Pillar 2: Rule Order, Incentives, and Tax Competition

Oxford University Centre for Business Taxation Policy Brief 2022

16 Pages Posted: 11 Mar 2022

See all articles by Michael P. Devereux

Michael P. Devereux

Centre for Business Taxation, Oxford University; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR); University of Oxford - Said Business School; University of Oxford - Said Business School

John Vella

Oxford University Centre for Business Taxation; University of Oxford - Faculty of Law

Heydon Wardell-Burrus

Oxford University Centre for Business Taxation; University of Oxford - Faculty of Law

Date Written: January 14, 2022

Abstract

Two of the most controversial questions relating to Pillar 2 are the extent to which it will allow countries to engage in tax competition, and which countries will collect the tax revenues it generates. The Model Rules published by the OECD/G20 Inclusive Framework on 20 December 2021 provide somewhat unexpected answers to both questions.

This Policy Brief focuses on two critical elements of Pillar 2: the Substance-Based Income Exclusion (SBIE) and the Qualified Domestic Minimum Top-up Tax (QDMTT). It makes three main points. (i) The addition of the QDMTT effectively alters the rule order of Pillar 2, and thus its distributional consequences. (ii) Pillar 2 effectively creates a floor on “source” country tax competition, but it does so in a roundabout manner. Countries still have an incentive to compete by reducing the Corporation Tax liability they impose on companies, perhaps even down to zero. However, countries now have an incentive to collect a QDMTT equivalent to 15% of Excess Profit. (iii) Pillar 2 increases the incentives for (at least some) countries to reduce the Corporation Tax liabilities they impose on companies, thus increasing the probability that countries reduce Corporation Tax liabilities perhaps even all the way to zero. Importantly, however, as noted, these countries have an incentive to impose a QDMTT. The substitution of Corporation Tax with the QDMTT would be a significant development and the creation of these incentives merits careful consideration.

Keywords: International Tax, Minimum Tax, Corporation Tax, Tax Reform, OECD, BEPS, Pillar 2, GloBE, Fairness, Tax and Development, Incentives, Tax competition

JEL Classification: H25, H32, H87, K34

Suggested Citation

Devereux, Michael P. and Vella, John and Wardell-Burrus, Heydon, Pillar 2: Rule Order, Incentives, and Tax Competition (January 14, 2022). Oxford University Centre for Business Taxation Policy Brief 2022, Available at SSRN: https://ssrn.com/abstract=4009002 or http://dx.doi.org/10.2139/ssrn.4009002

Michael P. Devereux

Centre for Business Taxation, Oxford University ( email )

Said Business School
Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

John Vella (Contact Author)

Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/john-vella

University of Oxford - Faculty of Law ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

HOME PAGE: http://www.law.ox.ac.uk/profile/john.vella

Heydon Wardell-Burrus

Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

University of Oxford - Faculty of Law ( email )

3 Worcester Street
Christ Church
Oxford, OX1 2BX
United Kingdom

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