Pillar 2 Misery
It is well known, over ten years since its inception, that the world, and notably the OECD, has been vigorously combating tax avoidance. This is a commendable but complex project. Regardless, as of 2024, we can conclude that the BEPS project has been quite successful. Around 150 countries, which account for approximately 75% of the total countries in the world and over 90% of the global economy, have endorsed it. All these countries have joined the so-called IF, or Inclusive Framework. In short, this means that these countries conform to BEPS. Should they fail to do so adequately, they end up on a grey or black list. Countries do not appreciate this, partly because they may be economically boycotted by many other countries. This blacklisting approach is a necessary component of BEPS because the OECD cannot enforce regulations—it is not a legislator. The EU, however, adopts many of the OECD's measures into legislation.
With all these rules, the fight against tax avoidance is well underway. However, a significant side effect is that tax laws have become far more complex. The OECD has now embraced this process wholeheartedly: a few years ago, they proposed two significant new measures, namely the introduction of the so-called Pillar 1 and Pillar 2. To get straight to the point: as far as Pillar 2 is concerned, it’s not a good idea, as I will explain below. Pillar 1 is somewhat different: it aims to redistribute the international taxing rights over multinational profits, allocating more profits to the countries where the ultimate consumers reside, the so-called market countries. This is particularly important for digital services and companies offering such services: the Googles, Bol.coms, and Alibabas of the world. However, it is obvious that countries like the USA and China do not favor this. They would collect less corporate tax and thus oppose the implementation of Pillar 1. It is therefore very doubtful whether it will ever come to fruition.
Back to Pillar 2; I have previously addressed this in my December 2022 column, where I consigned this plan to the dustbin. Pillar 2 is more commonly known as the 15% minimum corporate tax for multinationals. The idea behind it is sound, but the implementation is flawed. Many experts and countries now agree on this. The system is far too complex and contains numerous fiscal errors. My cautious expectation is that by the end of this decade, Pillar 2 will no longer exist or will have been significantly restructured.
To be clear: it is appropriate for multinationals to pay a fair share of taxes. From that perspective, a minimum tax is a good point. However, there are a few significant caveats. Firstly, most of the world has already implemented BEPS, targeting tax avoidance, which has significantly increased the tax burden on corporate profits in recent years. Therefore, the significance of Pillar 2 is not as great. Secondly, the vast majority of countries levy a corporate tax far exceeding 15%. Thirdly, it is the most complex tax system we know globally. This complexity extends not only to the rules themselves but especially to their implementation. Many countries will not be able to implement Pillar 2 because they lack the expertise and capacity for enforcement. The significant problem concerning complexity is that countries must "monitor each other" regarding the corporate taxes of multinationals: if one country undercollects, an additional tax must be imposed, sometimes by that country but sometimes by another country. Multinationals are typically established in many countries, and each of those countries must, in fact, verify compliance with the minimum rate; if not, it must be determined which country will levy the additional tax. With the complex structures of multinationals, often comprising dozens if not hundreds of group companies worldwide, this is virtually unworkable. Additionally, this involves a second corporate tax alongside the ordinary corporate tax, which remains in place for non-multinational enterprises. Achieving a minimum corporate tax could have been much simpler by "obliging" countries to comply and placing them on a deep black list if they fail. Countries especially do not want to be on a black list.
What is the current status? In the EU, Pillar 2 has been transposed into a directive that must already be implemented. Wisely, five member states have secured a postponement until 2030. If all goes well, this postponement will turn into a cancellation. The status of many other member states is unknown, but it is clear that it has not yet been implemented. The Netherlands has done so and has simultaneously imposed it on the BES Islands, likely because they have no corporate tax and certainly not because many multinationals are established in the BES. To my considerable surprise, Curaçao has also recently introduced a Pillar 2 package: for enthusiasts, this includes 68 pages of legal text and 276 pages of explanatory notes! It would be logical if the explanatory notes first indicated how many multinationals in Curaçao will be affected and why such a dramatic fiscal measure is being implemented. Even the Americans are not participating in Pillar 2. Therein lies the significant risk of this entire project: it is still highly uncertain whether many global players will join. If not, the project is bound to fail. In its current form, we need not lament this. Interestingly, another minimum tax is looming, but this time for very wealthy individuals. I will return to this soon, but my opinion is clear: a good initiative but wrong in form.
Peter Kavelaars is a Professor of Fiscal Economics at Erasmus University Rotterdam and Of Counsel at Deloitte Dutch Caribbean.
