The Pillar 2 Model Rules, released in December 2021, seek to impose a global minimum tax on large MNEs through the agreement and implementation by a critical mass of countries. If effective, Pillar 2 generally would ensure that a minimum amount of tax is paid in each jurisdiction in which in-scope MNEs operate. To reach this goal, the Model Rules required the design of a mutually agreed tax base – based upon financial accounting profit. As Pillar 2 does not envisage the alignment of domestic tax bases, there will inevitably be discrepancies between the domestic tax bases of each jurisdiction and the Pillar 2 tax base.
This paper proceeds in four parts. In Part I, it considers the history of the tax base issue, including the options discussed, as revealed in public OECD documents such as the Programme of Work and the October 2020 Blueprint. In Part II, the paper outlines how the Model Rules address both permanent and timing differences between the domestic tax base and the Pillar 2 base, as well as the cross-border allocation of taxes. In Part III, it considers the impact that these differences are likely to have on the tax minimization strategies of MNEs and, in Part IV, the opportunities which are created for States engaged in tax competition. Ultimately, the paper concludes that there are significant impacts on the incentives of both MNEs and States which ought to be expected in their behavior in the years to come.
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