus unfolds cannot be neglected by tax directors around the world.

With that in mind, and assuming no changes to the US GILTI tax regime, a few questions ought to be asked:

1.?????? Can you benefit from one of the Safe Harbors under GloBE? How is your country-by-country report looking?

?2.?????? What do you prefer to pay?

?Maybe a top-up tax under the income inclusion (IIR) rule where your holdings reside? Then, you might want to reorganize yourself to concentrate as much as you can under that IIR jurisdiction.

?Maybe a qualified domestic top-up tax where certain problematic subsidiaries might be located? How confident are you that such QDMTT will pass a peer review?

?In either scenario, it seems safe that nobody aside from a professional pirate would look favorable at taxing / being taxed through the undertaxed profits rule (UTPR).

?3.?????? And last but not least, should you be lobbying through your trade organization in favor of getting the US tax system prepared for Pillar Two, or, at the very least, negotiating additional concessions?

While Pillar One is not even worth debating, as it is impossible to conceive without the US, Pillar Two and the imposition of a new international tax order cannot be entirely ignored by the US and Chinese governments, and less so by their well-exposed multinationals. Indeed, when "taxation without representation" is imposed, one might as well learn to live with it or maybe, just maybe, find another path.

The path for Africa was to encourage the UN to take a leading role that allows for a genuinely democratic space to debate international tax policy, even if Europe rejects it. What path will the US choose?