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Diverging paths
Pillar One involves a commitment of Inclusive Framework jurisdictions to implement the agreed rules for dividing taxing rights over global business income through changes to their tax laws and treaties. This cannot be accomplished with incremental implementation over time – the new approach to nexus and profit allocation can take effect only when the necessary rules have been put in place by a critical mass of countries. Moreover, this unprecedented level of coordination among countries will be equally crucial to the proper operation of the new rules on an ongoing basis.
In contrast, Pillar Two takes the form of a common approach, with Inclusive Framework jurisdictions under no obligation to implement global minimum tax rules. Countries that choose to do so, however, should use the agreed approach and participating countries agree to accept the application of these rules by other countries. This means that implementation of global minimum tax rules is likely to play out over time in countries around the world and variation in the details of the rules across countries can be expected. That said, some countries have been vocal regarding their intention to move forward quickly with minimum tax rules, including the United States where legislation reflecting Pillar Two design concepts is already advancing through Congress with the strong backing of the Biden administration. Moreover, as more countries put global minimum tax rules in place, multilateral coordination will be necessary to prevent overlapping rules that result in taxation beyond the agreed minimum level.
Tax is and always will be a fundamental matter of sovereignty. Nevertheless, multilateral engagement is a component of countries’ individual fiscal policies – one that is becoming more important than ever. Given the necessity of multilateral cooperation and coordination among countries in the new global tax environment, the role of the G20 will not end with final agreement on Pillar One and Pillar Two. As the agreed rules are implemented and become operational in countries around the world, the ongoing involvement of the Inclusive Framework will be essential to the stability of the new international tax architecture.
At a minimum, the future work of the Inclusive Framework must include:
- Development of guidance on the new rules to facilitate common interpretations
- Support for the development and operation of robust new multilateral dispute prevention and resolution processes
- Comprehensive peer review and monitoring
- Periodic review and evaluation of the effectiveness of the new rules.
In all these workstreams, consultation with the business community will be critically important. Affected businesses should have the opportunity to provide feedback on the operation of the new rules across countries and on how the dispute prevention and resolution processes can be improved.
Tax administrations and taxpayers alike need certainty in the tax system. Managing through dramatic change calls for radical collaboration. With the leadership of the G20, government tax policymakers around the world, working together with business stakeholders, can reach the shared objective of a robust global economy for all.