POLICY NOTE

Uncertainties Hold Back Achievement of OECD Pillar 2

Goals

Antonio Tomassini* & Marica De Rosa**

The Organization for Economic Cooperation and Development (OECD) Pillar 2 that was designed to levy a minimum tax on multinationals in all of the
countries in which they operate still has many areas of uncertainty. These include issues from the more general uncertainties concerning the politics,
including the apparent desire not to adopt a multilateral convention for its implementation to the technical ones that revolve around the complexity of the
rules for calculating the effective tax rate (ETR) (which also increases compliance costs), with the risk of jeopardizing the Pillar 2 project’s objectives of
simplicity and uniformity. Moreover, the Biden Administration’s unequivocal support for Pillar 2 has not translated into action in the US Congress, and
any administrative steps the United States intending to undertake the implementation of Pillar 2 (in lieu of action in Congress) are also not evidenced.
Keywords: Pillar, base erosion, treaty, multilateral convention, effective tax rate, covered taxes, CFC, GILTI, BEAT, minimum tax, anti-avoidance, inclusive
framework, aggressive tax planning, GloBE, substance carve-out, incentives, top-up-tax, UTPR, STTR.

1 INTRODUCTION The Pillar 2 initiative is expected to help curb harmful tax

The OECD Pillar 2 initiative stems from the Actions of
the Organization for Economic Cooperation and
Development (OECD) Base Erosion and Profit Shifting
(BEPS) Project and aims at identifying a shared solution
to the base erosion and profit shifting to low-tax jur-
isdictions by generally reforming the international taxa-
tion rules to ensure that multinational enterprises
(MNEs) pay a fair amount of tax wherever they generate
profits in today’s digital and global economy. To achieve
this, the OECD/G20 Inclusive Framework designed a
set of rules to guarantee that large MNEs pay a mini-
mum level of tax regardless of the countries where they
are headquartered or in in which they operate. It seeks
to achieve this broadly with the operation of two
mechanisms: a subject to tax rule (STTR) and the global
anti-base erosion (GloBE) rules.1 The latter rules pro-
vide for the application of an effective minimum tax of
15% (global minimum tax) for companies with more
than EUR 750 million in turnover through two primary
interlinked rules, i.e., the income inclusion rule (IIR)
and the under taxed profit rule (UTPR).
competition among states and, at the same time, foster uni-
form anti-avoidance regulations such as the those on con-
trolled foreign companies (CFC) or the US Global Low-
Taxed Income (GILTI) and Base Erosion and Ant-abuse
Tax (BEAT) regimes from which Pillar 2 took inspiration.
2 STATUS OF PLAY AT OECD
On 20 December 2021, the OECD issued the Model
Rules2 that contain the basics to implement the GloBE.
They define the scope and establish the mechanisms for
determining the effective tax rate (ETR) on a jurisdic-
tional basis, the transition rules to be applied in the first
year when an MNE first comes into the scope of Pillar 2,
and the rules on the interaction of Pillar 2 with other tax
regimes (e.g., CFC and fiscal transparency). In March
2022, a companion Commentary on the Model Rules
was published providing interpretative guidance and a
number of concrete examples.
The OECD is also developing a framework of rules that
can facilitate the coordinated implementation of the

Notes
*
DLA Piper, Partner, PhD and Adjunct Professor in tax law. Email: antonio.tomassini@dlapiper.com.
**
DLA Piper, Head US-Italian desk NYC, LL.M international tax law. Email: marica.derosa@dlapiper.com.
1
On 1 Jul. 2021, the OECD/G20 Inclusive Framework on BEPS issued a statement providing that broad agreement had been reached on a two pillar approach to resolving issues
related to the taxation of the digital economy. The statement, titled Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy (the
‘2021 Statement’) included the agreed key components of Pillars One and Two. On 8 Oct. 2021, the 2021 Statement was updated (the ‘Oct. 2021 Update’) covering various rates
and thresholds, information on the scope of carve-outs, and a detailed implementation plan. The Oct. 2021 Update was agreed by 137 members of the Inclusive Framework.
2
Tax Challenges Arising from the Digitalization of the Economy – Global Anti-base Erosion Model Rules (Pillar Two), OECD / G20 Base Erosion and Profit Shifting Project, Inclusive
Framework on BEPS (20 Dec. 2021) (OECD 2021).

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© 2023 Kluwer Law International BV, The Netherlands
 Intertax
GloBE rules by both multinational and the tax authorities
of the various jurisdictions. On December 20, 2022 the
OECD released a first set of documents as part of the
implementation package including the following: (1) gui-
dance on Safe Harbours and Penalty Relief; (2) a public
consultation document on the GloBE Information Return;
(3) a public consultation document on Tax Certainty for
the GloBE Rules.
In particular, the guidance on Safe Harbors and
Penalty Relief is aimed at securing a soft landing on
the GloBE for MNEs introducing the use of CbCR
data as basis for the calculations and a penalty relief
regime which suggests the exemption of cases where
the MNE took a reasonable approach in the application
of GloBE.
3 EUROPEAN UNION DEVELOPMENTS
In December 2021, the European Commission circulated
a proposal for an EU Directive aimed at implementing
Pillar 2 in the Member States. It was published in a draft
form that contains the provisions (basically mirroring the
Model Rules) to be adopted by Member States ideally in
early 2024 in order to achieve a coordinated and timely
implementation. Almost a year after publication, the
Member States achieved unanimity in the European
Council to approve the directive. The proposed directive
is essentially in accordance with what has been established
within the OECD Framework setting the minimum ETR
of 15% and the relevant Model Rules. It expands the
scope (including MNEs without entities abroad with
same EUR 750 million threshold) and tends to the har-
monization of a binding IIR within the EU (as a conse-
quence, once implemented, there will less pressure on the
need for a UTPR).3 While the directive generally closely
follows the OECD Model Rules, it extends its scope to
large-scale (same EUR 750 million threshold) purely
domestic groups in order to ensure compliance with the
fundamental freedoms.
4 INITIATIVES OUTSIDE THE EU
Meanwhile, other jurisdictions outside the EU, including
Switzerland and the United Kingdom, have already pub-
lished draft regulations for the domestic implementation
of the GloBE rules. Additionally, jurisdictions such as
UAE and Bahrain that traditionally do not have a corpo-
rate tax system (direct corporate taxation is essentially
Notes
3
About the Proposal, see Ana Paula Dourado, The EC Proposal of Directive on a Minimum Level of Taxation in Light of Pillar Two: Some Preliminary Comments, 50(3) Intertax (2022).
4
For an illustration of possible combinations of the four interlocking types of rules, see Ana Paula Dourado, The Pillar Two Top-Up Taxes: Interplay, Characterization, and Tax
Treaties, 50(5) Intertax (2022).
5
OECD, Statement on a Two-Pillar Solution, supra n. 1.
6
The need for treaty amendments might limit the benefits coming from the STTR for developing countries, as highlighted by Ana Paula Dourado, Editorial: Pillar Two Model
Rules: Inequalities Raised by the GloBE Rules, the Scope, and Carve-Outs, 50(4) Intertax (2022).
184
non-existent) have announced that they will soon intro-
duce a minimum domestic tax of 15%. The big
unknown remains the United States that, although
Secretary Yellen had stated that they would come to an
understanding on implementation, for now, is still
struggling to give substance to their commitment espe-
cially after failing to pass Pillar 2 implementing
legislation.
5 STRUCTURE OF GLOBE RULES
The GloBE rules provide for the application of a mini-
mum tax rate of 15% for companies with consolidated
sales exceeding EUR 750 million. The main intercon-
nected mechanisms implementing them are4
(1) IIR that imposes a top-up tax on the parent com-
pany – ultimate parent company (UPE) – in relation
to profits that have not been subject to an appro-
priate level of taxation; and
(2) as a secondary mechanism, the UTPR. It operates as
a backstop to the IIR by providing an additional
mechanism (secondary rule) for collecting the top-up
tax in relation to the income of a constituent entity
(a subsidiary company in a given country) that falls
outside the scope of the IIR.
An additional (treaty) levy mechanism that precedes the
application of the GloBE rules, shall also be introduced
and is known as the STTR. This represents a minimum
standard unlike the GloBE rules that are merely a com-
mon approach. The STTR operates at the source jurisdic-
tion level on flows of income taxed in the recipient’s
jurisdiction at a nominal rate of less than 9%. It is treated
as a covered tax in the recipient’s jurisdiction under the
GloBE rules. The rule has been designed with the intent
to grant developing source countries a right to ‘tax back’
up to the agreed minimum rate when intragroup pay-
ments are structured to take advantage of low nominal
rates in the payee’s jurisdiction. It is a treaty-based rule
(to be implemented via a multilateral instrument5 (MLI)
to be worked out by the Inclusive Framework) that should
interact with any existing withholding rate in the relevant
treaty.6
It is worth noting a very significant change to the Pillar
2 rules that was introduced in the Model Rules of
December 2021, specifically, an optional and additional
levy mechanism that precedes the application of the IIR
and the UTPR that is referred to as the qualified domestic
 Uncertainties Hold Back Achievement of OECD Pillar 2 Goals

top-up tax (QDMTT). If a company’s ETR in a jurisdic-
tion is less than 15%, this instrument gives source jur-
isdictions the opportunity to collect the top-up tax
domestically instead of partly ceding its taxing power to
another jurisdiction through the IIR or UTPR.7 The
reasonable expectation is that most of the jurisdictions
will conform their approach in this direction and imple-
ment domestic minimum taxes that are compatible with
the GloBE rules in order to collect revenues that other
countries would otherwise collect.8
In the transition from the Blueprint (the first report
detailed by the OECD on Pillars One and Two) to the
Model Rules, a change (that was not properly contextua-
lized) of the under taxed payment rule to the UTPR
occurred. This has been lambasted by certain authors.9
The acronym remains the same but, in addition to chan-
ging diction, the substance of the allocation key changes
as well. Until the October version of the Blueprint,10 the
UTPR was only relevant for intercompany transactions
and required, in order for the rule to be applicable, that a
deductible intercompany payment be made by one con-
stituent entity to another that was resident in a jurisdic-
tion with taxation below 15%. With the Model Rules,
this precondition is removed. Therefore, the UTPR can
be applied without any transaction occurring between
the constituent entities. It is widely believed11 that this
has exacerbated the already existing incompatibility pro-
files with the OECD Model (and thus with treaties).
Hence, including the GloBE rules in an MLI, a convo-
luted route but one that would overcome the issue of
compatibility with bilateral treaties, becomes highly
significant.
The question of potential incompatibility with treaties
is generally compounded due to the nature of the GloBE
rules not being a pure anti-avoidance mechanism but a
new way to allocate the taxable base among states and to
secure a minimum effective rate of taxation. The GloBE
rules are founded on the need to curtail excessive base
erosion, yet aggressive tax planning is not a prerequisite
for their application. They are ‘new rules’, and perhaps
they should be viewed as a type of update to the old rules
embodied in treaties as a kind of response to the new
global economy. Viewed this way, the contrast with the
treaty provisions aimed at allocating taxing rights among
states (Article 7 and from 10–13 of the Model Tax
Convention) becomes clear.12 The GloBE rules attempt a
general reform of the international tax system inspired by
the single tax principle13 according to which taxes must
be paid at least once thereby avoiding double non-
taxation.
Given that at least until the impasse within the
European Council is overcome, the GloBE rules will be
implemented solely through domestic legislations, and
the treaty incompatibility problem will be magnified.
6 INTERACTION OF THE CFC RULES
WITH THE GLOBAL MINIMUM TAX
Under the Model Rules, whether the IIR or UTPR is
imposed on income earned in a given jurisdiction by
CFCs or Permanent Establishments of an MNE depends
on that country’s ETR with respect to that income. In
determining that ETR, the Model Rules take into account
the ‘covered taxes’ imposed on such income. These include
corporate (or equivalent, i.e., substitutive, withholding)
taxes imposed by the CFC jurisdiction provided they are
recorded in the financial statements (indirect, excise, and
digital taxes are not covered taxes). Additionally, under a
special rule, taxes (CFC taxes) imposed by the jurisdiction
of the parent entity on income of a CFC under a CFC
regime are also considered covered taxes (i.e., allocated to
the CFC’s jurisdiction for purposes of determining its
ETR) subject to the following limitation with respect to
passive income. The CFC taxes treated as covered taxes are
limited to the lesser of (1) the amount of CFC taxes
attributable to the CFC’s passive income and (2) the
CFC jurisdiction’s ‘top-up tax percentage’ multiplied by
the CFC’s passive income that is taken into account in the
parent jurisdiction’s CFC regime. The top-up tax percen-
tage equals 15% less the CFC jurisdiction’s ETR (not
taking into account CFC taxes treated as covered taxes).
This limitation ensures that the amount of CFC taxes
treated as covered taxes may not exceed a maximum of

Notes
7
For in depth considerations on key design issues of such domestic minimum taxes regimes and their implications for the application of the GloBE rules, see Noam Noked,
Designing Domestic Minimum Taxes in Response to the Global Minimum Tax, 50(10) Intertax.
8
M. Baraké, P. E. Chouc, T. Neef & G. Zucman, Revenue Effects of the Global Minimum Tax Under Pillar Two, 50(10) Intertax. The authors present an empirical simulation of
the revenue effects of the GloBE minimum tax, demonstrating the different impact on revenues based on the country that gets to collect them according to the ordering
rules.
9
C. Plunket, What‘s in a Name? The Under Taxed Profits Rule, Tax Notes International (28 Mar. 2022). S. Picciotto, Formulary Approach: The Last Best Hope for MNEs, Tax Notes
International (31 Oct. 2022). J. Vanderwolk, The UTPR Disregards the Need for Nexus, Tax Notes International (3 Nov. 2022). For a different position see A. Christians & T.
Diniz Magalhães, Undertaxed Profits and the Use-It-or-Lose-It Principle, Tax Notes International (7 Nov. 2022), wherein the authors defend Pillar 2’s UTPR by arguing that it
is supported by fundamental principles of international tax law and economic logic.
10
Tax Challenges Arising from Digitalization – Report on Pillar Two Blueprint, OECD / G20 Base Erosion and Profit Shifting Project, Inclusive Framework on BEPS (OECD
2020).
11
J. Li, The Pillar 2 Undertaxed Payments Rule Departs from International Consensus and Tax Treaties, 105 Tax Notes Int’l (21 Mar. 2022).
12
See Dourado, supra n. 5, at 395.
13
See S. Avy-Yonah, Who Invented the Single Tax Principle?: An Essay on the History of US Treaty Policy, 59(2) N. Y. L. Sch. L. Rev. (2015).

185
 Intertax
15% of the CFC’s ‘passive income’. It should be noted in
this regard that the concept of ‘passive income’ under the
Model Rules may be narrower than under the CFC
regimes of most countries. Any CFC taxes in excess of
this maximum amount remain covered taxes in the parent
company jurisdiction. As a practical matter, these excess
CFC taxes that remain in the parent jurisdiction become a
non-factor for Pillar 2 because there is no other practical
way to utilize them under it. This result, i.e., excess CFC
taxes remaining in the parent jurisdiction, arises when the
parent jurisdiction imposes tax at a rate in excess of the
Pillar 2 minimum rate of 15% thus the excess of CFC
taxes just represent this tax rate difference. The objective
of Pillar 2 is to establish a minimum but not a maximum
tax, and any jurisdiction’s taxes in excess of the minimum
rate are not intended to be reallocated to other jurisdic-
tions under the Pillar 2 framework. Additionally, the CFC
rules having an anti-avoidance purpose (which is different
from the GloBE ones) needs to be coordinated with the
GloBE rules but would probably be maintained by states
that are intending to protect their right to secure higher
taxation.
7 TREATMENT OF TAX INCENTIVES
Another issue at the centre of the international debate14 is
the characterization of tax incentives in this new, to say the
least, complex paradigm of the Pillar 2. Domestic tax
incentives, in fact, are substantially relevant in the
calculation15 of the tax for its purposes. Specifically, the
Model Rules consider only those tax credits for which
refunds can be claimed from the relevant tax authorities
within four years as qualified incentives for purposes of
computing the minimum ETR.16 The GloBE rules treat
a qualified credit in the same way as income or a subsidy
which means that the credit is taken into account in the
denominator of the calculation of the ETR and therefore
does not directly reduce the taxes paid in the year. All other
tax credits that do not qualify under the Model Rules, on
the other hand, are treated as an actual reduction in covered
taxes meaning that they reduce the numerator of the ETR
formula and thus the ETR itself. The risk is that the use of
the non-qualified tax incentives – because they reduce
covered taxes – may consequently reduce the constituent
entity’s ETR in its home country below 15% even though
it may be well above 15% for local tax purposes. This
would result in the need to apply a top-up tax in a country
that already imposes a high tax rate. Governments would
then quickly realize that such a novelty will reduce their
Notes
14
See among others, M. Herzfeld, Tax Credits and Incentives Under a Global Minimum Tax Regime, Tax Notes Today International (27 Jun. 2022).
15
M. P. Devereux, M. Simmler, J. Vella & H. Wardell-Burrus, What Is the Substance-Based Carve-Out Under Pillar 2? And How Will It Affect Tax Competition?, Oxford
University Centre for Business Taxation (17 Nov. 2021).
16
Article 3.2.4. Model Rules, above. Art. 10, para. 134 through 138 Tax Challenges Arising from the Digitalization of the Economy – Commentary to Global Anti-base Erosion Model
Rules (Pillar Two) (OECD 2022).
186
ability to offer credits and other incentives for boosting
their economies. Tax credits are one of the primary tools to
encourage investment according to a mantra that has else-
where been referred to as a ‘tax stimulus’.
In any case, Pillar 2 does not eliminate the possibility of
taking advantage of tax incentives; indeed, it would not be
compatible with the OECD mandate, however, their benefit
can no longer be established ex ante and, in order to assess
their overall effect, a modelling exercise applied to each
specific case might be necessary. After the publication of
the Model Rules in December 2021, a number of business
organizations submitted comments on the provision, and
discussions with governments and the OECD are ongoing.
In October 2022, the OECD released a new report on Pillar 2
entitled, ‘Tax Incentives and the Global Minimum
Corporate Tax’ providing insights into jurisdictions’ future
use of tax incentives. The report was addressed to govern-
ments and tax authorities and proposes several recommenda-
tions as well as a number of tax policy considerations.
Although the OECD’s guidance is meant to provide a
basis for jurisdictions to perform their own analysis of
their tax incentives, the report may be a beneficial tool
for assessing the potential impact of Pillar 2 on the tax
profile of multinational companies and help shape their
strategy as the implementation of Pillar 2 approaches.
Many jurisdictions are already in the process of revisiting
their tax incentive framework ahead of the contemplated
implementation of Pillar 2. Public consultation opportu-
nities are likely to arise affording multinationals the
opportunity to provide input on policy decisions within
jurisdictions implementing the GloBE rules.
The key takeaways from the report are: (1) certain tax
incentives are less affected by Pillar 2; (2) some jurisdic-
tions may focus more heavily on providing these incen-
tives in order to continue attracting foreign investments;
and (3) the OECD report does not provide clarity on the
politically sensitive topic of the treatment of refundable
versus non-refundable tax credits. In fact, the OECD
acknowledges the difference of treatment under the
GloBE rules. It is expected that further political debate
will follow related to this topic.
8 SUBSTANCE-BASED CARVE-OUT
AND INCENTIVES
At the same time, while it is true that tax incentives
reduce the ETR, it should be noted that the substance-
based carve outs might provide some reprieve. In fact, the
deduction (based on a formula) provides for a certain value
 Uncertainties Hold Back Achievement of OECD Pillar 2 Goals

to be attributed to factors representing the ‘substance’ of
the activities carried out in the local jurisdiction and
essentially grants a subsidy for labour costs and invest-
ments in tangible assets for the jurisdictions where MNEs
have operating activities. At the same time, it does not
reward (or penalize) companies that generate profits pri-
marily from the use of intellectual property and other
intangible assets. A corollary (the authors do not know
how intended) of the substance carve-out is that the Pillar
2 would also have an impact on the allocation of business
types to certain jurisdictions rather than others.
US Treasury officials have indicated that, although the
GILTI in its current form is not a qualifying IIR, as a CFC
regime, it is a covered CFC tax regime in principle under
the model rules, however, there is still a need for the US
Treasury to administratively design a mechanism for allo-
cating the GILTI tax among US parent companies’ CFCs.
In absence of US tax legislation adopting Pillar 2, treating
the GILTI as a covered CFC tax regime substantially
reduces the mismatch between the US tax system and
Pillar 2. US Treasury officials seem to take the position
that, with the following definition, a CFC tax regime
under the Model Rules should cover the GILTI:

9 THE US GILTI, CAMT, AND THE a set of tax rules (other than an IIR) under which a
INTERPLAY WITH PILLAR 2 direct or indirect shareholder of a foreign entity (the
controlled foreign company or CFC) is subject to cur-
9.1 GILTI: Is the GILTI a Qualifying CFC Tax? rent taxation on its share of part, or all of the income
earned by the CFC, irrespective of whether that income
The GILTI under current law is incompatible with the is distributed currently to the shareholder.
Pillar 2 model rules for a number of reasons: (1) the
GILTI17 tax rate is less than the Pillar 2 minimum rate
Although the GILTI is, by statute, a tax on blended
of 15%; (2) Pillar 2 requires a conforming IIR to be based
income of a US parent company’s CFCs,18 per US
on a country-by-country determination, yet the GILTI
Treasury officials, it is still a current tax on the direct or
regime aggregates the income of all controlled foreign
indirect shareholder of all of the CFCs for which their
corporations owned by a US shareholder regardless of
income is so blended that is not itself disqualifying. From
jurisdiction and thus allows the blending of income
the authors’ discussions with OECD personnel directly
from high and low tax jurisdictions; (3) the amount sub-
involved in the design and implementation of Pillar 2,
ject to the GILTI tax is reduced by a deemed return of
it was ascertained that they agree with the US Treasury
10% of the tax carrying value of depreciable tangible
position and indicate that they are working cooperatively
property Qualified Business Asset Investment (QBAI)
with them on designing an allocation key for the GILTI.
used to produce the GILTI; and, finally, (4) the GILTI
What this actually means is that the OECD is working on
is calculated based on tested income that is a purely US
an additional layer of rules so that the United States
tax law concept while Pillar 2 calculations are based on
remains part of the Pillar 2 framework.
book income.
Assuming the US Treasury (in coordination with
The Biden Administration engaged with members of
OECD Secretariat) is able to design such an allocation
the OECD and with the OECD Secretariat to drive the
key for the GILTI tax, that paid by a US parent company
current consensus around the Pillar 2 minimum rate with
would qualify as a covered tax in the jurisdictions of the
a commitment to pass tax reform to conform the GILTI
relevant CFCs thereby increasing the respective ETRs of
with Pillar 2. In fact, the Build Back Better legislation in
the CFCs.19 Once such an allocation key has been pub-
2021 passed by the US House of Representatives but not
lished, it will be interesting to see whether some of the
taken up by the US Senate included changes that would
countries involved in the Inclusive Framework raise objec-
have conformed the GILTI to Pillar 2, i.e., to a qualifying
tions and how these are resolved. For now, the impression
IIR. Unfortunately, the US tax reform legislation passed
remains that the US Treasury and the OECD Secretariat
recently by the US Congress, i.e., the Inflation Reduction
do not anticipate any such problems.
Act, did not include the changes to the GILTI that were
Some observers have commented that treating the
included in the Build Back Better legislation passed by
GILTI as a covered CFC tax but not as a qualifying
the US House of Representatives in 2021.
IIR tax creates an unfair cream-skimming opportunity

Notes
17
GILTI, which stands for global intangible low taxable income, is the regime of CFC c.d. catch-all of the US tax system that was introduced in 2017 to subject to tax all CFC
income of US parent companies that, until then, had not been intercepted by the regime CFC Subpart F with the result that 100% of the income of a CFC (both assets and
liabilities) is subject to taxation. Unlike the scheme Subpart F that levies tax on CFCs at a regular rate of 21% with a deduction for foreign tax credits, the GILTI is levied at
an ETR of 10.5% (13.125% following the application of limitations on foreign tax credits). In addition, compared to other CFC regimes, the GILTI and the related tax
payable by the US parent company are not determined country by country. Instead, it allows the offset of income and losses of all CFCs of a US parent company regardless of
the jurisdiction of incorporation.
18
A. Velarde, Treasury Defends GILTI as Good Pillar 2 Regime, Tax Notes Today International (16 May 2022); R. S. Avi-Yonah & B. Wells, Pillar 2 and the Corporate AMT, Tax
Notes Today International (8 Aug. 2022). R. Cassanos, NYSBA Tax Section Focuses on U.S. Tax Implications of OECD Reform, Tax Notes Today International (22 Jul. 2022).
19
S. Soong Johnston, OECD Working Party Considering Options to Allocate CFC Taxes, Tax Notes Today International (29 Jun. 2022).

187
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for the United States, i.e., unfairly gives the United
States the first opportunity to tax profits that could
otherwise be collected by source countries, including
under Pillar 2.20
This line of commentary appears to be based on a
partial view of the structure of the US international tax
system and the structure of the Inclusive Framework as
reflected in the model rules as distilled in the following
paragraphs.
9.2 GILTI Does Not Override the Primary
Taxation Right of the Source Country
The structure of the US international tax system respects
the primary right of source countries to impose corporate
income tax at rates only such countries determine. When
low tax source countries exercise this primary tax right to
impose corporate income tax at rates below the GLOBE
minimum rate, they do so by pursuing specific tax com-
petition policies. Post-Pillar 2 implementation, these low
tax countries retain this primary taxing right and indeed
could elect to increase their regular corporate income tax
rates to be at least equal the GloBE minimum rate. Doing
so should already eliminate any concern that the United
States or any other parent jurisdictions could engage in
inappropriate planning in order to circumvent the GloBE
ordering rules. However, it could be argued that, in
general, those countries in need of competitive tax rates
are the developing countries that might see foreign capital
investment directed elsewhere if their tax systems no
longer offer certain benefits.
The structure of the US international tax system
respects the primary right of source countries to impose
corporate income tax by incorporating a foreign tax
regime in both of the United States’ CFC
regimes – Subpart F and the GILTI. In calculating the
GILTI tax (Subpart F tax, for that matter), the United
States allows a foreign tax credit (subject to certain lim-
itations) for source country corporate income taxes and for
source country withholding taxes on income taxed under
the GILTI regime. Indeed, a scenario could be envisioned
where the GILTI tax could be satisfied in its entirety by
foreign tax credits when the source countries’ average tax
rates are at least equal to or exceed the GILTI tax rate. In
such a scenario, the United States would have no residual
tax to collect on the GILTI income.
Of course, it could be argued that the United States,
like any other jurisdiction that imposes a CFC tax, is
situated at the front of the queue when taxing its CFCs’
undertaxed income (i.e., before a QDMTT, IRR, or
Notes
20
Some notable commentaries on the GLOBE ordering include: Mindy Herzfeld CFC Rules, 175 Tax Notes Fed. (2 May 2022), and Heydon Wardell-Burrus Should CFC
Regimes Grant a Tax Credit for Qualified Domestic Minimum Top-Up Taxes?, 106 Tax Notes Int’l (27 Jun. 2022).
21
Treasury Regulations ss 1.861–8 and 1.861–10T.
188
UTPR) ahead of other jurisdictions looking to the revenue
to impose additional tax within the Pillar 2 framework.
However, under the Model Rules, the source country has
the opportunity to impose a QDMTT; if the source coun-
try fails to impose a QDMTT, then other countries may
impose the UTPR or IIR. The United States (having
failed to adopt an IIR) cannot, in principle, even mini-
mally benefit from the potential Pillar 2 top-up tax.
A common thread in commentaries suggesting that
treating the GILTI as a qualifying CFC tax is a calculated
move by the United States attempting to invert the
ordering rule under Pillar 2 and thereby achieve an advan-
tage over the rest of the world is the assumption that
perhaps the GILTI tax rate will be increased in order to
capture any tax that could otherwise be collected by
source countries under QDMTT regimes. On the contrary,
the United States has recently doubled down on the
GILTI statutory tax rate of 10.5% by not changing the
statutory rate in its recently passed Inflation Reduction
Act, thus it is a reasonable expectation that the GILTI tax
that the United States collects is not going to be increased
with a potential top-up tax opportunity under Pillar 2.
9.3 Why the GILTI Tax as a Covered CFC Tax
(But Not a Compliant IRR) Is Not an
Advantage for US MNEs
Another reason why it is difficult to affirm that treating
the GILTI as a CFC tax regime (but not a qualifying IIR)
creates an advantage for the United States is the quanti-
tative factor tied to how US MNEs are required to calcu-
late foreign tax credits. US MNEs, it appears, would not
benefit materially by treating the GILTI as a CFC tax
regime (but not a qualifying IIR) because, under the
Model Rules, the covered CFC tax component of the
GILTI tax would be computed assuming that it is charged
at the statutory rate less available Foreign Tax Credits
(FTCs). However, because of the expense allocation
mechanism in the United States FTC regime, US MNEs
end up paying a higher GILTI effective rate, meaning that
only a portion of a US MNE’s GILTI tax will be available
as Pillar 2 covered tax.
Ordinarily, the United States allows FTCs limited to
the US corporate tax rate on foreign taxable income
(foreign source income multiplied by the US corporate
tax rate). Under this approach, if the source country’s
corporate income tax rate equals or exceeds the US corpo-
rate income tax rate, in principle, the United States
should not impose any residual tax on those profits
under its CFC regimes. The expense allocation rules21
 Uncertainties Hold Back Achievement of OECD Pillar 2 Goals

taken into account in calculating the FTC limitation,
however, modify this general approach in a manner that
results in US MNEs paying residual US tax even when the
source country corporate income taxes equal or exceed the
US corporate income tax rate.
The expense allocation rules require that, for purposes
of calculating the US FTC, certain US expenses (interest,
research and development (R&D), and stewardship
expenses) of the US parent company should be partially
reclassified as expenses incurred with respect to foreign
source income as they are fungible expense incurred by the
parent company to support its activities and activities of
foreign subsidiaries.22 Hence, the US expenses of the
parent company allocated to foreign source income reduce
its amount that is taken into account in calculating the
US foreign tax credit limitation. Although this does not
change the amount of foreign source taxable income, it
decreases the FTC limitation, resulting in an MNE bear-
ing residual GILTI tax even when the GILTI income has
been subject to source country tax rates higher than the
US corporate income tax rate.
Formally, the Model Rules and commentaries do not
(and the authors have not heard that there is any OECD
proposal that would expand the Model Rules to do so) take
into account the US FTC expense allocation rules as such
rules are not common in other countries. Additionally, it is
unlikely that any further development of the implementa-
tion framework would consider such arcane provisions and
factor them in when calculating the amount of the GILTI
tax treated as a covered CFC tax. Stated otherwise, with
expense allocation rules, US MNEs operating in countries
with tax rates at least as high as the GILTI statutory rate
(10.5%) could pay the GILTI tax at an effective rate sub-
stantially higher than 10.5% and yet still be subject to a
top-up tax because the Pillar 2 starting point is not the
higher effective GILTI rate but the GILTI statutory rate.
This would unfortunately change the character of the Pillar
2 top-up tax from one designed to achieve a minimum rate
to, effectively, a surtax.
9.4 Subpart F, a Traditional CFC Rule
The Subpart F regime is the historic US CFC regime that
was introduced in the 1960s to prevent the deferral of US
taxation on certain types of passive income of US parent
companies’ CFCs. The GILTI regime, in contrast, was
established in 2017 to prevent the deferral of US taxation
of all income of CFCs that was not previously taxed under
the Subpart F regime. A key difference between the
Subpart F regime and the GILTI regime is that the former
applies on a CFC-by-CFC basis thus there is no
aggregation or blending such as that occurring under
the GILTI regime. This CFC-by-CFC determination
makes a rather straightforward application of the Pillar 2
jurisdiction-by-jurisdiction framework. Additionally, US
tax on Subpart F income is imposed at the regular corpo-
rate income tax rate of 21%, i.e., does not have the 50%
deduction nor the QBAI benefit. Notably, there has not
been any commentaries suggesting that the Subpart F
regime should not be a qualifying CFC regime that trans-
lates into a covered tax for the GloBE calculation.
9.5 Corporate Alternative Minimum Tax
(CAMT): Could the Tax Be Considered
a QDMTT?
The CAMT that imposes a 15% rate on the book earnings
of US corporations (and foreign-parented multinationals
that include at least one US domestic corporation (a
Foreign Group) with average financial statement income
(overaged over three years) in excess of USD 1 billion
appears to be another layer of non-conformity of the US
tax rules with Pillar 2. On one hand, the CAMT is applied
on financial statement income which brings the US mini-
mum tax much closer to the OECD rules in terms of the
tax base. However, on the other hand, it does not provide
for a country-by-country allocation of such additional
taxes but instead is based on a blended consolidated rate
test. As a result, it appears that the CAMT would create
the same concerns as the GILTI in not having a country-
by-country allocation mechanism and would require a
similar creative solution from the OECD.23
Another important and politically sensitive reason why
the CAMT would not be a Pillar 2-styled QDMTT is that
the AMT allows the exclusion from the calculation of the
general business credits, R&D credits, low-income hous-
ing tax credits, and the new renewable energy incentives
that were added as a part of the Inflation Reduction Act.
Although, in its design and intent, it was never supposed
to be a QDMTT, it is difficult not to ask why the United
States missed another opportunity to reform the architec-
ture of its tax system so as to embrace the Pillar 2
framework.
10 SCENARIOS AND PROSPECTS
Pillar 2 is a framework agreement by which the signatory
countries have defined a ‘common approach’. The Model
Rules represent mere guidelines (a soft law initiative just
like many others in the past few years) for possible
domestic legislation but do not exercise any binding effect

Notes
22
Cody Kallen Expense Allocation: A Hidden Tax on Domestic Activities and Foreign Profits, Tax Foundation (26 Aug. 2021).
23
For different perspective on the interpretation of CAMT in the context of Pillar 2 see Reuven S. Avi-Yonah, Bret Wells Pillar 2 and the Corporate AMT, Tax Notes
International (8 Aug. 2022).

189
 Intertax
in the fashion of international agreements. After all, the
OECD itself made it clear in October 2021 that, while
Pillar 1 will be the subject of an MLI, the implementation
of Pillar 2 is primarily at the discretion of individual
countries. However, given the complications outlined
above, the members of the OECD Inclusive Framework
might want to consider the adoption of an MLI also for
Pillar 224 as a more effective solution to ensure coordina-
tion and consistent implementation of the GloBE rules. In
fact, proceeding with the implementation of Pillar 2 with-
out an MLI would lead to uncertainty and a surge of tax
litigation. Indeed, the risks of double taxation due to
possible conflicting qualification and interpretation of
various transactions would increase whenever the defini-
tions provided by the Model Rules are not in accordance
with the domestic ones (e.g., CFC rules, QDMTT, rules
for allocation of income to permanent establishments and
on transparent entities). This seems to be contrary to the
objectives set forth by the OECD. To this purpose, the
latest document released for public consultation by the
OECD on Tax Certainty for the GloBE Rules, considered
the proposal for a mechanism similar to ICAP
(International Compliance Assurance Programme) to pre-
vent disputes, as well as instruments for dispute resolution
such as an MLI or a domestic provision. Unfortunately,
even if probably the best option, the procedures for the
adoption of an MLI are quite complex and are likely to
lengthen the amount of time for the implementation of
Pillar 2. The only avenue for acceleration, therefore,
Notes
24
M. Lebovitz, G. B. Wilcox, W. S. Payne, L. Giardelli, J. F, Lopez Valek & M. K. Hall, If Pillar 1 Needs an MLI, Why Doesn’t Pillar 2, Tax Notes International (29 Aug.
2022).
25
For the controversial details of the directive, see Ana Paula Dourado, Is There a Need for a Directive on Pillar Two?, 50(6&7) Intertax (2022).
190
could be the adoption of the EU Directive on global
minimum tax and the United States taking a clear posi-
tion pro Pillar 2.25
Concisely, the interpretative and application aporias
from both a policy and a technical perspective are many
and only partially addressed in this contribution.
Certainly, there is a need for corrective mechanisms,
for special regimes, and incentives even if this is to
the detriment of simplicity. The logic for complex
corrective mechanisms seems to have inspired the
GloBE rules themselves when providing a substance
based carve-out, i.e., an exclusion for an amount of
income that is at least 5% of the book value of tangible
assets and payroll. This exclusion could actually have
very significant impacts, including possibly neutralizing
the minimum tax.
If the main objective of the GloBE is to avoid arbi-
trary profit shifting and create a mutually advantageous
situation, the introduction of exceptions, perhaps gov-
erned by local regulations, may undermine the objective
and expose companies to an excessive increase in com-
pliance costs and likely require the use of ad hoc software
and complex country-by-country audits of the many
variables related to the minimum tax framework. To
this purpose, it is paramount (also on the baseof the
consultation document on the GloBE Information
Return) to establish a clear outline of the information
to be collected and reported by MNEs and identify
possible simplification strategies.