The Organization for Economic Co-operation and Development (“OECD”) Global Tax Deal is a groundbreaking international agreement to overhaul how multinational corporations are taxed . It emerged from the Base Erosion and Profit Shifting (“BEPS”) project, launched in 2013 to combat tax avoidance by multinational corporations.[1] The BEPS initiative addressed how companies were shifting profits to low-tax jurisdictions, eroding global tax revenues.[2] After extensive negotiations involving 139 countries, including the U.S., the OECD Global Tax Deal was finalized in 2021.[3] Its purpose is to create a more unified international tax regime, with the U.S., home to several of the world’s largest multinational corporations like Google and Amazon, playing a pivotal role in pushing the negotiations forward.[4]
The deal introduces a two-pillar framework: Pillar One reallocates taxing rights to ensure that large multinational corporations, especially in the digital economy, pay taxes where their customers are located, even if they have no physical presence there.[5] Pillar Two establishes a global minimum corporate tax rate of 15%, ensuring that multinational companies pay at least this rate, regardless of where they operate.[6] This framework aims to curb the “race to the bottom” in global tax competition, making the international tax system fairer and more transparent.[7]
Pillar One: Reallocating Taxing Rights
Pillar One of the OECD’s global tax framework is designed to reallocate taxing rights over large multinational enterprises (MNEs), particularly digital companies, by shifting part of their profits to market jurisdictions where they have significant customer bases, even if they have no physical presence there.[8] The key components, Amount A and Amount B, aim to tax residual profits and standardize returns for marketing and distribution activities, respectively.[9] However, the parties were unable to reach a global consensus to meet the June 30, 2024 deadline for Pillar One due to disagreements over how profits should be reallocated and concerns about revenue loss, especially from the U.S., which feared that the framework would disproportionately target its tech giants.[10] Additionally, the complexity of implementation and disputes over digital services taxes (DSTs) further delayed an agreement.[11] Without a global agreement, countries are more likely to impose unilateral DSTs, which could lead to trade disputes and double taxation, making the global economy less predictable and more fragmented.[12] While Pillar One is not dead, the missed deadline puts its future in jeopardy, with the risk of more countries adopting unilateral DSTs, creating the potential for double taxation and trade conflicts.[13]
Pillar Two: Establishing a Global Minimum Corporate Tax
Pillar Two sets a global minimum corporate tax rate of 15%, designed to limit tax competition between countries and curb profit shifting to tax havens.[14] Under this pillar, multinational corporations with revenues exceeding €750 million would be subject to a top-up tax if their effective tax rate falls below 15% in any jurisdiction.[15] This framework ensures that all profits are taxed at a minimum rate, reducing the incentive for companies to move their income to low-tax countries.[16]
The Importance of U.S. Adoption of Pillar Two
Adopting Pillar Two is crucial for the U.S. to maintain its competitiveness in the global market. If the U.S. does not adopt the framework, its multinational corporations may face higher taxes in foreign jurisdictions that implement Pillar Two’s top-up tax mechanisms.[17] For instance, the income inclusion rule (IIR) and the undertaxed profits rule (UTPR) allow countries to impose additional taxes on profits not sufficiently taxed in other jurisdictions.[18] Without U.S. participation, American companies could see their tax burdens rise without the U.S. capturing any additional revenue.[19] Indeed, implementation of Pillar Two is estimated to increase U.S. corporate tax revenues by $34.9 billion over 10 years.[20] Furthermore, U.S. inaction could undermine global efforts to reform the international tax system, leading to a fragmented landscape where some countries implement the 15% minimum tax and others do not.[21] This could result in an uneven playing field that disadvantages U.S. multinationals.
For many countries, the deal is crucial in ensuring fairness in the global tax system. Wealthier nations, like the U.S. and members of the European Union, benefit because they can recapture some of the revenue lost to low-tax jurisdictions.[22] For developing nations, the deal offers a more stable source of tax revenue from global businesses operating within their borders.[23]
The Challenges of Implementing Pillar Two in the U.S.
For the U.S., Pillar Two is closely aligned with the Biden administration’s tax reform agenda, which includes increasing corporate taxes and preventing tax avoidance.[24] The U.S. Treasury, under Secretary Janet Yellen, has been an active proponent of Pillar Two, supporting it as part of President Biden’s efforts to prevent harmful tax competition and secure revenue needed for domestic priorities.[25] Indeed, the U.S. already has a similar system in place under the Global Intangible Low-Taxed Income (GILTI) regime, placing a minimum 10.5% tax rate on foreign income earned by U.S. multinationals.[26] However, adjustments are required to make GILTI compliant with Pillar Two, including increasing the GILTI rate and moving to a country-by-country calculation of taxes.[27]
The Biden administration seeks to raise the GILTI rate from 10.5% to 21%, above the minimum rate required under Pillar Two, in efforts to align with international standards while closing loopholes that allow profit shifting.[28] These efforts have faced significant resistance from Republicans in Congress, who argue that such reforms would reduce the competitiveness of U.S. multinationals and increase their tax burden.[29] Making GILTI compliant with Pillar Two’s country-by-country calculations and increasing the minimum tax rate poses substantial challenges for U.S. companies, which would need to overhaul their tax reporting and compliance systems.[30]
Implementation of the OECD Global Tax Deal in the U.S. could face significant obstacles depending on the outcome of the 2024 presidential election, given the diverging tax policies advocated by candidates former President Trump and Vice President Harris. Trump, who has been critical of multilateral agreements, including international tax frameworks, is likely to oppose the adoption of Pillar Two’s global minimum tax.[31] During his presidency, Trump implemented the Tax Cuts and Jobs Act (TCJA), which lowered the corporate tax rate.[32] If elected again, Trump is expected to advocate for lower taxes and less regulation, potentially undoing any progress made toward U.S. compliance with the OECD deal.[33]
On the other hand, Harris, who is closely aligned with the Biden administration’s tax policies, has voiced support for raising taxes on corporations and the wealthy to fund public programs.[34] Her support for Pillar Two would likely continue the Biden administration’s efforts to align U.S. tax policy with global standards, including raising the GILTI rate and shifting to country-by-country reporting. However, even Harris’ administration might struggle to pass these changes through Congress, particularly with strong Republican opposition to global tax initiatives.
While the OECD Global Tax Deal presents a historic opportunity to reform the international tax system, its implementation in the U.S. is fraught with challenges. Both political opposition and the complexity of adapting existing tax regimes, such as GILTI, to meet OECD standards make it unclear whether the U.S. will fully adopt the deal. However, the importance of U.S. participation cannot be overstated, as the country’s involvement is key to ensuring the success of the global minimum tax regime.
[1] Press Release, Deloitte, BEPS Actions, Base Erosion and Profit Shifting (Apr. 9, 2015), https://www.deloitte.com/au/en/services/tax/analysis/beps-actions.html; Base erosion and profit shifting (BEPS), OECD, https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html (last visited Sept. 18, 2024).
[2] Id.; Andrew Lautz, The 2025 Tax Debate: International Taxes Under Pillars 1 and 2, Bipartisan Policy Center (Aug. 26, 2024), https://bipartisanpolicy.org/explainer/the-2025-tax-debate-international-taxes-under-pillars-1-and-2/.
[3] Id.
[4] Press Release, WTS Global, The US’ role in global adoption of Pillar 1 and Pillar 2 / ongoing conversations in the US on tax reform / a status update on US tax reform (Dec. 21, 2021), https://wts.com/global/publishing-article/20211221-usa-tp-nl~publishing-article/.
[5] Lautz, supra note 2.
[6] Alan Cole & Cody Kallen, Risks to the U.S. Tax Base from Pillar Two, Tax Foundation (Aug. 30, 2023), https://taxfoundation.org/research/all/federal/global-minimum-tax-us-tax-base/.
[7] Lautz, supra note 2; Press Release, U.S. Department of the Treasury, Statement from Secretary of the Treasury Janet L. Yellen on the OECD Inclusive Framework Announcement (Oct. 8, 2021), https://home.treasury.gov/news/press-releases/jy0394/.
[8] Daniel Bunn, Three Questions on Pillar One, Tax Foundation (July 25, 2022), https://taxfoundation.org/blog/oecd-pillar-one/.
[9] Daniel Bunn, Testimony: The OECD’s Pillar One Project and the Future of Digital Services Taxes, Tax Foundation (Mar. 7, 2024), https://taxfoundation.org/testimony/pillar-one-digital-services-taxes/; OECD, Pillar One – Amount B: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project (2024), OECD Publishing, https://doi.org/10.1787/21ea168b-en.
[10] Paola Tamma & Bjarke Smith-Meyer, Yellen says US is not ready to sign global tax treaty just yet, Politico (Oct. 16, 2023), https://www.politico.eu/article/janet-yellen-us-not-ready-to-sign-global-tax-treaty/; Yellen says India and China hindering ‘Pillar 1’ tax deal, Reuters (May 24, 2024), https://www.reuters.com/business/finance/yellen-says-india-china-hindering-pillar-1-tax-deal-2024-05-24/.
[11] Press Release, Dentons, Pillar One deadline has passed: new Digital Services Taxes on the horizon? (July 8, 2024), https://www.dentons.com/en/insights/alerts/2024/july/8/pillar-one-deadline-has-passed-new-digital-services-taxes-on-the-horizon.
[12] Id.
[13] Id.; David Lawder, Digital tax talks in G20 spotlight as US tariff threat looms, Reuters (July 23, 2024), https://www.reuters.com/technology/digital-tax-talks-g20-spotlight-us-tariff-threat-looms-2024-07-23/.
[14] Thomas Brosy, A Primer On The OECD’s Global Minimum Tax And How It Could Affect The US, Tax Policy Center (Mar. 5, 2024), https://www.taxpolicycenter.org/taxvox/primer-oecds-global-minimum-tax-and-how-it-could-affect-us/.
[15] Alan Cole & Cody Kallen, Risks to the U.S. Tax Base from Pillar Two, Tax Foundation (Aug. 30, 2023), https://taxfoundation.org/research/all/federal/global-minimum-tax-us-tax-base/.
[16] Id.
[17] Id.; Andrew Lautz, The 2025 Tax Debate: International Taxes Under Pillars 1 and 2, Bipartisan Policy Center (Aug. 26, 2024), https://bipartisanpolicy.org/explainer/the-2025-tax-debate-international-taxes-under-pillars-1-and-2/.
[18] Lawder, supra note 13.
[19] Lautz, supra note 17.
[20] Cole & Kallen, supra note 15.
[21] Geelen et al., Impact on global implementation of Pillar 2 if the US fails to adopt it, DLA Piper (July 20, 2022), https://www.dlapiper.com/en-us/insights/publications/2022/07/impact-on-global-implementation-of-pillar-2-if-the-us-fails-to-adopt/.
[22] Thomas Brosy, A Primer On The OECD’s Global Minimum Tax And How It Could Affect The US, Tax Policy Center (Mar. 5, 2024), https://www.taxpolicycenter.org/taxvox/primer-oecds-global-minimum-tax-and-how-it-could-affect-us/.
[23] What Does the Global Minimum Tax Deal Mean for Developing Countries?, International Institute for Sustainable Development (Feb. 10, 2022), https://www.iisd.org/articles/global-minimum-tax-deal/.
[24] Andrew Lautz, The 2025 Tax Debate: International Taxes Under Pillars 1 and 2, Bipartisan Policy Center (Aug. 26, 2024), https://bipartisanpolicy.org/explainer/the-2025-tax-debate-international-taxes-under-pillars-1-and-2/.
[25] David Lawder, Yellen defends global corporate minimum tax deal amid Republican criticism, Reuters (Apr. 30, 2024), https://www.reuters.com/world/us/yellen-us-negotiating-rd-tax-credit-part-global-tax-deal-2024-04-30/.
[26] GILTI, Thomson Reuters, https://tax.thomsonreuters.com/en/glossary/global-intangible-low-taxed-income (last visited Sept. 18, 2024).
[27] Geelen et al., Impact on global implementation of Pillar 2 if the US fails to adopt it, DLA Piper (July 20, 2022), https://www.dlapiper.com/en-us/insights/publications/2022/07/impact-on-global-implementation-of-pillar-2-if-the-us-fails-to-adopt/.
[28] Andrew Lautz, The 2025 Tax Debate: International Taxes Under Pillars 1 and 2, Bipartisan Policy Center (Aug. 26, 2024), https://bipartisanpolicy.org/explainer/the-2025-tax-debate-international-taxes-under-pillars-1-and-2/.
[29] Id.; Geelen et al., supra note 27.
[30] Alan Cole & Cody Kallen, Risks to the U.S. Tax Base from Pillar Two, Tax Foundation (Aug. 30, 2023), https://taxfoundation.org/research/all/federal/global-minimum-tax-us-tax-base/.
[31] Erica York, The Corporate Tax Rate Tug-of-War, Tax Foundation (Aug. 26, 2024), https://taxfoundation.org/blog/trump-harris-corporate-tax-proposals/.
[32] Id.
[33] Tracking 2024 Presidential Tax Plans, Tax Foundation, https://taxfoundation.org/research/federal-tax/2024-tax-plans/ (last visited Sept. 18, 2024).
[34] Id.
