Tax Treaty Obstacles in Implementing the Pillar Two Global Minimum Tax Rules and a Possible Solution for Eliminating the various challenges

Abstract

This article addresses the interaction between the Global minimum tax rules (namely, the Income Inclusion and the Undertaxed Payment Rule) with tax treaties. In particular, the article analyses potential limitations to the application of the Income Inclusion Rule by the provisions of Article 9 of tax treaties. Further, the article investigates possible obstacles to the application of the Income Inclusion Rule to tax treaties that contain tax sparing clauses. The article then conducts a similar analysis with respect to the Undertaxed Payments Rule, which is assessed from the perspective of Article 9 and the non-discrimination provisions of Article 24. Furthermore, the article explores whether importing Article 9(1) in the list of exceptions to the saving clause would be appropriate and its related consequences. Thereafter, the Article gives an insight into the problem of tax treaty overrides which may arise if the Pillar Two rules are implemented in national legislation without making relevant changes to tax treaties, highlighting, in particular, the dimension of State responsibility. Moreover, this contribution also explores the dispute resolution instruments available to solve potential tax disputes where, by effect of the application of the GloBE rules, “taxation not in accordance with the convention” may be detected, also, hinting to possible ramifications under non-tax agreements. Finally, in light of the strong arguments made in this paper which indicate that conflicts could indeed arise and treaty overrides could occur, the contribution puts forth a solution in the form of a safeguard clause - as opposed to a saving clause or interpretative MAPs - that policy makers can incorporate in their treaty network to ensure that the GloBE rules can be applied without triggering frictions with tax treaty law. Of course, the Pillar Two rules should be applied within the boundaries of the safeguard clause and if a State goes beyond its authorization, a conflict could once again indeed arise with the provisions of the treaty. On the other hand, if such a clause is not inserted in tax treaties then there is a concrete risk that an unforeseen obstacle of considerable magnitude could arise on the path of the Pillar Two Initiative.