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Pillar Two Implementation is Inescapable

This is according to an OECD progress report issued yesterday which states that “…implementation of the global minimum corporate tax seems ineluctable.”

Whilst mainly focusing on Pillar One of the Two-Pillar framework, the report does provide a useful update on the status of Pillar Two’s global implementation and the OECDs opinion on how its progressing. 

It accepts that the 2023 implementation date for the income inclusion rule (IIR) has now slipped as most  countries are planning implementation for 2024.

The OECD model rules intended the IIR to be in force in 2023, whilst the under-taxed payments rule was planned for 2024.

It may now be the case that when enacted domestically, both rules come into effect in 2024 in a number of jurisdictions. 

It notes that all G7 countries as well as a number of other jurisdictions have scheduled changes in domestic tax legislation.

The EU has the draft directive and the UK has published a consultation document. Other countries such as Japan have reiterated their support for Pillar Two and confirmed their intention to implement domestic legislation. 

The progress report also notes that a number of jurisdictions have plans for a domestic minimum tax. This is to be expected given this protects the domestic tax base, it does not result in additional tax on MNE groups and it provides compliance benefits for MNEs. 

Whilst the Pillar Two GloBE rules (which implement the global minimum tax) are now in the hands of the inclusive framework jurisdictions, some of the other aspects are still with the OECD. 

Most notably, there is the subject to tax rule, which is a treaty based rule to address low rates of withholding tax.

The OECD confirms that work is continuing with the draft model treaty provision, its commentary as well as a new multilateral instrument to coordinate its implementation. 

Whilst there are undoubtedly concerns as to whether some jurisdictions can implement the Pillar Two rules (including the US), this upbeat report from the OECD indicates their overall satisfaction with the planned implementation of Pillar Two. 

Although they refer to the need to have a critical mass of countries for the implementation of Pillar One, this also applies to Pillar Two.

As noted in our recent article What Happens if the US Doesn’t Implement Pillar Two?, once jurisdictions begin to implement the Pillar Two rules and it gathers momentum it will be in the interests of individual jurisdictions to implement the rules, particularly as they are implemented as a common approach.