On 8 October 2021 Secretary of the Treasury Janet L. Yellen claimed that: “As of this morning, virtually the entire global economy has decided to end the race to the bot-tom on corporate taxation.” Tax competition threatens the long‐term viability of the existing international corporate tax system and bringing it to an end would thus be a veritable game‐changer. But is Secretary Yellen correct? Will the OECD/G20 Inclu-sive Framework’s “Two Pillar Solution” that has now been agreed by 137 jurisdic-tions, in particular the global minimum tax found in Pillar 2, bring competition in corporate taxation to an end? This note examines one of the factors that will deter-mine the impact of Pillar 2 on tax competition: the design of the substance‐based carve‐out.
The success of the recently agreed international tax reform hinges on a technical issue in the design of the Pillar 2 global minimum tax.
Pillar 2 ensures the minimum taxation of ‘residual’ (e.g. non-routine) profits at 15%. ‘Routine’ profit is not subject to Pillar 2.
The effects depend on which of two possible options is used:
Option 1 removes the incentive to compete below a liability of 15% of residual profits and puts a floor to tax competition.
Option 2 still maintains an incentive for governments to compete by reducing their taxes – possibly all the way to zero.
Consequences for tax competition depend on the technical details to be revealed. Announcement containing more details of the proposal are expected shortly.