Pillar 2’s Impact on Tax Competition


The Two-Pillar Solution agreed by 137 countries on 8 October 2021 has been hailed as “historic” and a “a once-in-a-generation accomplishment for economic diplomacy.” To a significant extent, this is due to the expected impact of Pillar 2 (essentially a global minimum tax) on tax competition among states. This paper examines Pillar 2’s impact on tax competition. It builds on a short policy brief released by the authors in January 2022 in which the main incentives created by Pillar 2 that are relevant to tax competition were first identified.

The paper is divided into 7 sections. Section 1 introduces the paper. Section 2 discusses Pillar 2’s objectives: addressing profit shifting and tax competition. Section 3 discusses the Top-Up Tax calculation under Pillar 2, with a particular focus on the “Substance Based Income Inclusion” and the “Qualified Domestic Minimum Top-up Tax” (QDMTT) variables. Section 4 sets out three main conclusions on Pillar 2’s impact on tax competition. First, Pillar 2 does set a floor on tax paid on corporate profit by multinationals equal to 15% of “Excess Profit”. It also sets an effective floor on competition among “source” countries. The floor is set at zero Corporation Tax liabilities and a tax of 15% of Excess Profit collected through a QDMTT. Second, Pillar 2 may provide some countries with an incentive to raise revenues through a QDMTT rather than a Corporation Tax. Put more provocatively, Pillar 2 may strengthen the incentive for some countries to compete on Corporation Tax, but they can recover the Corporation Tax revenues foregone through the QDMTT. Third, countries can compete below the floor identified above by offering grants and “Qualified Refundable Tax Credits”. Section 5 considers implementation issues. It considers options for uniform or differentiated implementation of Pillar 2. It also considers factors that may be thought to weaken countries’ incentives to rely on QDMTTs instead of Corporation Tax. Section 6 proposes an alternative design for the Top-Up Tax calculation that may have been preferable. Section 7 concludes. An appendix provides a formal algebraic analysis in support of the main conclusions reached in the paper.

Overall, therefore, this paper concludes that Pillar 2 should have a significant impact on tax competition, but the impact may be less straightforward and significant than may have been expected. It also creates incentives that are not clearly desirable from a policy perspective.