What Is the Substance-Based Carve-Out under Pillar 2? And How Will It Affect Tax Competition?

Key messages:

The success of the recently agreed international tax reform hinges on a technical issue in the design of the Pillar 2 global minimum tax

Pillar 2 ensures the minimum taxation of ‘residual’ (e.g. non-routine) profts at 15%. ‘Routine’ proft is not subject to Pillar 2.

The effects depend on which of two possible options is used: 

• Option 1 removes the incentive to compete below a liability of 15% of residual profts and puts a floor to tax competition 
• Option 2 still maintains an incentive for governments to compete by reducing their taxes – possibly all the way to zero.

Consequences for tax competition depend on the technical details to be revealed.

Announcement containing more details of the proposal are expected shortly.