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

Author

Listed:
  • Michael P. Devereux
  • Martin Simmler
  • John Vella
  • Heydon Wardell-Burrus

Abstract

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.

Suggested Citation

  • Michael P. Devereux & Martin Simmler & John Vella & Heydon Wardell-Burrus, 2021. "What Is the Substance-Based Carve-Out under Pillar 2? And How Will It Affect Tax Competition?," EconPol Policy Brief 39, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:econpb:_39
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    File URL: https://www.ifo.de/DocDL/EconPol_Policy_Brief_39_Pillar2.pdf
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    Cited by:

    1. Chen, Xuyang, 2024. "The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition," MPRA Paper 121893, University Library of Munich, Germany.
    2. Bruno Casella & Baptiste Souillard, . "A new framework to assess the fiscal impact of a global minimum tax on FDI," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.

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