Article: The Need for Global Minimum Tax: Assessing Pillar Two Reform

Abstract

In 2021, the Organisation for Economic Co-operation and Development (OECD) announced its proposal to introduce a global minimum tax. This proposal signals that Base Erosion and Profit Shifting (BEPS) program achieved limited success and tax avoidance continues as some countries tax at low or zero tax rates. This article reviews the existing international tax rules to demonstrate that their inefficient design is among the key factors that have compelled developed countries to support a global minimum rate. In contrast to the previous approach where the OECD identified harmful tax practices, pillar two seeks to address tax competition. In doing so tax rates and incentives will be re-calibrated so as to ensure that a corporation pays 15% in each jurisdiction. For this the rules allow the residence countries to tax back the difference between the minimum and effective tax rate (ETR). The design of the rules indicates that developing countries will not gain tax revenues from this proposal. A more important point for developing countries to consider is that tax structures depend on regulation and structure of the economy. This article presents evidence to suggest that countries must weigh their overall economic objectives against the minimum tax. Minimum tax, CFC, BEPS, incentives, capital controls