Implementing Pillar Two: Potential Conflicts with Investment Treaties

Abstract

A key objective of pillar two is to coordinate a minimum 15 percent tax on the GloBE income of certain in-scope multinational enterprises. This objective has been driven by the Organisation for Economic Co-operation and Development and focuses on global cooperation and model rules to calculate and collect the proposed tax. Tax is also a key driver in investment decisions. By design or default, the pillar two rules will clash with the typical tax incentives offered by countries to attract foreign direct investment, including tax holidays, lower tax rates, exemptions, and accelerated depreciation regimes. Often these tax incentives are offered in investment treaties. These agreements offer a win-win solution in that they set out the minimum protections that investors may rely on when making an investment in the host state, backed up by the direct remedy of binding international arbitration if those protections are not provided. For the host state, the protections provided by an investment treaty encourage inbound cash flows, and for the investor's home state, they offer the hope of repatriated profits. Although no precise numbers can be offered, clearly the tax benefits provided by investment treaties will be affected by the pillar two rules. This paper outlines some of the potential conflicts between pillar two requirements and the protections provided in investment treaties. It also offers some preliminary solutions.