Tax Harmony: The Promise and Pitfalls of the Global Minimum Tax

Michigan Journal of International Law Michigan Journal of International Law

Volume 43 Issue 3

2022

Tax Harmony: The Promise and Pitfalls of the Global Minimum Tax Harmony: The Promise and Pitfalls of the Global Minimum

Tax Tax

Reuven Avi-Yonah

University of Michigan Law School

Young Ran (Christine) Kim

Cardozo School of Law

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Tax Harmony: The Promise and Pitfalls of the Global Minimum Tax

, 43

MICH. J. INT'L L. 505 (2022).

Available at: https://repository.law.umich.edu/mjil/vol43/iss3/2

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505

TAX HARMONY:

THE PROMISE AND PITFALLS OF THE

GLOBAL MINIMUM TAX

Reuven Avi-Yonah

and Young Ran (Christine) Kim

†

BSTRACT

The rise of globalization has become a double-edged sword for

countries seeking to implement a beneficial tax policy. On one hand,

there are increased opportunities for attracting foreign capital and

the benefits that increased jobs and tax revenue brings to a society.

However, there is also much more tax competition among countries

to attract foreign capital and investment. As tax competition has

grown, effective corporate tax rates have continued to be cut,

creating a “race-to-the-bottom” issue.

In 2021, 137 countries forming the OECD/G20 Inclusive Frame-

work on BEPS passed a major milestone in reforming international

tax by successfully introducing the framework of a global minimum

corporate tax, known as Pillar Two. It aims to set a floor for

corporate tax rates with various corrective measures so that

multinational enterprises’ income will be taxed once in either

source country or residence country at a substantive tax rate.

Hence, Pillar Two is the first implementation of the “single tax

principle” at the global level. Because Pillar Two requires an

unprecedented amount of coordination among countries, it is im-

portant to understand Pillar Two thoroughly so that countries can

maneuver the challenges of implementation, while still enjoying the

ultimate benefit that would come from this global tax harmony.

This Article analyzes the issues of tax competition and why most

countries in the world have come to the conclusion that a global

minimum tax is needed. This Article explains the single tax principle

as the theoretical underpinning of Pillar Two, breaks down the

principles and policies that comprise Pillar Two, and anticipates

* Irwin I. Cohn Professor of Law, University of Michigan Law School.

† Professor of Law, Cardozo School of Law. We are grateful to participants of the

Boston College Law School Tax Colloquium, National Tax Association Annual Conference,

and Rocky Mountain for Junior Scholars Workshop for helpful comments. Special thanks to

the University of Utah’s Albert and Elaine Borchard Fund for Faculty Excellence. Ryan An-

derson, Benton Eskelsen, and Darian Hackney provided excellent research assistance.

506 Michigan Journal of International Law [Vol. 43:3

what promise and pitfalls passage of the global minimum tax will

bring. Because the basis of Pillar Two is a direct extension of the

Global Intangible Low Tax Income (GILTI) and Base Erosion and

Anti-Abuse Tax (BEAT) provisions of the Tax Cuts and Jobs Act, it

is reasonable to anticipate that the global minimum tax will be

considered a success if it is implemented by all the G20 countries.

INTRODUCTION

On October 8, 2021, 136 countries signed the Organisation for Econom-

ic Co-operation and Development (“OECD”) Base Erosion and Profit Shift-

ing (“BEPS”) statement (“the Statement”), which embodies the farthest-

reaching revolution in international taxation since the 1920s.

The State-

ment marks the beginning of a new international tax regime for the twenty-

first century. Fit for a modern, digital, globalized world, the Statement em-

braces the ideal of corporate tax harmonization to combat the race to the

bottom that has dominated international taxation since the advent of globali-

zation in the 1980s.

This article will discuss the promises and pitfalls of the new interna-

tional tax regime, as embodied in Pillar Two of the Statement. The State-

ment envisages this regime as built on two pillars.

Pillar One is focused on

expanding source country taxing rights on the income of large multinational

enterprises. In particular, it targets digital companies such as Facebook or

Google that are able to extract profits from a source jurisdiction without a

physical presence.

We address Pillar One in a companion article, thus we

will not engage with it here.

1. Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the

Digitalisation of the Economy, O

RG. FOR ECON. COOP. & DEV. [“OECD”] (Oct. 8, 2021),

http://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-

arising-from-the-digitalisation-of-the-economy-october-2021.pdf [hereinafter, Statement]. At

first, 136 jurisdictions out of the 140 members of the OECD/G20 Inclusive Framework on

BEPS joined the deal, the G20 finance ministers approved the agreement on October 13,

2021, and the G20 leaders approved on October 31, 2021. G20 Leaders Confirm Commitment

to Global Tax Changes Under BEPS 2.0, EY

TAX NEWS UPDATE (Nov. 2, 2021),

http://taxnews.ey.com/news/2021-1991-g20-leaders-confirm-commitment-to-global-tax-

changes-under-beps-20. As of November 4, 2021, 137 countries and jurisdictions joined a

new two-pillar plan.

OECD: BEPS, Inclusive Framework on Base Erosion and Profit Sharing,

OECD, http://www.oecd.org/tax/beps/ (last visited Mar. 11, 2021).

2. The race to the bottom is a term to describe tax competition. This Article uses the

two terms interchangeably depending on the context.

3. Statement, supra note 1.

4. See Reuven Avi-Yonah, Young Ran (Christine) Kim & Karen Sam, A New Frame-

work for Digital Taxation, 63 H

ARV. INT’L L.J. (forthcoming 2022).

5. See id.

2022] The Promise and Pitfalls of the Global Minimum Tax 507

This article will discuss the circumstances that led to more than 130 ju-

risdictions around the world agreeing to implement the global minimum tax

and the single tax principle of Pillar Two. The double-edged sword of glob-

alization and tax competition created difficulties for many countries, as they

were being increasingly squeezed by multinational enterprises to provide

lower corporate tax rates and tax holidays as conditions for receiving for-

eign investment. While increased foreign direct investment (“FDI”) can cre-

ate higher-paying job opportunities, economic growth, and the societal ben-

efits of an increased tax base, these benefits are greatly diminished when the

country needs to offer exceedingly low tax rates or tax holiday enticements

to secure the FDI.

As tax competition has grown, global effective corporate

tax rates have continued to be cut, creating a “race-to-the-bottom” where the

tax rate needed to attract foreign investment is so low that there is almost no

net benefit to the society securing the foreign capital.

Countries can address this problem by closing off their trade borders or

by making cutbacks to their social safety net.

However, the better solution

is to limit tax competition.

Pillar Two aims to address the issue of “race-to-

the-bottom” tax competition and achieve tax harmonization through the

adoption of a global minimum tax. Multinational enterprises that meet the

€750 million Euro revenue threshold—regardless of which jurisdiction they

are headquartered in or operate from—will be subject to a global minimum

tax.

But the way this new regime works is quite complex, because multina-

tional enterprises’ income involves at least two countries—the source coun-

try where income is generated, and the residence country where investors

are located.

As an example, consider that Orange, a hypothetical U.S. multinational

enterprise, has a subsidiary corporation in Ireland.

The Irish subsidiary’s

income from its trade or business is considered active income, and Ireland

(the source country) has primary jurisdiction to tax that income under the

benefits principle.

Ideally, Ireland will tax the income at a substantive tax

6. OPTIONS FOR LOW INCOME COUNTRIES’EFFECTIVE AND EFFICIENT USE OF TAX

INCENTIVES FOR INVESTMENT,INT’L MONETARY FUND [“IMF”] (2015), http://www.imf.org

/external/np/g20/pdf/101515.pdf.

7. See infra Part I.

8. See id.

9.Statement, supra note 1, at 4. Such a revenue threshold will be determined under

Base Erosion and Profit Shifting (“BEPS”) Action 13 (country by country reporting), and a

tax base will be determined by reference to financial accounting income.

10. This hypothetical example is similar to Apple Inc.’s structure, which has been criti-

cized for avoiding taxes through its Irish subsidiaries. See, e.g., Simon Bowers, Apple’s Cash

Mountain, How It Avoids Tax, and the Irish Link,T

HE IRISH TIMES (Nov. 6, 2017),

http://www.irishtimes.com/business/apple-s-cash-mountain-how-it-avoids-tax-and-the-irish-link-

1.3281734.

11. Under the benefits principle, active income from trade or business is primarily as-

signed to the source country’s tax jurisdiction (and the residence country has secondary juris-

diction), while passive income, such as dividends, interest, and royalty, is primarily assigned

508 Michigan Journal of International Law [Vol. 43:3

rate. However, with the large negotiating power of massive multinational

enterprises, source countries do not always tax them at substantive rates.

Under Pillar Two’s global minimum tax, if the Irish subsidiary’s income is

taxed below the agreed minimum tax rate of fifteen percent in Ireland (the

source country), then the parent entity in the United States (the residence

country) is required to include such under-taxed income in its U.S. tax base

and pay the difference in additional taxes to the United States. If the United

States (the residence country) has not enacted Pillar Two’s income inclusion

rule as a corrective measure, then the Irish subsidiary’s tax deduction in Ire-

land (the source country) would be denied. Alternatively, an equivalent ad-

justment would be made to the extent that the low-tax income of the Irish

subsidiary is not subject to minimum tax under an income inclusion rule.

As illustrated in the example, the mechanics of Pillar Two can be quite

complicated. However, the objective of Pillar Two is clear: to implement

the goal of the single tax principle (that is, “full taxation”) in international

tax, thereby solving the problems created by the tax competition prevalent

in the twentieth century.

The single tax principle requires multinational

enterprises’ income to be subject to taxation once. By doing so, it prevents

both double taxation and double non-taxation. However, there are nuances

to the single tax principle. First, the country (residence or source country)

that can exercise primary tax jurisdiction is determined based on whether

income is active or passive according to the benefits principle.

With active

income, the source country has primary tax jurisdiction, and the residence

country has secondary jurisdiction. If taxation by the source country is sub-

stantial, the residence country will yield its secondary taxing right by allow-

ing a foreign tax credit to prevent double taxation.

On the other hand, if

the first taxation is nominal (below the minimum rate), it is not considered

to have satisfied the imposition of a “single tax,” and thus corrective rules

by the secondary tax jurisdiction should apply to prevent double non-

taxation. Thus, the single tax principle suggests that all income of multina-

the residence country’s tax jurisdiction (and the source country has secondary jurisdiction).

This principle is a product of the compromise among nations in 1923, driven by four econo-

mists in the League of Nations. See infra Part II.A; Reuven S. Avi-Yonah, The Structure of

International Taxation: A Proposal for Simplification, 74 T

EX.L.REV. 1301, 1305 (1996).

12. The single tax principle provides that corporate profits should be subject to a mini-

mum tax and that if the country with the primary right to tax such income (source or resi-

dence) does not impose tax at the minimum level, the other country involved should tax it. For

a discussion of the single tax principle, see e.g., infra Part II.A.; Reuven S. Avi-Yonah, Who

Invented the Single Tax Principle? An Essay on the History of US Treaty Policy, 59 N.Y.L.

CH.L.REV. 305 (2015) [hereinafter, Single Tax Principle]. For full taxation, see Ruth Ma-

son, The Transformation of International Tax, 114 A

M.J.INT’L L. 353 (2020) [hereinafter,

Transformation].

13. For a discussion of the benefits principle, see supra note 11.

14. See, e.g., I.R.C. § 901 (upholding a residence country’s obligation to prevent dou-

ble taxation by unilaterally granting foreign tax credits).

2022] The Promise and Pitfalls of the Global Minimum Tax 509

tionals must be taxed once at a substantive tax rate. Hence, Ruth Mason re-

fers to this principle as “full taxation.”

The single tax principle was first conceived of in the early twentieth

century as the basis for the foreign tax credit.

The United States and other

countries began to practically implement the principle in the 1960s and

1970s.

However, until recently, it had not been fully integrated into inter-

national tax because of fierce tax competition and many unilateral tax poli-

cies that are inconsistent with the single tax principle.

Many scholars did

not believe that reasonable tax harmony could be achieved through the sin-

gle tax principle, and thus, it had been somewhat controversial.

Nonethe-

less, the OECD BEPS 1.0 Project in the 2010s aspired to achieve the single

tax principle through global tax harmonization.

Perhaps because of linger-

ing doubts about its feasibility, the project achieved limited success.

The passage of the U.S. Tax Cuts and Jobs Act (“TCJA”) of 2017

played a crucial role in establishing the feasibility of the single tax principle.

The TCJA adopted two new innovative breakthrough tax mechanisms: the

Global Intangible Low Tax Income (“GILTI”) rule for residence taxation

and the Base Erosion Anti-Abuse Tax (“BEAT”) rule for source taxation.

These two rules showed how the single tax principle can be achieved unilat-

erally to combat base erosion and profit shifting by U.S. multinational en-

terprises. The success of the TCJA also demonstrated conceptually that

there are ways to stop tax competition if the Group of Twenty (“G20”)

countries implement the single tax principle fully with proper corrective

measures.

Building upon those previous efforts, Pillar Two implements the single

tax principle globally for the first time by introducing a global minimum tax

rate of fifteen percent, and various corrective measures, such as the Income

Inclusion Rule (“IIR”) for residence taxation, and the Undertaxed Payment

Rule (“UTPR”) (denial of deduction) and Subject To Tax Rule (“STTR”)

15.Transformation, supra note 12, at 22, 25.

16. See infra Part II.A.1.

17. See id.

18. See id.

19. See infra Part II.A.2.

20. See infra Part II.B.

21. See, e.g., Mindy Herzfeld, The Case Against BEPS: Lessons for Tax Coordination,

21 F

L.TAX REV. 1 (2017).

22. The Global Intangible Low Tax Income (“GILTI”) rule imposed the U.S. tax as

residence taxation on certain foreign subsidiaries’ income from intangible assets, and Base

Erosion Anti-Abuse Tax (“BEAT”) denies deductions in the U.S. as source taxation if the de-

ductible payments are unlikely to be subject to residence-based taxation. I.R.C. §§ 951A, 59A.

See infra Part II.C.

23.SeeLilian V. Faulhaber, Taxing Tech: The Future of Digital Taxation, 39 V

A.TAX

REV. 145, 175 (2019) [hereinafter, Taxing Tech].

510 Michigan Journal of International Law [Vol. 43:3

for source taxation.

Unlike Pillar One, which requires changing more than

3,000 tax treaties with the participation of over 130 source jurisdictions, Pil-

lar Two can generally be implemented unilaterally through domestic legisla-

tion with no changes to existing tax treaties.

More importantly, Pillar Two

only requires cooperation by the G20, which are home to over ninety per-

cent of the world’s largest multinational enterprises (“MNEs”), because it

offers strong corrective measures exercised by residence countries. Pillar

Two is therefore more likely to be implemented than Pillar One. Also, the

two pillars deal with different problems—Pillar One with physical presence

and source taxation and Pillar Two with a global minimum tax and resi-

dence taxation—and can conceptually be separated from each other.

The benefits that Pillar Two is expected to bring to the world are signif-

icant. At a global minimum tax rate of fifteen percent, approximately $150

billion U.S. dollars in additional global tax revenues will be generated each

year.

The various corrective measures imposed on both source and resi-

dence countries would reduce MNEs’ motivation to engage in base erosion

and profit shifting, because they would be paying a substantial “single tax”

no matter where they are located, or where their profits are attributed.

Despite its promise, there are still some concerns about Pillar Two. The

fifteen percent global minimum tax rate is relatively low compared to the

average G20 corporate tax rate of about twenty-seven percent.

The sub-

stance carve-outs in the Statement also raise concerns that Pillar Two may

still allow a certain level of tax competition.

Also, there are concerns that,

because Pillar Two gives the priority to residence taxation (via the IIR) over

source taxation (via the UTPR/STTR), it is skewed toward the interests of

the G20 countries over those of developing countries.

Although there is

some truth to this critique, its significance depends on another question: are

tax holidays for FDI the result of a careful cost/benefit analysis by source

countries, or are tax holidays the result of pressure exerted by the MNEs and

the availability of other potential jurisdictions for investment? If the answer

is the latter, the critique is less convincing because the tax competition prob-

lem can be solved by the IIR and residence taxation, which neutralize the

multinationals’ incentive to shop around the source countries for lower tax

rates.

24. See infra Part III.A.

25. See infra Part IV.B.3.

26. See infra Part IV.A.1.

27. See infra Part IV.A.2.

28. BEPS Monitoring Group Comments on the Model Rules for a Global Anti-Base-

Erosion Minimum Corporate Tax, 105 T

AX NOTES INT’L 1421 (Mar. 21, 2022); Elke Asen,

Corporate Tax Rates Around the World, 2020,T

AX FOUND. (Dec. 9, 2020),

http://taxfoundation.org/publications/corporate-tax-rates-around-the-world/. The average cor-

porate tax rate, as of 2020, for the G20 is 26.96 percent.

29. See infra Part IV.B.2.

30. See infra Part IV.B.1.

2022] The Promise and Pitfalls of the Global Minimum Tax 511

This article is one of the first wave of comprehensive scholarly papers

to describe Pillar Two of the new international tax regime and to analyze its

theoretic underpinnings.

Part I defines the tax competition problem Pillar

Two was designed to address. Part II presents the existing efforts to resolve

tax competition. It discusses the historical origins and development of the

single tax principle and explains the TCJA’s crucial role in leading to the

fruition of Pillar Two. Part III analyzes Pillar Two as a new solution to tax

competition. It highlights three rules in the Statement (the IIR, UTPR, and

STTR) and introduces the implementation plans by the OECD/G20 and the

United States in the Build Back Better (“BBB”) Act. Part IV addresses the

contribution, benefits, and potential challenges of Pillar Two. It concludes

by reflecting on how, in retrospect, Pillar Two fits in with the two principles

underlying the century-old regime, namely the benefits principle and the

single tax principle.

I. HE PROBLEM OF TAX COMPETITION

The current age of globalization has made countries face the trilemma

of balancing (1) FDI-driven job creation and economic growth, (2) econom-

ic openness and competition from peers, and (3) securing a social safety

net.

First, globalization has allowed many countries to utilize FDI to cre-

ate more and better-paying jobs for their citizens,

to generate investment

in their economic infrastructure, and to introduce technologies that allow for

modernization.

The economic growth of Asian countries, such as Singa-

pore, Hong Kong, South Korea, and Taiwan, is believed to have been pri-

marily initiated by the influx of FDI in the 1950s.

These countries’ econ-

31. See e.g., Jinyan Li, The Pillar 2 Undertaxed Payments Rule Departs from Interna-

tional Consensus and Tax Treaties, 105 T

AX NOTES INT’L 1401 (Mar. 21, 2022); Chris Wil-

liam Sanchirico, A Game-Theoretic Analysis of Global Minimum Tax Design (U of Penn, Inst

for Law & Econ Research Paper No. 22-19, 2022); Wei Cui, New Puzzles in International Tax

Agreements,T

AX L. REV. (forthcoming).

32. On the importance of curbing tax competition to maintain democracy and the social

safety net under globalization, see Reuven S. Avi-Yonah, Globalization, Tax Competition,

and the Fiscal Crisis of the Welfare State, 113 H

ARV.L.REV. 1573 (2000) [hereinafter, Tax

Competition]; Reuven S. Avi-Yonah, Globalization, Tax Competition and the Fiscal Crisis of

the Welfare State: A Twentieth Anniversary Retrospective, in T

HINKER,TEACHER,TRAVELER:

EIMAGINING INTERNATIONAL TAX,ESSAYS IN HONOR OF H. DAVID ROSENBLOOM 39

(Georg Kofler, Ruth Mason & Alexander Rust eds., 2021).

33. Foreign Direct Investment “is a category of cross-border investment made by a res-

ident in one economy (the direct investor) with the objective of establishing a lasting interest

in an enterprise (the direct investment enterprise) that is resident in an economy other than

that of the direct investor.” OECD,

OECD B

ENCHMARK DEFINITION OF FOREIGN DIRECT

INVESTMENT 17 (4th ed. 2008), http://www.oecd.org/daf/inv/investment-policy/2090148.pdf.

34.SeeYoram Y. Margalioth, Tax Competition, Foreign Direct Investments and

Growth: Using the Tax System to Promote Developing Countries, 23 V

A.TAX REV. 161

(2003).

35. See id. at 163.

512 Michigan Journal of International Law [Vol. 43:3

omies have since grown and flourished while the economies of other nations

who were similarly developing in the 1950s have stalled. Many would at-

tribute such contrast to these Asian countries’ ability and success in attract-

ing FDI.

Second, a country that opens up its economy to FDI faces the risks that

come with a dependency on foreign capital that may be diverted elsewhere.

These risks come from competition from peer countries vying to attract for-

eign capital to their economy. The epitome of such rivalry is “tax competi-

tion,” which has been prevalent since the twentieth century.

Many devel-

oping countries who want to invite FDI to their soil offer a low tax rate to

foreign investors, such as overall low corporate tax rates, or tax holidays

where foreign investors are exempt from taxation for a predetermined peri-

od of time.

Such tax competition is harmful to developing countries,

which depend on corporate taxes to a much greater extent than developed

countries.

On average, corporate tax accounts for approximately twenty-

four percent of a developing country’s tax revenue, and only around eight

percent of a developed country’s tax revenue.

This problem has worsened

as developed countries like Ireland have also begun engaging in tax compe-

tition, putting even more downward pressure on corporate tax rates. Ire-

land’s current corporate tax rate of 12.5 percent is much lower than the

OECD’s average corporate tax rate of 23.51 percent.

To compete, devel-

oping countries may have to drop their rates even lower. Tax competition

creates an incentive to continue to lower tax rates or offer other tax incen-

tives to attract more FDI, potentially running these tax rates down to the

point where jurisdictions may receive little to no net revenue benefit from

the FDI. This “race-to-the-bottom” issue may not be apparent if one only

compares statutory tax rates by looking at countries’ published tax rate(s)

for corporate income, but if one looks at the rate foreign corporations are

36.Id. For different uses of tax incentives for FDI across countries, see IMF, supra

note 6.

37. See, e.g., David Elkins, The Merits of Tax Competition in a Globalized Economy,

91 I

ND. L.J. 3 (2016).

38. Tax holiday refers to a government incentive program that offers a tax reduction or

elimination to businesses. See id.

39.SeeIvan O. Ozai, Tax Competition and the Ethics of Burden Sharing, 42 F

ORDHAM

INT’L L. J. 61, 68 (2018).

40. Developed countries also have the benefit of their tax revenue from personal in-

come tax typically being three to four times more than their corporate tax revenues. See Avi

Nov, The “Bidding War” to Attract Foreign Direct Investment: The Need for a Global Solu-

tion, 25 V

A.TAX REV. 835 (2006); Richard Bird, The Personal Income Tax,PREMNOTES:

AX POLICY NO. 137, June 2001 at 1; Revenue Statistics 2021: Initial Impact of COVID-19

on OECD Tax Revenues, OECD (2021), http://www.oecd-ilibrary.org/sites/6e87f932-en

/index.html?itemId=/content/publication/6e87f932-en.

41. Asen, supra note 28. Developed countries’ engagement in tax competition is espe-

cially problematic because they are better able to absorb the negative aspects of creating tax

incentives while still gaining all the same benefits.

2022] The Promise and Pitfalls of the Global Minimum Tax 513

actually paying—the effective tax rates—it is evident that poorer countries’

effective tax rates were basically cut in half from 1996 to 2007.

Third, a country also needs to maintain an adequate social safety net

and various welfare programs to protect its low-income population from

poverty and hardship. In the United States, the earned income tax credit,

child tax credits, and a cash transfer program called Temporary Assistance

for Needy Families (“TANF”) are examples of this safety net.

In Europe,

these safety nets can encompass all health care costs, education, and hous-

ing. Such large safety nets require significant tax revenue, but countries re-

ducing their corporate tax rates or offering tax holidays in order to retain

foreign investors will find maintaining a robust social safety net much more

difficult with a revenue stream that is vulnerable to such downward fluctua-

tions.

Therefore, only two sides of the trilemma can be addressed simultane-

ously. If a country is economically open, it must choose between (1) attract-

ing FDI, which requires tax competition and cuts to the social safety net,

and (2) losing FDI by foregoing tax competition and maintaining the social

safety net. If tax competition is inevitable in a globalized economy, a coun-

try may then either (1) close up its economy, preserve its tax revenue, and

forego the benefits of globalization, or (2) open its economy, endure tax

competition, and subject the social safety net to potential volatility and cuts

even though it serves as a crucial buffer against the downsides of globaliza-

tion.

In fact, many European countries have reduced social safety net pro-

grams following the financial crisis in 2008.

The United States retreated

from economic openness during the Trump administration.

However, nei-

ther approach has been praised as a reasonable solution to the trilemma be-

cause they are each destructive, requiring some fraction of the economy to

sacrifice or be worse off.

Hence, the best solution to this trilemma is finding a way to productive-

ly limit tax competition. Stopping destructive tax competition that races to

the bottom is a constructive way to solve the trilemma, and every country

42.SeeLaura Abramovsky, Alexander Klem & David Phillips, Corporate Tax in De-

veloping Countries: Current Trends and Design Issues, 35 F

ISCAL STUD. 4 (2014) (providing

figure 1 at page 569 outlining trends in corporate income taxes in advanced and developing

economies and figure 2 at 570 tracking effective tax rates at different rates of profitability).

43.SeeEarned I.R.C. § 32(a) (Earned Income Tax Credit); I.R.C. § 24(a) (Child Tax

Credits); 42 U.S.C. §§601–19 (Temporary Assistance for Needy Families).

44. See, e.g.,IMF, supra note 6, at 3.

45.SeeMarianne Bitler & Hilary Hoynes, The More Things Change, the More They

Stay the Same? The Safety New and Poverty in the Great Recession. 34 J.

AB.ECON. S403

(2016).

46.SeeAdam Posen, The Price of Nostalgia; America’s Self-Defeating Economic Re-

treat,F

OREIGN AFFS. (May 2021), http://www.foreignaffairs.com/articles/united-states/2021-

04-20/america-price-nostalgia.

47. See id.

514 Michigan Journal of International Law [Vol. 43:3

involved would benefit. The problem, however, is that source countries

hosting FDI cannot curb tax competition unilaterally. If a country declares

that it will not engage in tax competition by offering tax incentives, such as

tax holidays, to MNEs, then these enterprises will invest elsewhere. For ex-

ample, when the Philippines declined to give a tax exemption and $15 mil-

lion USD in tax incentives to General Motors, the FDI was diverted to Thai-

land.

The fundamental problem is that modern MNEs are exceedingly

mobile. They can be located in any country with adequate infrastructure and

an educated workforce. The geographic location of the investment does not

matter since intellectual property can be moved at no cost from one location

to another. The need of manufacturing facilities to be regularly updated or

retrofitted for new processes or innovations also serves to make moving to

new locations less cumbersome.

A common practice of MNEs is to assemble a list of countries that are

acceptable in terms of infrastructure and an educated workforce. The MNE

then approaches the government of each country and asks what it would re-

ceive by way of tax breaks if it invested in the country. If confronted by a

refusal to compromise on taxes, the MNE threatens to go elsewhere, and

few politicians can resist the pressure of losing the favorable headlines that

accompany job creation by a major MNE.

For example, Intel in the 1990s conducted an auction for its new source

country, pitting Ireland against Israel, and was able to obtain over $1 billion

USD in tax concessions from both countries.

More recently, Amazon con-

ducted an auction among U.S. localities to bid to become the locations of its

second headquarters, which ended up in the vicinity of Washington D.C., an

area not lacking in development.

The problem of tax competition is most acute in developing countries

because they depend more on corporate tax revenues than richer countries.

The percentage of total revenues from corporate tax in the OECD member

states is around seven to eight percent, but in developing countries it is clos-

er to twenty-four percent.

Recognizing the negative impact of tax compe-

tition on the global economy, the OECD issued the Harmful Tax Competi-

tion Report in 1998 to address the problem.

However, the problem

48. Gabriella Stern & Rebecca Blumenstein, GM May Locate Major Plant in

Thailand, Not Philippines,W

ALL ST. J. (May 16, 1996), http://www.wsj.com/articles

/SB832194544528469500.

49.SeeAvi-Yonah, Tax Competition, supra note 32, at 1645–46.

50.Id.

51.SeeReuven Avi-Yonah, Orli Avi-Yonah, Nir Fishbien & Hayian Xu, Federalizing

Tax Justice, 53 I

ND.L.REV. 479 (2020).

52. R

EVENUE STATISTICS BROCHURE INITIAL IMPACT OF COVID-19 ON OECD TAX

REVENUES, OECD (2021), http://www.oecd.org/tax/tax-policy/revenue-statistics-highlights-

brochure.pdf.

53. H

ARMFUL TAX COMPETITION:AN EMERGING ISSUE, OECD, (1998), http://

www.oecd.org/ctp/harmful/1904176.pdf.

2022] The Promise and Pitfalls of the Global Minimum Tax 515

remained unaddressed, perhaps because it was unrealistic to expect that de-

veloped countries would craft a solution to a problem that more seriously

affects developing countries.

Nevertheless, the harm from tax competition is not limited to develop-

ing countries. Even the OECD member states suffer from the decline in cor-

porate tax revenues resulting from tax competition because they cannot raise

other taxes, which are already quite high.

Instead, most OECD members

had to implement austerity measures that cut the social safety net in the

wake of the financial crisis of 2008, even though they understood the im-

portance of the social safety net for their citizens. For instance, Greece, one

of the European Union (“EU”) members hardest hit by the financial crisis,

was faced with either dramatically raising taxes or drastically curtailing

public health spending, and chose to cut spending, which resulted in under-

staffed and underfunded hospitals and higher copays that drastically impact-

ed vulnerable groups.

Similarly, the Netherlands’ financial shortfalls ne-

cessitated a move to privatize insurance companies while Sweden switched

many hospitals and primary health care services over to the private sector

in order to cut costs.

These cuts of the social safety net were what led to

the first BEPS Project of the OECD in 2013–15.

This BEPS 1.0 Project

was designed to limit tax competition by introducing various measures to

prevent tax base erosion and MNEs shifting profits to low-tax jurisdic-

tions.

A major question regarding potential solutions to curbing tax competi-

tion is whether they only address artificial profit shifting to low-tax jurisdic-

tion, such as tax havens, or also target real investment shopping around the

world. The OECD’s Harmful Tax Competition report from 1998 focused on

artificial profit shifting to low-tax jurisdictions, as did the BEPS 1.0 Project,

which was based on the concept of “value creation.”

Pillar One of the

global tax deal also focuses on artificial profit shifting. Pillar Two, on the

other hand, addresses both artificial profit shifting and real investment shift-

ing, although the latter is limited only by the substance carve-out described

in Parts III and IV.

54. REVENUE STATISTICS BROCHURE INITIAL IMPACT OF COVID-19 ON OECD TAX

REVENUES, supra note 52, at 9.

55. See Elisavet Athanasia Alexiadou, Health Care Reforms and the Challenge of Ine-

quality From a Human Rights Lens: Lessons From Europe, 17 I

ND.HEALTH L. REV. 63 (2020).

56.Id.at 74.

57. See Reuven Avi-Yonah, The Great Recession and the International Tax Regime,

LUWER INT’L TAX BLOG (Apr. 23, 2019), http://kluwertaxblog.com/2019/04/23/the-great-

recession-and-the-international-tax-regime.

58. See Itai Grinberg, The New International Tax Diplomacy, 104 G

EO. L.J. 1137

(2016); Transformation, supra note 12, at 354.

59. See Reuven Avi-Yonah, The OECD Harmful Tax Competition Report: A Retro-

spective After a Decade, 34 B

ROOK.J.INT’L L. 783 (2009).

516 Michigan Journal of International Law [Vol. 43:3

II. EXISTING SOLUTIONS TO TAX COMPETITION

Destructive tax competition would disappear if the international tax re-

gime achieved tax harmony. The difficult part is how to achieve this harmo-

ny. Having a uniform tax system across the globe would be the simplest so-

lution, but it is not realistic when each sovereign country has the ability and

right to develop their own tax systems. Consequently, an international tax

regime should offer a principle and framework that can systematically pre-

vent tax competition if countries agree to participate. This Part introduces

the single tax principle that we endorse and examines the existing efforts to

combat tax competition prior to the Statement and Pillar Two.

A. The Single Tax Principle, 1918 – 2015

The best solution to the problems created by tax competition is the sin-

gle tax principle, which requires that all income of MNEs be subject to taxa-

tion once.

However, there is nuance to the single tax principle. If the ef-

fective tax rate for single taxation was nominal, then it would be an empty

solution to resolve tax competition. Thus, to make this principle effective,

the single tax principle accompanies a practical principle—that is, that all

income of MNEs be taxed once at a substantive tax rate, such as the average

G20 tax rate (currently around 26.96 percent).

If this proposition is not

met, corrective rules would need to apply to accomplish the result that

MNEs’ income be taxed at a substantive rate.

The income of MNEs’ cross-border transactions involves more than one

country. Thus, the next issue stemming from the single tax principle is

which country should have primary jurisdiction to tax such income. The in-

ternational tax regime answers this question with the benefits principle. The

benefits principle was originally developed in 1923,

under which: (1) ac-

tive income from trade or business is primarily assigned to the source coun-

try’s tax jurisdiction (with the residence country having secondary jurisdic-

tion), and (2) passive income, such as dividends, interest, and royalties, is

primarily assigned to the residence country’s tax jurisdiction (with the

source country having secondary jurisdiction).

MNEs’ corporate income

from their trade or business is considered active income, and thus, is primar-

ily assigned to source countries where such trade or business is conducted

and income is generated. Because of the primacy of source taxation for ac-

tive income under the benefits principle, residence countries of MNEs that

60.SeeReuven Avi-Yonah, Who Invented the Single Tax Principle?: An Essay on the

History of US Treaty Policy, 59 N.Y.

L. S

CH.L.REV. 305 (2015).

61. See generally Asen, supra note 28. The rate of tax for the single tax principle is the

residence country’s tax rate for passive income (earned mostly by individuals) and the average

G20 source tax rate for active income (earned mostly by corporations).

62. T

HOMAS S. ADAMS,INTERSTATE AND INTERNATIONAL DOUBLE TAXATION,

ECTURES ON TAXATION 101 (Roswell Magill ed., 1932).

63.Id.

2022] The Promise and Pitfalls of the Global Minimum Tax 517

have secondary tax jurisdiction over such income should grant a foreign tax

credit for source taxes.

However, the journey toward achieving the single tax principle encoun-

tered challenges. Globalization in the late twentieth century resulted in in-

creased tax competition among source countries, which are mostly develop-

ing countries with strong needs to lure FDI. Hence, source-based taxation

with a substantive tax rate was difficult to sustain. Furthermore, there are

too many source countries to be able to effectively cooperate to curb tax

competition.

The single tax principle solves tax competition among source countries

by requiring a secondary tax jurisdiction to enforce the single tax principle

at a substantive tax rate if source-based taxation is nominal. Such nominal

source taxation should not count as a full “once” for the purposes of the sin-

gle tax principle. Ruth Mason (a Professor of Law and Taxation at the Uni-

versity of Virginia School of Law) refers to this concept as “full taxation.”

Under the benefits principle, residence countries have secondary tax juris-

diction. If residence countries exercise the secondary tax jurisdiction at a

substantial tax rate, the single tax principle can still be accomplished. This is

relatively straightforward to accomplish compared to an effort to curb

source country tax competition, because over ninety percent of the world’s

largest multinationals are residents of the G20.

More importantly, if all residence countries exercise “full taxation”

power on MNEs’ global income, it would eliminate the problem of MNEs

shopping source countries by removing the incentive to do so.

If an

MNE’s residence country is going to ensure that the MNE pays its full in-

come tax regardless of the country or tax haven where they claim to have

“earned” the income, there will be no economic benefit for MNEs to source

country shop.

64.SeeMitchell A. Kane, Strategy and Cooperation in National Response to Interna-

tional Tax Arbitrage, 53 E

MORY L.J. 89 (2004) (“Commitment to a single tax principle is in

evidence whenever a country relieves double taxation through a foreign tax credit and will not

agree to tax sparing.”); see also I.R.C. §§ 901, 903.

65.SeeReuven Avi-Yonah and Haiyan Xu, Evaluating BEPS: A Reconsideration of

the Benefits Principle and Proposal for UN Oversight, 6 H

ARV.BUS.L.REV. 185 (2016).

66.Transformation, supra note 12, at 22, 25.

67. Role of the G20, E

UROPEAN COMM’N, http://ec.europa.eu/info/food-farming-fisheries

/farming/international-cooperation/international-organisations/g20_en (last visited Mar. 11,

2022); Emmanuel Saez & Gabriel Zucman, A Wealth Taxation on Corporations’ Stock,G20

NSIGHTS (2021), http://www.g20-insights.org/policy_briefs/a-wealth-tax-on-corporations-stock/

(“Corporations headquartered in the G20 represent over 90% of global corporate equity mar-

ket value.”).

68. See Reuven S. Avi-Yonah, Hanging Together: A Multilateral Approach to Taxing

Multinationals, 5 M

ICH.BUS.&ENTREPRENEURIAL L. REV. 137 (2016).

518 Michigan Journal of International Law [Vol. 43:3

1. The Origins of the Single Tax Principle

The origins of the single tax principle can be traced back to the adop-

tion of the U.S. foreign tax credit in 1918.

Double taxation occurs in inter-

national tax when a source country and residence country levy tax on the

same declared income.

Many countries enter into income tax treaties to

avoid such double taxation. Under such tax treaties, source countries offer

reduced withholding tax rates for aliens’ income from domestic sources,

whereas residence countries offer tax exemption or credit to foreign-source

income.

Thomas Adams, the U.S. Treasury advisor who introduced the

credit, stated that he rejected the exemption system used by most European

countries because it led to double non-taxation.

The same formulation can be found in the commentary to the first mod-

el tax treaty, issued under the auspices of the League of Nations in 1927,

which states as follows:

It is highly desirable that States should come to an agreement with

a view to ensuring that a taxpayer shall not be taxed on the same

income by a number of different countries, and it seems equally de-

sirable that such international cooperation should prevent certain

incomes from escaping taxation altogether. The most elementary

and undisputed principles of fiscal justice, therefore, required that

the experts should devise a scheme whereby all incomes would be

taxed once and only once.

American tax policy began to change in the 1960s under the guidance

of Stanley Surrey, the first Assistant Secretary for Tax Policy and the true

intellectual father of the single tax principle. Surrey had publicly advocated

for the single tax principle in 1957 when he testified in the U.S. Senate

against a proposed United States-Pakistan tax treaty that provided for dou-

ble non-taxation.

The treaty was not ratified. Surrey proposed imposing

69. See Avi-Yonah, supra note 60.

70.SeeKlaus Vogel, Double Tax Treaties and Their Interpretation, 4 B

ERKELEY J.

NT’L L. 4 (1986).

71. See C

HARLES H. GUSTAFSON,ROBERT J. PERONI &RICHARD CRAWFORD PUGH,

AXATION OF INTERNATIONAL TRANSACTIONS:MATERIALS,TEXT, AND PROBLEMS 63 (4th

ed. 2011).

72. A

DAMS, supra note 62, at 101, 112–13. For example, the first U.S. tax treaty with

France in 1932 abolished the United States withholding tax on royalties despite the fact that

France would not tax them, thereby creating certain double non-taxation in violation of the

single tax principle.

73. Reports Presented by the Comm. of Technical Experts on Double Taxation and Tax

Evasion, League of Nations Doc. C.216M.85 1927 II (1927). The first model tax treaty also

included a provision imposing a withholding tax on interest, but provided that it would be re-

funded if the taxpayer could show that the income was declared to her country of residence.

74. Joseph J. Thorndike, Stanley Surrey Knew a Thing or Two About Loopholes,T

ANALYSTS ARTICLE ARCHIVE ONLINE (Feb. 7, 2013), http://www.taxhistory.org/thp

/readings.nsf/ArtWeb/05B6E5635C931F6F85257B160048DD4D?OpenDocument.

2022] The Promise and Pitfalls of the Global Minimum Tax 519

U.S. taxation in full on all Controlled Foreign Companies (“CFCs”)

U.S. MNEs. Although Subpart F enacted in 1962 only applied the tax in sit-

uations where the income was likely to escape source taxation,

Surrey

achieved his main aim of generally imposing the single tax principle on U.S.

MNEs. Surrey also incorporated the single tax principle into U.S. tax trea-

ties (for example, the United States-Luxembourg tax treaty)

by making it

clear that U.S. withholding taxes would not be reduced unless the income

was subject to tax in the residence jurisdiction.

This provision was also

included in the first U.S. Model Tax Treaty of 1981.

In the same year, however, the United States succumbed to the pres-

sures of globalization and the need to attract foreign investment by enacting

the portfolio interest exemption, which abolished the U.S. withholding tax

on portfolio interest regardless of whether it was taxed at the source.

The

rule violated the single tax principle, but also led to massive capital flight

into the United States. It is one of the first examples of U.S. tax competition

during globalization.

Furthermore, in the 1990s, Congress began weaken-

ing Subpart F by adopting exceptions, such as for active banking and insur-

ance, even though the income was mobile and not taxed at the source.

The erosion of the single tax principle culminated with the establish-

ment in 1997 of the “check the box” rule, which led to the complete under-

mining of Subpart F, especially after it was codified in 2006.

The “check

75. I.R.C. §§ 957(a), 951, 952; Controlled Foreign Corporations (“CFCs”) are foreign

corporations in which more than fifty percent of the vote or value is owned by U.S. sharehold-

ers who each own ten percent or more of the CFC.

76. I.R.C. §§ 951–65; The Subpart F provisions of the Internal Revenue Code eliminate

deferral of U.S. tax on some categories of foreign income by taxing certain U.S. persons cur-

rently on their pro rata share of such income earned by their CFCs.

77. Income and Capital Tax Treaty, Lux.-U.S., art. XVI, Dec. 18, 1962, http://

www.irs.gov/pub/irs-trty/luxem.pdf.

78. This is the origin of the Subject to Tax Rule (“STTR”) in Pillar Two, discussed in-

fra Part III.A.2.

79. Single Tax Principle, supra note 12; Reuven Avi-Yonah & Gianluca Mazzoni,

Stanley Surrey, the 1981 US Model, and the Single Tax Principle, 49 I

NTERTAX 729 (2021).

In 1984, the United States terminated its treaties with tax havens such as the Netherlands An-

tilles because they led to double non taxation in violation of the single tax principle.

80. I.R.C. § 871(h)(3); see Marilyn Franson, Repeal of the Thirty Percent Withholding

Tax on Portfolio Interest Paid to Foreign Investors, 6 N

W. J. INT’L L. & BUS. 3 (1984).

81. Reuven Avi-Yonah, What Goes Around Comes Around: Why the USA is Responsi-

ble for Capital Flight (and What It Can Do About It), 13

HAIFA L. REV. 321 (2019).

82. D

AVID R. SICULAR, THE NEW LOOK-THROUGH RULE: W(H)ITHER SUBPART F?

(Apr. 23, 2007), http://www.paulweiss.com/media/104725/SubPartF04-May-07.pdf.

83. A business entity may be treated as a pass-through entity (such as partnership or

disregarded entity) or a corporation for U.S. income tax purposes. Prior to the entity classifi-

cation regulations (also known as the “check-the-box”), an entity’s tax classification as a cor-

poration or flow-through entity was determined by a multifactor text. However, the check-the-

box regulations enacted in 1997 allow an eligible (i.e., not automatically classified as a corpo-

520 Michigan Journal of International Law [Vol. 43:3

the box” rule enables U.S. MNEs to shift income from both the United

States and high-tax foreign countries to tax havens without triggering Sub-

part F.

The result of this erosion and violation of the single tax principle

was that, by 2017, U.S. MNEs had amassed more than $3 trillion USD of

income in low-tax foreign jurisdictions.

Due to the increasingly intense and competitive nature of tax competi-

tion between countries over the past twenty-five years, the first author of

this article, Reuven Avi-Yonah, has advocated for the single tax principle as

a solution to tax competition since 1997.

Income from cross-border trans-

actions should be subject to one-time taxation. However, taxing cross-

border income just once also means care should be taken that it should not

be undertaxed. With this in mind, Avi-Yonah has argued that the appropri-

ate rate of tax for purposes of the single tax principle would be determined

by the second principle of international taxation, the benefits principle. That

means the active income should be taxed at least at the source tax rate

(which tends to be lower than the residence rate), but at no more than the

residence rate.

As Part III demonstrates, the underlying idea behind Pillar Two can be

traced back to the concept of the single tax principle.

Specifically, Pillar

Two offers various measures by which residual taxation by the residence (or

source) jurisdiction should occur when the tax imposed by the source (or

ration) entity to elect to be classified as a corporate or a pass-through for U.S. income tax pur-

poses. I.R.C. § 7701; Treas. Reg. § 301.7701-2; see also S

ICULAR, supra note 82.

84.Id.

85. Richard Phillips, Matt Gardner, Alexandria Robins & Michelle Surka, Offshore

Shell Games 2017,I

NST. ON TAX’N &ECON.POL’Y (Oct. 17, 2017), http://itep.org/off

shoreshellgames2017.

86. Reuven Avi-Yonah, International Taxation of Electronic Commerce, 52 T

AX L.

EV. 507 (1997) [hereinafter, Electronic Commerce]. Avi-Yonah later developed a different

normative argument for the single tax principle, basing it for corporate taxation on the need to

curb the power of the largest multinationals. See Reuven Avi-Yonah, Corporations, Society

and the State: A Defense of the Corporate Tax, 90 V

A.L.REV. 1193, 1202 (2004); Reuven

Avi-Yonah, A New Corporate Tax,T

AX NOTES FED. 653, 654 (2020).

87. This similarity has been noted by other scholars. See, e.g., Elizabeth Gil García,

The Single Tax Principle: Fiction or Reality in a Non-Comprehensive International Tax Re-

gime? 11 W

ORLD TAX J. 497 (2019); Transformation, supra note 12, at 353 (“Because states

already faithfully adhered to the no-double-tax norm, growing acceptance of full taxation as a

goal of international tax brings states closer to implementing Avi-Yonah’s “single-tax princi-

ple.”); Leopoldo Parada, Full Taxation: The Single Tax Emperor’s New Clothes, 24 F

LA.TAX

REV. 729 (2021) (identifying the BEPS 2.0 project (consisting of Pillars One and Two) as a

modern approach to the single tax principle); Wolfgang Schoen, Is There Finally an Interna-

tional Tax System? in T

HINKER,TEACHER,TRAVELER:REIMAGINING INTERNATIONAL TAX,

SSAYS IN HONOR OF H. DAVID ROSENBLOOM 475 (Georg Kofler et al. eds., IBFD 2021)

(“What can one say about the “single tax principle”? Has it gained the status of a guiding and

binding principle of international tax law? Here, it is evident that the BEPS Action Plan

adopted Avi-Yonah’s findings to a large extent. International taxation – it claims – should

ensure that income from cross-border transactions is taxed exactly once – not more, not

less.”).

2022] The Promise and Pitfalls of the Global Minimum Tax 521

residence) jurisdiction falls below a specified level—that is, the global min-

imum tax rate. Such mechanic embodies the idea of corrective measures to

prevent insufficient taxation as argued by the first author of this article in

support of the single tax principle.

2. Academic Debate

Scholars and commentators have engaged in a long debate on whether

tax harmony or achieving the single tax principle would be possible in the

real world. H. David Rosenbloom of New York University, in his famous

Tillinghast Lecture in 1998,

characterized international tax arbitrage as

“the deliberate exploitation of differences in national tax systems.”

Rosenbloom, international tax harmony was an unachievable ideal, whereas

tax competition and the resulting arbitrage was an inevitable by-product of

independent tax policymaking by sovereign states. Thus, preventing mis-

matches in tax policy “is not and should not be a first-rank policy objective

of the United States.”

Rosenbloom also identified line-drawing problems

related to distinguishing impermissible arbitrage from permissible tax plan-

ning. Rosenbloom considered “international income” and the “international

tax system” to be imaginary, rejected the single tax principle, and thus, ar-

gued that there was no principled objection to arbitrage.

Academics, including the first author of this article, responded to Ros-

enbloom’s critique by clarifying the policy concerns raised by international

tax competition and tax arbitrage and further detailing the efficiencies and

benefits of the single tax principle.

Adam Rosenzweig

and Diane Ring

88. Electronic Commerce, supra note 86, at 517.

89. H. David Rosenbloom, The David R. Tillinghast Lecture International Tax Arbi-

trage and the “International Tax System”, 53 T

AX L. REV. 137, 137 (2000) [hereinafter, Arbi-

trage]; Reuven Avi-Yonah, Commentary on Rosenbloom, 53 T

AX L. REV. 167, 167 (2000);

Michael J. Graetz, Taxing International Income - Inadequate Principles, Outdated Concepts,

and Unsatisfactory Policy, 54 T

AX L. REV. 261, 335 (2001); DANIEL SHAVIRO,FIXING US

NTERNATIONAL TAXATION 2 (2014), http://web.law.columbia.edu/sites/default/files/microsites

/law-theory-workshop/files/DShaviro.pdf; Julie Roin, Taxation Without Coordination, 31 J.

EGAL STUD. S61, S61 (2002); see Kane, supra note 64, at 92; Yariv Brauner, An Interna-

tional Tax Regime in Crystallization,56

AX L. REV. 259, 262–63. For a summary of the aca-

demic debate, see Ruth Mason & Pascal Saint-Amans, Has Cross-Border Arbitrage Met Its

Match?, in T

HINKER,TEACHER,TRAVELER:REIMAGINING INTERNATIONAL TAX.ESSAYS IN

HONOR OF H. DAVID ROSENBLOOM (Georg Kofler et al. eds., IBFD 2021), reprinted in 41

A.TAX REV. 1, 10–11 (2021).

90.Arbitrage, supra note 89, at 166. Recently, the term “mismatches” has been more

often used to describe arbitrage.

91. H. David Rosenbloom, Cross-Border Arbitrage: The Good, the Bad, and the Ugly,

85 T

AXES 115, 116 (2007).

92.Id. at 115.

93. Avi-Yonah, supra note 89, at 170–71.

94. Adam H. Rosenzweig, Harnessing the Costs of International Tax Arbitrage, 26 V

AX REV. 555, 564–65 (2007).

522 Michigan Journal of International Law [Vol. 43:3

argued that international tax competition and the resulting arbitrage raised

equity concerns because not everyone could benefit from it. Daniel Shaviro,

Mitchell Kane, Ring, and Rosenzweig highlighted the efficiency concerns,

arguing that tax competition and the resulting arbitrage could cause various

behavioral responses of taxpayers, such as distorting the choice of location

for investment.

Some commentators were concerned about the interaction effect that

could arise from U.S. tax policy responses to arbitrage. Shaviro pointed out

that a unilateral response may cause retaliation by other countries.

Kane

developed a model involving zero-sum tax competition among states seek-

ing to attract capital and argued that a state might exploit the ambiguity of

mismatching tax rules to win this competition without instigating retaliatory

responses.

Omri Marian’s study of the LuxLeaks rulings demonstrated

how the country Luxembourg was able to exploit the mismatches/arbitrages

of tax rules in such a way as to gain a significant economic advantage over

its neighboring states without attracting notice.

Rosenbloom also pushed back on the notion that tax competition and

arbitrage was a threat to revenue. He argued that as long as the taxpayer

complies with each national tax regime, no one country has cause to com-

plain about revenue loss.

100

Kane and Rosenbloom rejected the conception

of hypothetical, collective income, or revenue that could have been availa-

ble had tax competition not existed.

101

However, the over 170 member ju-

risdictions of the BEPS Inclusive Framework who signed on to the State-

ment and Pillar Two clearly disagree.

102

95.SeeDiane M. Ring, One Nation Among Many: Policy Implications of Cross-Border

Tax Arbitrage, 44 B.C.

L. R

EV. 79, 125–28 (2002).

96. Daniel Shaviro, Money on the Table?: Responding to Cross-Border Tax Arbitrage,

HI.J.INT’L L. 317, 323–25 (2002); Kane, supra note 64, at 114; Ring, supra note 95, at

126–27 (2002); Rosenzweig, supra note 94, at 564–65.

97. Shaviro, supra note 96, at 327.

98. Kane, supra note 64, at 142.

99. Until national legislators and the European Commission began to uncover the Lux-

embourg’s secret tax ruling practice to offer favorable tax treatment, there had been no retalia-

tion from other European Union (“EU”) countries because they simply did not know about it.

See Omri Marian, The State Administration of International Tax Avoidance, 7 H

ARV.BUS.L.

EV. 1, 27–28 (2017).

100. Avi-Yonah, supra note 89, at 167.

101. Mason & Saint-Amans, supra note 89, at 5; see Kane, supra note 64, at 115 (argu-

ing that the acceptance of the single tax principle suggests that there is some international

consensus on the meaning of income, but no such consensus exists.).

102. OECD, H

YBRID MISMATCH ARRANGEMENTS:TAX POLICY AND COMPLIANCE

ISSUES 11 (2012), http://www.oecd.org/ctp/exchange-of-tax-information/hybrid-mismatch-

arrangements-tax-policy-and-compliance-issues.pdf (“Although it is often difficult to deter-

mine which of countries involved has lost tax revenue [as a result of tax competition], it is

clear that collectively the countries concerned lose tax revenue.”).

2022] The Promise and Pitfalls of the Global Minimum Tax 523

On a more direct challenge to the single tax principle, scholars have

raised concerns about what it means to tax only once.

103

Shaviro suggests

that being taxed twice at low rates (for example, two percent and two per-

cent) need not necessarily be worse than being taxed once (for example, five

percent).

104

He further argues that the single tax principle would be hard to

operationalize despite higher levels of international cooperation because it is

“challenging to coordinate distinctive tax systems across multiple complex

dimensions” and, worse, countries have little interest in harmonizing their

tax rules.

105

Nevertheless, recent developments, such as 137 Inclusive Framework

member jurisdictions agreeing to the two-Pillar solution—including the

global minimum tax in the Statement

106

—indicate that international interest

in tax harmony is not as outlandish as some scholars suggest.

107

But the

global tax deal in the Statement was not built in a day. The next subpart fur-

ther explains the global reaction toward the single tax principle and tax

harmony prior to the creation of Pillar Two.

B. Global Efforts Begin in the Late 2000s

The recent international struggle in combatting tax competition is well

known among those in the field of international taxation. The first promis-

ing step toward the single tax principle occurred in the context of tax infor-

mation transparency. Following the 2008 financial crisis, the Foreign Ac-

count Tax Compliance Act of 2010 (“FATCA”) was enacted in the United

States.

108

FATCA was designed to stop the practice of U.S. residents pre-

tending to be foreigners in order to escape from U.S. taxation.

109

This prac-

103. John Bentil, Situating the International Tax System Within Public International

Law, 49 G

EO.J.INT’L L. 1219, 1251–52 (2018); see also Daniel Shaviro, The Two Faces of

the Single Tax Principle, 41 B

ROOK.J.INT’L L. 1293, 1294 (2016).

104. Shaviro, supra note 103, at 1294. However, this argument did not consider that tax-

ing once in the single tax principle has more nuance than just one count—that is, cross-border

income should be taxed once at a substantive tax rate.

105. Daniel Shaviro, The Crossroads Versus the Seesaw: Getting a “Fix” on Recent

International Tax Policy Developments, 69 T

AX L. REV. 1, 3–4 (2015).

106.Statement, supra note 1, at 4–5.

107.SeeBentil, supra note 103, at 1251–52; Shaviro, supra note 96, at 330 (arguing the

STP would be difficult to operationalize despite increased levels of international cooperation

because “[s]hort of countries agreeing to harmonize their distinctive rules (which they appear

to have little interest in doing), it is quite challenging to coordinate all of the interactions be-

tween distinctive systems across multiple complex dimensions.”).

108. See, e.g., Michael S. Kirsch, Revisiting the Tax Treatment of Citizens Abroad: Rec-

onciling Principle and Practice, 16 F

LA.TAX REV. 117, 122 (2014).

109. To explain this concept more technically, U.S. residents pretend to be foreigners to

enjoy tax benefit from the portfolio interest exemption and other tax breaks for foreign portfo-

lio investment, such as the exemption of capital gains. For an explanation of FATCA general-

ly, see Young Ran (Christine) Kim, Considering “Citizenship Taxation”: In Defense of

FATCA, 20 F

LA.TAX REV. 335, 359–62 (2017).

524 Michigan Journal of International Law [Vol. 43:3

tice enabled double non-taxation of income hidden in offshore accounts,

where such assets were rarely detected because of bank secrecy.

110

Thus,

FATCA required foreign financial institutions, such as Swiss banks, to re-

port accounts held by U.S. residents and citizens to the U.S. government.

111

If foreign financial institutions do not comply, they are subject to tax penal-

ties and criminal charges. FATCA’s major success directly led to the devel-

opment of the Common Reporting Standard at the global level, which linked

over 100 foreign jurisdictions in a system where they could automatically

exchange tax information with each other.

112

The enhanced transparency in

tax information among countries can help achieve the single tax principle

because it prevents double non-taxation of passive investment income

earned by individuals. It is still not perfect (as evidenced by the recent leaks,

such as the Pandora Papers),

113

but it is a significant step forward to full im-

plementation of the single tax principle.

Second, in recent years, many countries have been more willing to co-

operate and harmonize substantive tax rules to resolve tax competition.

114

Europe, the 2008 financial crisis led to massive austerity, which in turn put

pressure on politicians to raise concerns that MNEs (especially U.S. MNEs)

were not paying their fair share of tax to Europe as a source jurisdiction.

115

Some countries, such as the United Kingdom and France, realized that tradi-

tional international tax rules with a physical presence requirement did not

allow them to tax Big Tech despite the fact that those companies collected

and profited from the user data of their citizens.

116

Thus, they adopted digi-

tal services taxes (“DSTs”).

117

This move caused heated debate around the

world, leading the OECD to launch BEPS Project 1.0 to try to update the

international tax regime that overlooked under-taxation of the digital econ-

omy and to prevent trade wars over individually-enacted DSTs.

118

Through these efforts, countries realized that a complete harmonization

of substantive tax law was unlikely to be fully successful as a comprehen-

110.Id.

111. I.R.C. §§ 1471, 1472, 1473, 1474.

112. See id.

113. See The Pandora Papers: An ICIJ Investigation, I

NT’L CONSORTIUM INDEP.

OURNALISTS http://www.icij.org/investigations/pandora-papers/ (last visited Mar. 11, 2022).

The Pandora Papers are 11.9 million leaked documents that the International Consortium of

Investigative Journalists published that exposed the secret offshore accounts of thirty-five

world leaders as well as more than 100 billionaires, celebrities and business leaders

114.SeeOECD,

NCLUSIVE FRAMEWORK ON BASE EROSION AND PROFIT SHIFTING,

http://www.oecd.org/tax/beps/ (last visited Mar. 11, 2022).

115.SeeSchreuer Rappepert & Singer Tankersley, Europe’s Planned Digital Tax

Heightens Tensions with US, N.Y.

IMES, Mar. 19, 2018, at 1–2, http://www.nytimes.com

/2018/03/19/us/politics/europe-digital-tax-trade.html.

116.Id. at 3–4.

117. See e.g., Young Ran (Christine) Kim, Digital Services Tax: A Cross-border Varia-

tion of the Consumption Tax Debate, 72 A

LA.L.REV. 131, 136 (2020).

118. OECD, supra note 114.

2022] The Promise and Pitfalls of the Global Minimum Tax 525

sive solution to tax competition because individual states would be reluctant

to defer to another states’ underlying tax rules, or agree to implement a

common set of rules for harmonization that may not match their tax objec-

tives.

119

An alternative to harmonization that states have pursued recently

are conditional rules.

120

Mason explains these conditional rules as “fiscal

fail-safe” measures to guarantee full taxation and implement the single tax

principle.

121

In other words, the conditional or secondary rules attempt to

ensure that cross-border income does not escape tax by identifying “condi-

tions under which, if one country does not tax, another country fills the tax

void.”

122

These conditional rules emerged in the BEPS Project 1.0, such as

in Action 3 for expanding the CFC regimes

123

and Action 2 for anti-hybrid

rules.

124

The BEPS Project 2.0 Pillar Two for a global minimum tax is also

built on this conditional, fiscal fail-safe rules as demonstrated in Part

III.A.

125

Although not extensively harmonious because of various carve-

outs and specific exceptions that various countries demanded, the examples

reflect a new willingness to cooperatively coordinate efforts to address in-

ternational tax arbitrage in a more comprehensive way.

On reflection, BEPS Project 1.0 included some significant steps toward

tax harmony and the single tax principle. BEPS Project 1.0 is contrary to

Rosenbloom’s preferred solution of acquiescing to tax competition and arbi-

trage, which is doing nothing, because he did not believe there was a prob-

lem to solve. However, while this Project advanced the single tax principle,

most of its actions have been recommendations, not requirements, and for

the most part its recommendations went unimplemented throughout the

world. However, the EU did adopt various action items of BEPS Project 1.0

through its own directives, such as the Anti-Tax Avoidance Directive

(“ATAD”).

126

But such a regional approach is limited in its ability to ad-

vance the single tax principle because of the need for global harmonization.

BEPS Project 1.0 was disappointing because it did not fully implement the

119. See e.g., Yariv Brauner, Treaties in the Aftermath of BEPS, 41 BROOK.J.INT’L L.

974, 976–77 (2016).

120. See Transformation, supra note 12, at 378–79. Mason offers two examples of con-

ditional rules: penalty defaults and fiscal fail-safes. Penalty defaults may be set up in tax law

and treaties if states do not resolve tax ambiguities against the taxpayer. Rules that deny tax-

treaty benefits to fiscally transparent entities could be understood as penalty defaults. Fiscal

fail safes are explained in the above text.

121.Id.at 374–75.

122.Id.at 381.

123. OECD, D

ESIGNING EFFECTIVE CONTROLLED FOREIGN COMPANY RULES,ACTION

3–2015FINAL REPORT 12 (2015), http://dx.doi.org/10.1787/9789264241152-en.

124. OECD, N

EUTRALISING THE EFFECTS OF HYBRID MISMATCH ARRANGEMENTS,

CTION 2 – 2015 FINAL REPORT 49–50 (2015), http://dx.doi.org/10.1787/9789264241138-en.

125. See infra Part III.A.

126. Reuven Avi-Yonah & Gianluca Mazzoni, BEPS, ATAP and the New Tax Dialogue:

A Transatlantic Competition? 46

NTERTAX 885, 885 (2018).

526 Michigan Journal of International Law [Vol. 43:3

single tax principle on any meaningful scale or update the international tax

regime for the twenty-first century.

127

The shortcomings of BEPS Project 1.0 were addressed in BEPS Project

2.0. The new project developed a plan for international taxation that ad-

dressed the most pressing concerns in the plan’s two Pillars. However, the

impetus of the plan did not come from the EU or any other multilateral

agreement – it was a direct result of the passage of the TCJA. The next sub-

part discusses the important provisions of the TCJA that inspired BEPS Pro-

ject. 2.0.

C. The TCJA as Constructive Unilateralism

The United States has a long history of unilaterally adopting tax poli-

cies that are later enacted by many other countries around the world. This

risk-taking on the part of the United States is considered by many to be in-

ternationally constructive because it allows other jurisdictions to evaluate

the effectiveness of a tax policy before implementation.

128

Most notably, the

United States has led the way with the Foreign Tax Credit, CFCs, and the

two international tax rules in the TCJA—GILTI and BEAT, discussed in

more detail below.

129

Passage of the TCJA was not primarily motivated by a desire to imple-

ment the single tax principle. Instead, the U.S. government wanted to bring

back and tax the nearly $3 trillion USD of offshore corporate profits of the

U.S. MNEs.

130

Before the TCJA, U.S. parent companies with foreign sub-

sidiaries were generally not taxed on the earnings of their subsidiaries until

the earnings were distributed to them (or repatriated to the United States).

131

If the foreign corporation did not distribute earnings back to the United

States, U.S. parents could indefinitely defer paying U.S. taxes at the thirty-

five percent rate on this foreign income.

132

As a result, U.S. MNEs, such as

Apple, could incorporate a subsidiary in tax havens or low-tax jurisdictions

like Ireland (where the corporate tax rate is 12.5 percent) and allocate as

127. Reuven Avi-Yonah, Full Circle: The Single Tax Principle, BEPS, and the New US

Model, 1G

LOBAL TAX’N 12, 12 (2016) (criticizing BEPS Project 1.0 for not changing the

obsolete physical presence requirement in tax treaties and limiting the unworkable arm’s

length standard for transfer pricing).

128. Reuven Avi-Yonah, Constructive Dialogue: BEPA and the TCJA 2 (Univ. Mich.

Pub. L.

Rsch. Paper No. 665, 2020), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=

3544065.).

129.Id.at 2, 4, 16.

130. Reuven S. Avi-Yonah, The International Provisions of the TCJA: A Preliminary

Summary and Assessment, (Univ. Mich. Pub. L. Rsch. Paper No. 605, 2017), http://

papers.ssrn.com/sol3/papers.cfm?abstract_id=3193278.

131.Id.

132. Upon repatriation of earnings from a foreign subsidiary, U.S. corporate sharehold-

ers’ earnings were treated as dividends that were included in the parent corporation’s income

and were subject to U.S. taxation at a rate of up to thirty-five percent with a foreign tax credit

based on foreign taxes paid.

2022] The Promise and Pitfalls of the Global Minimum Tax 527

much taxable income as possible to these low-tax jurisdictions in order to

minimize U.S. corporate income tax.

133

Between 2005 and 2017, U.S.

MNEs had accumulated $2.6 trillion USD of low-taxed foreign income off-

shore that had never been subject to the thirty-five percent corporate income

tax rate.

134

Thus, one of the primary goals of the TCJA was to remove po-

tential tax benefits from offshoring income, thus returning the $2.6 trillion

USD in capital to the United States for taxation and deterring such profit-

shifting activity in the future.

135

At the same time, other corporations whose businesses are more fo-

cused on the domestic market, such as Walmart, lobbied to reduce the thir-

ty-five percent corporate tax rate, while owners of pass-through entities

(like then-President Trump) pushed for a reduction of the tax rate on part-

nerships.

136

The result was the TCJA. The TCJA implemented a participation ex-

emption for dividends from CFCs,

137

cut the corporate tax rate from thirty-

five percent to twenty-one percent,

138

and cut the partnership and other

pass-through tax rate from thirty-seven percent to 29.6 percent.

139

However,

to pay for all these tax cuts within the confines of Budget Reconciliation,

the Republican members of Congress decided to apply the single tax princi-

ple to U.S. MNEs to stop their base erosion and profit-shifting strategies

that have harmed U.S. revenue.

140

Three important provisions of the TCJA represented steps toward the

single tax principle. First is the one-time mandatory “repatriation tax”

(sometimes referred to as the “transition tax”). A significant tax rate (be-

133. For example, in a recent high-profile tax case, the European Commission demanded

that Apple pay Ireland €13.1 billion Euros in underpaid taxes because Ireland granted state aid

to the company. Padraic Halpin, Ireland Collects Disputed Apple Taxes in Full ahead of Ap-

peal,R

EUTERS (Sept. 18, 2018, 8:55 AM), http://reut.rs/38wQSLQ.

134. Key Elements of the U.S. Tax System,T

AX POL’Y CTR. (last updated May 2020),

http://www.taxpolicycenter.org/briefing-book/what-tcja-repatriation-tax-and-how-does-it-

work.

135. See Avi-Yonah, supra note 130.

136.SeeJohn Ydstie, How Trump’s Corporate Tax Cut Is Playing Out for Wal-Mart,

NPR (Jan. 13, 2018, 5:47 PM), http://www.npr.org/2018/01/13/577900650/how-trump-s-

corporate-tax-cut-is-playing-out-with-wal-mart; see also Reuven Avi-Yonah, How Terrible is

the New Tax Law? Reflections on TRA17, (Univ. of Mich. Pub. L. Rsch. Paper No. 586,

2018), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3095830.

137. Before the Tax Cuts and Jobs Act (“TCJA”), U.S. taxpayers were subject to U.S.

income taxes on their worldwide income. But income earned by the foreign subsidiaries of

U.S. corporations was subject to tax only when repatriated to the United States as dividends.

The TCJA changed the tax rules for multinational corporations by generally exempting the

earnings of foreign subsidiaries’ active businesses from U.S. corporate taxation, even if repat-

riated. Technically, there now is a 100 percent dividend-received deduction. This is called

“participation exemption.” I.R.C. § 245A.

138. I.R.C. § 11.

139. I.R.C. § 199A.

140.SeeAvi-Yonah, supra note 136, at 5–6.

528 Michigan Journal of International Law [Vol. 43:3

tween eight and fifteen percent) was imposed on the past accumulated off-

shore profits of U.S. MNEs.

141

It was imposed only one time, and it did not

matter whether those offshore profits were repatriated to the United

States.

142

Those profits were parked in low-tax jurisdictions, resulting in

nominal source taxation. They were not subject to residence taxation by the

United States because the pre-TCJA tax law allowed the U.S. MNEs to de-

fer taxation until the profits were repatriated.

143

Hence, the new temporary

repatriation tax in the TCJA implemented the single tax principle because

these profits were previously subject to double non-taxation through the

“check the box” policy.

Second, the GILTI rule imposed a tax on certain foreign subsidiaries’

income from intangible assets.

144

Although the TCJA lowered the top cor-

porate income tax rate from thirty-five percent to a flat twenty-one percent,

the U.S. corporate tax rate still exceeds the rate in many countries.

145

Thus,

situating ownership of a profitable patent, for example, in a foreign subsidi-

ary in a lower-rate or no-tax jurisdiction instead of in the United States still

could produce a substantial tax savings for an MNE. GILTI aims to prevent

such profit shifting from easily movable intangible assets by imposing the

U.S. tax as residence taxation on foreign-source income from intangibles.

146

GILTI is foreign income earned by U.S. shareholders of CFCs from intan-

gible assets, such as copyrights, trademarks, and patents. It is calculated as

the total active income earned by a CFC that exceeds ten percent of the

firm’s depreciable tangible property (known as the Qualified Business Asset

Investment, or “QBAI”). The resulting U.S. shareholders who own ten per-

cent or more of a CFC are liable for the tax on its GILTI, which generally

applies at a rate between 10.5 percent and 13.125 percent.

147

GILTI is per-

haps the most successful and influential achievement of the single tax prin-

ciple contained within the TCJA. Income subject to the GILTI rule would

be subject to little-to-no tax in source and otherwise not be subject to U.S.

141. I.R.C. § 965.

142.SeeReuven Avi-Yonah, The International Provisions of the TCJA: Six Results Af-

ter Six Months (Univ. of Mich. Pub. L. Rsch. Paper No. 621, 2018), http://papers.ssrn.com

/sol3/papers.cfm?abstract_id=3242008.

143. U.S. multinational enterprises (“MNEs”) deployed complicated corporate structures

with the check-the-box rule so that they could defer the U.S. taxation until the offshore profits

were repatriated, which rarely happened.

144. See Avi-Yonah, supra note 142.

145.Id.

146.Id.;Avi-Yonah, The Baby and the Bathwater: Reflections on the TCJA’s Interna-

tional Provisions, 101 T

AX NOTES INT’L 599 (Feb. 1, 2021).

147. I.R.C. § 951A. Under current law, GILTI is defined as net foreign income after a

deduction for 10 ten percent of the value of foreign tangible assets. Half of GILTI is taxed at

the U.S. corporate rate of twenty one percent, which means the basic rate on GILTI is 10.5%.

If a company pays foreign taxes, it can claim eighty percent of the value of those taxes as a

credit against GILTI liability. Taking this foreign tax credit policy into account means the tax

rate on GILTI moves up to 13.125%.

2022] The Promise and Pitfalls of the Global Minimum Tax 529

residence taxation. The exclusion for offshore tangible assets returns (the

QBAI exemption) may tarnish the purpose of GILTI, but it is unlikely to be

a major drawback because the largest U.S. MNEs had few tangible assets

offshore.

148

Finally, the BEAT provision addressed the problem of base erosion by

foreign MNEs.

149

Suppose that a U.S. corporation pays deductible pay-

ments, such as interest and royalties, to a related foreign entity. From the

foreign entity’s perspective, such interest and royalties are U.S. source in-

come. But suppose further that the foreign entity is not subject to U.S. with-

holding tax for various reasons, such as tax treaty benefits and statutory tax

exemptions. This is a classic example of multinationals escaping source-

based taxation (in this case, U.S. taxation) by accumulating large amounts

of deductible payments offshore. Neither the U.S. corporation nor the for-

eign recipient pay tax to the source country. To avoid such base-erosion

payment, the BEAT reverses deductions and imposes an alternative mini-

mum tax set at ten percent (12.5 percent from 2026) on the modified tax

base of the U.S. corporation.

150

The BEAT was enacted despite potentially

violating the non-discrimination provision of all U.S. tax treaties because

the rule applies to the case of “U.S. subsidiary-foreign parent” but not the

case of “U.S. subsidiary-U.S. parent.”

151

Nonetheless, BEAT effectively

denies deductions in source countries for payments that are unlikely to be

subject to residence-based taxation. BEAT achieves the single tax principle

by strengthening source-based taxation.

The TCJA, albeit begrudgingly, moved the United States toward the

single tax principle and combating tax competition. The global result was

remarkably constructive, as the TCJA demonstrated a means to feasibly

achieve reasonable tax harmonization. Inspired by the international tax pro-

visions of the TCJA, the G20 and the OECD launched BEPS Project 2.0 in

2017, using GILTI and BEAT as the models for its Pillar Two proposal. Pil-

lar One of the Statement focuses on updating outdated rules in source-based

taxation.

152

Pillar Two is more directly on point for implementing the single

tax principle through a combination of rules strengthening residence-based

taxation (for example, the IIR) and source-based taxation (UTPR and

STTR). The benchmark of “substantial tax” counted “once” for single tax

148. This also meant that the new participation exemption in the TCJA violates the sin-

gle tax principle, but it is unlikely to benefit the multinationals much.

149. I.R.C. § 59A.

150.Id.

151. A tax treaty’s non-discrimination provision promises to treat nationals of one coun-

try that is party to the tax treaty the same as nationals of the source country that is party to the

tax treaty if both sets of nationals are in the same circumstance. Under BEAT, it is possible

that two corporations in the same circumstance could be treated differently.

152. Pillar One focuses on source-based taxation and finally partially abolishes the obso-

lete physical presence requirement and the arm’s length standard for some of the profits of

large multinationals above a fixed return on assets. See Avi-Yonah, Kim & Sam, supra note 4.

530 Michigan Journal of International Law [Vol. 43:3

purposes is set at fifteen percent, the global minimum tax. Part III will dis-

cuss Pillar Two in greater detail.

III. A NEW SOLUTION:PILLAR TWO AND GLOBAL MINIMUM TAX

The Statement presents Pillar Two and the global minimum tax as a

new solution to tax competition. Together with Pillar One, the entire

framework in the Statement represents a revolution in international taxation

by offering many solutions, such as eliminating the obsolete permanent es-

tablishment requirement for Amount A in Pillar One and proposing a fifteen

percent global minimum tax in Pillar Two. All of these are decisive breaks

from the past, and have been suggested for twenty-five years but have

gained little traction until now.

153

Thus, the Statement encompasses both

revolution and evolution.

This Part focuses on Pillar Two of the Statement. Pillar Two is a new

solution to tax competition. It is aimed at systematically preventing the race

to the bottom and eliminating incentives for both states and MNEs to en-

gage in tax competition. However, this novel solution builds upon past ef-

forts. This article argues that Pillar Two has finally embodied the single tax

principle which states that all income of MNEs ought to be taxed once at a

substantive tax rate. If this proposition is not met, corrective rules apply to

accomplish the result. This Part explains the details of Pillar Two and the

relevant implementation rules, such as the proposed BBB Act of the United

States. The rules are very technical and complex. Evaluating these rules

through the lens of the single tax principle—that all income must be taxed

once substantially—will help readers understand the rules intuitively if the

technicalities overwhelm.

A. Unpacking Pillar Two

Pillar Two consists of (1) two interlocking domestic rules requiring in-

come inclusion (for residence countries (IIR) and denial of deduction for

source countries (UTPR), together referred to as the Global anti-Base Ero-

sion (“GLoBE”) Rules, and (2) a treaty-based rule (STTR).

1. Domestic Rules: Global Anti-Base Erosion (“GloBE”) Rules

GloBE Rules, have two components: income inclusion (IIR) and denial

of deduction (UTPR). MNEs that meet the €750 million Euros revenue

threshold determined under BEPS Action 13 (country-by-country reporting)

are subject to a global minimum tax regardless of the jurisdiction where

153. Reuven S. Avi-Yonah, The New International Tax Framework: Evolution or Revo-

lution?, 25 A

M.SOC’Y INT’L L. 11 (2021), http://www.asil.org/insights/volume/25/issue/11.

2022] The Promise and Pitfalls of the Global Minimum Tax 531

they are headquartered or operating.

154

Also, the Statement makes it clear

that the U.S. GILTI regime will co-exist with the GloBE rules.

155

First, the IIR requires the residence countries of multinational corpora-

tions to impose top-up tax

156

on an ultimate parent entity (“UPE”) at a min-

imum rate of fifteen percent if the source country where a subsidiary oper-

ates imposes tax below such minimum rate on the subsidiary’s income. The

fifteen percent global minimum tax rate is an effective rate, not a nominal

rate.

157

The IIR allocates top-up tax based on a top-down approach subject

to a split-ownership rule for shareholdings below eighty percent.

158

With the

single tax principle in mind, this rule acts as a corrective measure that al-

lows residence countries to tax if source taxation is not substantial enough

to count “once.”

Second, if a residence country does not impose this minimum tax, the

subsidiary’s deduction for payment to the parent entity would be denied or

an equivalent adjustment would be required as per the UTPR to the extent

that the low tax income of a subsidiary is not subject to tax under an IIR.

159

This represents an additional corrective measure to guarantee substantial

source taxation if residence countries do not cooperate.

To illustrate, suppose that a subsidiary in the source country earns $100

USD of income and the source country imposes tax at ten percent, which is

below the fifteen percent global minimum tax rate. Then, the residence

country of the parent entity includes the $100 USD in the parent’s income

and imposes tax at a rate that is equal to the difference between the fifteen

percent of global minimum rate and the said ten percent tax rate. Suppose

further that the subsidiary pays the $100 USD to the parent in a deductible

form, such as a royalty. If the residence country does not have the IIR, the

subsidiary’s deduction for the $100 USD royalty payment will be denied.

Pascal Saint-Amans, the director of the OECD’s Center for Tax Policy

and Administration, explains that the UTPR is intended as an insurance pol-

154. Statement, supra note 1, at 4 (explaining that government entities, international or-

ganizations, non-profit organizations, pension funds or investment funds that are Ultimate

Parent Entities (“UPE”) of an MNE Group or any holding vehicles used by such entities, or-

ganizations or funds are not subject to the Global Anti-Base Erosion (“GloBE”) rules).

155. Id. at 5.

156. A top-up tax allows the residence country to tax the difference between the appli-

cable tax rate in a particular country up to the agreed global minimum tax rate. David Lawder

& Leigh Thomas, Explainer: What is a Global Minimum Tax and How Could it Affect Com-

panies, Countries? R

EUTERS (Apr. 14, 2021, 8:50 AM), http://www.reuters.com/business

/what-is-global-minimum-tax-how-could-it-affect-companies-countries-2021-04-14. For ex-

ample, if a country only taxed at eleven percent, the residence country could tax the difference

of four percent to ensure the fifteen percent global minimum was achieved.

157. Statement, supra note 1, at 4 (explaining that this effective tax rate is calculated on

a jurisdictional basis and uses a common definition of covered taxes and tax a tax base deter-

mined by reference to financial accounting income).

158. Id.

159. Id at 3.

532 Michigan Journal of International Law [Vol. 43:3

icy against countries that refuse to implement Pillar Two.

160

If companies

move to non-cooperating jurisdictions in hope of gaining a tax advantage,

the effect would be fully neutralized. However, certain MNEs will not be

subject to the undertaxed payment rule for the first five years after meeting

the €750 million Euros revenue threshold if their foreign tangible assets do

not exceed €50 million Euros and they operate in no more than five foreign

countries.

161

There are important carve-outs to the GloBE rules.

162

First, the sub-

stance-based carve-out of income from the Pillar Two rules will exempt, in

the first year, eight percent of the carrying value of tangible assets and ten

percent of payroll. These percentages will decline by 0.2 percent each year

for the next five years, and by 0.4 percent (for tangible assets) and 0.8 per-

cent (for payroll) each year for the subsequent five years, after which the

exemption will be five percent of both tangible assets and payroll. Second, a

de minimis carve-out will exclude profits from countries where the MNE

has less than €10 million Euros in revenue and less than €1 million Euros in

profits. The Statement offers that there will be further carve-outs, such as

safe harbors, in the implementation documents.

163

These substantial carve-

outs harm the spirit of the single tax principle, and infra Part IV.B.2 dis-

cusses their pitfalls.

2. Treaty-Based Rule: Subject to Tax Rule (“STTR”)

The STTR is a standalone treaty rule whose origin can be traced back to

Stanley Surrey’s U.S. tax treaty policy in the 1960s, discussed in Part II.A.1.

It specifically targets intercompany payments that exploit treaties to shift

profits to low-tax jurisdictions.

164

Therefore, this rule applies to certain cat-

egories of deductible payments that present a greater risk of base erosion,

such as interest and royalties.

165

There were negotiations by the Inclusive

Framework regarding the minimum rate for STTR, between 7.5 percent and

nine percent,

166

however, the Statement stipulates that the minimum rate

will be nine percent.

167

160. Alex Parker, How the Global Tax Agreement Could Backfire for Biden, LAW360

(Oct. 18, 2021), http://www.law360.com/tax-authority/articles/1431269/how-the-global-tax-

agreement-could-backfire-for-biden.

161. Statement, supra note 1, at 4.

162. In addition to the two carve-outs in the text above, international shipping income is

excluded from the GloBE rules. Statement, supra note 1, at 5.

163. Id. at 4–5.

164. OECD, T

AX CHALLENGES ARISING FROM DIGITALISATION - REPORT ON PILLAR

TWO BLUEPRINT: INCLUSIVE FRAMEWORK ON BEPS, OECD/G20 BASE EROSION AND

PROFIT SHIFTING PROJECT 150, ¶ 566 (2020), http://doi.org/10.1787/abb4c3d1-en [hereinaf-

ter, P

ILLAR TWO BLUEPRINT].

165. Id. at 150, ¶ 568.

166. OECD,

STATEMENT ON A TWO-PILLAR SOLUTION TO ADDRESS THE TAX

CHALLENGES ARISING FROM THE DIGITALISATION OF THE ECONOMY 5 (July 1, 2021),

2022] The Promise and Pitfalls of the Global Minimum Tax 533

For example, suppose that a subsidiary in the source country pays a

royalty to a parent company of $100 USD, and the parent’s $100 USD roy-

alty income is subject to a nominal tax rate of one percent below the mini-

mum rate (nine percent) in the residence country. Then, the source country

is allowed to impose withholding tax on the royalty payment at a rate that is

equal to the difference between the minimum rate provided for under the

STTR (nine percent) and the said nominal tax rate (one percent).

168

3. Model Rules

The Statement provides, “[p]illar Two should be brought into law in

2022, to be effective in 2023, with the UTPR coming into effect in 2024.”

169

The OECD/Inclusive Framework will present Model Rules for Pillar Two to

define the scope and mechanics of the GloBE rules and provide a template

for domestic legislation to implement the GloBE regime. The OECD

/Inclusive Framework will also provide model treaty provisions to give ef-

fect to the STTR by mid-2022.

170

At the end of 2022, the OECD expects to

have an implementation framework to facilitate the coordinated implemen-

tation of the GloBE rules.

171

In December 2021, the OCED/Inclusive Framework released Model

Rules for Pillar Two, consisting of ten chapters that explained the GloBE

regime in detail.

172

In addition to this seventy-page document, the OECD

/Inclusive Framework distributed Commentary to the Model Rules (Pillar

Two) later in March 2022, which is about 230 pages long. There are multi-

ple supplements issued by the OECD/Inclusive Framework,

173

but the au-

thors found the six-page fact sheets most helpful for many readers.

174

http://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-

arising-from-the-digitalisation-of-the-economy-july-2021.pdf [hereinafter J

ULY STATEMENT].

167.Statement, supra note 1, at 5.

168. P

ILLAR TWO BLUEPRINT, supra note 164, at 165, ¶ 650.

169.Statement, supra note 1, at 5.

170. G

LOBAL ANTI-BASE EROSION MODEL RULES (PILLAR TWO), FREQUENTLY ASKED

QUESTIONS, OECD 6 (Dec. 2021). The model treaty provisions were supposed to be released

in November 2021, but the released was delayed to mid-2022.

171.Id.

172. T

AX CHALLENGES ARISING FROM THE DIGITALISATION OF THE ECONOMY –

LOBAL ANTI-BASE EROSION MODEL RULES (PILLAR TWO), OECD (Dec. 2021), http://

www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-theeconomy-global-

anti-base-erosion-model-rules-pillar-two.htm [hereinafter, Model Rules]. Chapter 1 addresses

questions of the GloBE scope. Chapters 2–5 contain the key operative rules. Chapter 6 deals

with mergers and acquisitions. Chapter 7 provides special rules that apply to certain tax neu-

trality and existing distribution tax regimes. Chapter 8 deals with administration, Chapter 9

provides for rules on transition and Chapter 10 contains definitions. Id. at 7.

173. See e.g., T

HE PILLAR TWO RULES IN A NUTSHELL, OECD (Dec. 2021), http://

www.oecd.org/tax/beps/pillar-two-model-rules-in-a-nutshell.pdf; O

VERVIEW OF THE KEY

OPERATING PROVISIONS OF THE GLOBE RULES, OECD (Dec. 2021), http://www.oecd.org/tax

534 Michigan Journal of International Law [Vol. 43:3

FIGURE 1. TOP-UP TAX EXPLAINED

175

First, the Model Rules explain what “top-up tax” means in Pillar Two.

As Figure 1 shows, top-up tax first assumes a minimum tax amount relating

to the MNE’s excess profit calculated at the minimum tax rate of fifteen

percent. If certain Covered Taxes (in Step 3 below) paid by constituent enti-

ties of the MNE do not reach the minimum tax amount, the GloBE Rules

will impose an additional tax to fill the deficient tax amount. So, the top-up

tax seems to describe the tax rules that pull the top of the tax liability

amount up to a certain minimum level.

To determine top-up tax liability for an MNE, the Model Rules offer

five steps:

176

• Step 1: An MNE Group determines whether it is within the

scope of the GloBE rules. If so, it identifies the location of

each Constituent Entity within the MNE Group.

• Step 2: The MNE Group determines income of each con-

stituent entity. This so-called GloBE Income of a constitu-

ent entity is the income used for preparing a consolidated

financial statement of the ultimate parent entity.

177

• Step 3: The MNE Group determines taxes attributable to

income determined in Step 2. (Covered Taxes)

• Step 4: The MNE Group calculates the effective tax rate of

all Constituent Entities located in the same jurisdiction. If

an MNE is subject to an effective tax rate below fifteen

percent in any jurisdiction, calculate the top-up tax with re-

spect to that low tax jurisdiction.

• Step 5: The MNE Group is liable to the so-impose top-up

tax under IIR in the residence country or UTPR in the

source country in accordance with the agreed rule order.

178

/beps/pillar-two-GloBE-rules-fact-sheets.pdf (referred to as “fact sheets” in the file name as-

signed by the OECD).

174.Id.

175.Id. at 1.

176.Id.

177.Model Rules, supra note 172, at 15, art. 3.1.

178. Jinyan Li makes a noteworthy observation on the Model Rules’ revised approach

on the UTPR. See Li, supra note 31 (explaining that the UTPR is similar to the U.S. BEAT

rule as an anti-base-erosion rule with respect to MNEs’ intragroup payments. But the Model

2022] The Promise and Pitfalls of the Global Minimum Tax 535

The initial and overwhelming responses from MNEs are that the Model

Rules are so complex that they need to be simplified.

179

For example, Step 4

requires MNEs to calculate their effective tax rate in each jurisdiction where

they do business. It is a novel compliance challenge that requires MNEs to

prepare new information systems.

180

The OECD/Inclusive Framework also

acknowledges the challenges, so the OECD/Inclusive Framework promises

to develop safe harbors that let MNEs avoid full calculations of top-up tax

in certain circumstances.

181

However, the Model Rules Commentary did not

include the details on safe harbors, so MNEs have to wait until, hopefully,

later in 2022 for this issue to be resolved.

B. The U.S. Implementation of Pillar Two through the

Build Back Better (“BBB”) Act

The recently unveiled international tax provisions of the BBB Act

182

represent the United States’ plan to implement Pillar Two. They also serve

as a significant move toward the United States’ implementation of the single

tax principle by introducing various mechanisms to ensure that cross-border

income is taxed once at a substantive tax rate. This Subpart discusses the

proposed changes in the BBB and how they fit in with the new international

tax regime, especially Pillar Two.

1. Global Intangible Low Tax Income (“GILTI”)

Probably the most important element in the BBB Act is the modifica-

tion of the GILTI rules. The BBB Act raises the GILTI tax rate from 10.5

Rule removes the link to intragroup payments and makes the UTPR a modified formulary ap-

portionment to share tax base among countries. Li concludes that such modified approach de-

parts from the international consensus on the original version of Pillar Two UTPR and may be

incompatible with tax treaties.).

179. See e.g., Isabel Gottlieb, Companies Eager to See Details on Minimum Tax Simpli-

fications,B

LOOMBERG TAX (Mar. 23, 2022), http://news.bloombergtax.com/daily-tax-report-

international/companies-eager-to-see-details-on-minimum-tax-simplifications; Allison Chris-

tians, Full Professor, H. Heward Stikeman Chair in Tax Law, McGill University Faculty of

Law, Oral Presentation “Let the GILTI GloBE Games Begin” at the 4th Annual UCI Law–A.

Lavar Taylor Tax Symposium (Mar. 21, 2022); BEPS Monitoring Group Comments on the

Model Rules for a Global Anti-Base-Erosion Minimum Corporate Tax, supra note 28, at

1427.

180. Gottlieb, supra note 179.

181.Model Rules, supra note 172, at 47, art. 8.2. However, BEPS Monitoring Group

criticizes that such safe harbors protect the interest of MNEs and may harm the goal of Pillar

Two. BEPS Monitoring Group Comments on the Model Rules for a Global Anti-Base-Erosion

Minimum Corporate Tax, supra note 28, at 1427.

182. H.R. 5376, 117th Cong. (2021) (Introduced in the House on Sept. 27, 2021, re-

ferred to the House Budget Committee, Build Back Better Act Rules Committee Print, updat-

ed Nov. 3, 2021) [hereinafter Build Back Better (“BBB”) Act].

536 Michigan Journal of International Law [Vol. 43:3

percent

183

to fifteen percent

184

(15.8 percent with foreign tax credits), re-

duces the exemption ratio of tangible assets (QBAI) from ten percent

185

five percent,

186

and applies the GILTI rule on a country-by-country basis.

187

GILTI has been the most successful unilateral implementation of the

single tax principle by a residence country. But the proposed changes in the

BBB Act are intended to implement Pillar Two’s GloBE rules with other

participating countries. The new GILTI rate of fifteen percent is the same as

the global minimum tax rate of fifteen percent in Pillar Two. The reduction

of the QBAI limit to five percent is similar to the substance carve-out per-

mitted by the OECD.

188

Specifically, the OECD’s substance carve-out un-

der Pillar Two “will exclude an amount of income that is five percent of the

carrying value of tangible assets and payroll.”

189

Country-by-country appli-

cation of GILTI is required by Pillar Two.

190

These changes in the U.S. law, if enacted, make it much more promis-

ing that the other G20 countries will enact similar changes. If all the G20

members follow up on their commitments to the Statement, the world will

be much closer to achieving the single tax principle. Since ninety percent of

large MNEs are headquartered in the G20,

191

this means that they will be

subject to the fifteen percent minimum tax in residence countries. That in

turn should enable source countries to apply the UTPR and the STTR with-

out worrying that an MNE can move its operations elsewhere to pay a lower

rate. As the single tax principle proposes, substantive taxation will exist in

either residence or source countries via corrective measures.

It is also important that the GILTI foreign tax credit limit is raised from

eighty percent to ninety-five percent,

192

because that means that source

183. Daniel Bunn, Piling on the GILTI Verdicts,TAX FOUND. (July 15, 2021),

http://taxfoundation.org/biden-gilti-proposal/ (“Half of GILTI is taxed at the U.S. corporate

rate of 21 percent, which means the basic rate on GILTI is 10.5 percent.”).

184. BBB Act, H.R. 5347, § 138131(a)(3) (2021).

185. I.R.C. § 951A(b)(2)(A).

186. BBB Act, H.R. 5347, § 138126(d) (2021).

187. BBB Act, H.R. 5347, § 138124(a) (2021). GILTI is currently calculated using

MNEs’ global average tax rates, but under BBB, GILTI would be calculated based on a

MNEs operations in each individual country. Daniel Bunn, GILTI by Country is not as Simple

as it Seems, T

AX FOUND. (May 18, 2021), http://taxfoundation.org/gilti-by-country/. For game

theoretic model analysis comparing a global average regime and a country-by-country regime,

see Sanchirico, supra note 31 (suggesting that a global average model is superior to a country-

by-country regime).

188.Statement, supra note 1, at 4.

189.Id.

190.Statement, supra note 1, at 5 (“It is agreed that Pillar Two will apply a minimum

rate on a jurisdictional basis. In that context, consideration will be given to the conditions un-

der which the US GILTI regime will co-exist with the GloBE rules, to ensure a level playing

field.”).

191. Saez & Zucman, supra note 67.

192. BBB Act, H.R. 5347, § 138127(a) (2021).

2022] The Promise and Pitfalls of the Global Minimum Tax 537

country taxes that meet the global minimum tax rate will be almost fully

creditable against residence taxation. This change shows another important

element of the single tax principle, because if a source tax is substantial

enough to satisfy the global minimum tax rate, it counts as taxing “once”

and thus residence taxation yields to source to guarantee a “single” tax on

such income. Then why not allow 100 percent of foreign tax credit instead

of limiting it to ninety-five percent? The limitation presumably intends to

remind U.S. MNEs to consider U.S. tax implications instead of simply pay-

ing foreign taxes without consideration at the expense of the U.S. tax reve-

nue.

We would have preferred the global minimum tax rate in Pillar Two

and the GILTI rate proposed by the Biden administration to be higher than

fifteen percent—for example, twenty-one percent—because twenty-one

percent is the current corporate income tax rate of the United States

193

and

is closer to the average corporate tax rate of the G20 (26.96 percent).

194

Fur-

thermore, we would have preferred to eliminate the QBAI exemption for

offshore tangible assets because there is no reason to limit the corrective

measures initiated by the residence country, such as GILTI, to income from

offshore intangible assets. Nonetheless, the GILTI provisions in the BBB

Act represent a reasonable compromise position to realize the single tax

principle.

Some Democrats in the U.S. House of Representatives, such as Con-

gressmen Tom O’Halleran, Henry Cuellar, and Lou Correa, expressed con-

cern that the changes to GILTI in the BBB Act could reduce the competi-

tiveness of U.S. MNEs.

195

Their concern is primarily that the U.S.

government has moved too quickly by instituting these rules before the rest

of the world and creating what they argue are new rules, specifically, the

country-by-country regime.

196

These Congressmen posit that the “new rules

in the [Ways and Means Committee’s] draft would allow other countries to

take advantage of our rules, and harm U.S. companies. If we wait, it will al-

low Congress the opportunity to adjust the implementation of the policy

based on how G20 countries write their own GILTI regimes.”

197

193. I.R.C. § 11.

194. Asen, supra note 28.

195. Lawmakers Recommend Caution on GILTI Changes,T

AX NOTES (Oct. 8, 2021),

http://www.taxnotes.com/tax-notes-today-international/global-intangible-low-taxed-income-

gilti/lawmakers-recommend-caution-gilti-changes/2021/10/20/7bcn7?highlight=headquartered%

20G20.

196.Id.

197.Id.

538 Michigan Journal of International Law [Vol. 43:3

2. Foreign Tax Credit (“FTC”) Limitations

The BBB Act requires FTC determinations on a country-by-country ba-

sis.

198

This tightens up the availability of the FTC by adding another cap to

the creditable amount of foreign taxes per country. The new per-country

limitation on top of the existing basket limitations (per category of income)

in the FTC rules

199

finally achieves the Reagan Administration’s proposal

from 1985,

200

which suggested both per category and per country limits ap-

plicable to FTCs.

Since the TCJA reduced the corporate tax rate to twenty-one percent,

most U.S. MNEs paying taxes to foreign countries would be in an excess

FTC position, meaning that the MNEs’ foreign taxes exceed the credit limit

allowed by the U.S. tax law.

201

Furthermore, the proposed global minimum

tax rate of fifteen percent is still lower than the U.S. corporate tax rate of

twenty-one percent, which may still offer room for moderate tax competi-

tion among countries. Hence, allowing generous FTCs to U.S. MNEs would

reduce U.S. tax revenue, undermining its social safety net. In that regard,

the BBB Act’s tightened FTC rule is essential to prevent cross-crediting

202

(as allowed by the TCJA) and to curb an incentive to invest in lower tax

foreign jurisdictions. Furthermore, this change would also reduce the incen-

tives of source countries to engage in tax competition by granting a tax hol-

iday, because even if they offer a low tax rate to U.S. MNEs, that would on-

ly decrease the MNEs’ overall FTC availability due to the BBB Act’s per-

country limitation.

203

198. BBB Act, H.R. 5347, § 138124(a) (2021).

199.Cf.Michael Smith, Complexity of Biden’s FTC Proposals Sparks Worry,T

AX NOTES

(Nov. 15, 2021), http://www.taxnotes.com/tax-notes-federal/corporate-taxation/complexity-

bidens-ftc-proposals-sparks-worry/2021/11/15/7cl9w?highlight=build%20back%20better

(commenting that the new rule will add complication and thus administrability concerns:

“While the rules may look like those historically used when analyzing FTCs, the differences

between the Biden proposal and the per-country system of 1932 and 1960 are massive”).

200. W

HITE HOUSE,THE PRESIDENT’S TAX PROPOSALS TO THE CONGRESS FOR

FAIRNESS,GROWTH, AND SIMPLICITY (May 1985), 389–96.

201. Garrett Watson, Tax Reform’s Broader Corporate Tax Base Opens More to Biden’s

Proposed Rate Hike,T

AX FOUND. (June 22, 2021), http://taxfoundation.org/us-corporate-tax-

base/ (“The TCJA reduced the corporate tax rate from 35 percent to 21 percent beginning in

2018. . .”).

202. C

ONG.RSCH.SERV., R45186, ISSUES IN INTERNATIONAL CORPORATE TAXATION:

HE 2017 REVISION (P.L. 115-97) 3 (2021), http://sgp.fas.org/crs/misc/R45186.pdf (“Cross-

crediting occurs when credits for taxes paid to one country that are in excess of the U.S. tax

due on income from that country can be used to offset U.S. tax due on income earned in a

second country that imposes little or no tax.”).

203. The foregone cross-crediting eliminated by the BBB Act might have a synergy with

the anti-deferral rules in the TCJA.

2022] The Promise and Pitfalls of the Global Minimum Tax 539

3. Foreign-Derived Intangible Income (“FDII”)

The Foreign-Derived Intangible Income (“FDII”) rule provides that

owners of intellectual property held in the United States with sales to for-

eign customers are subject to a lower tax rate than the regular corporate tax

rate of twenty-one percent.

204

Currently the effective tax rate is 13.125 per-

cent.

205

FDII has given an important advantage to U.S. MNEs with valuable

intangible property and significant exports, such as Apple and Google.

The BBB Act only raises the FDII effective tax rate from 13.125 per-

cent to 15.8 percent.

206

The effective tax rate increases because the BBB

Act reduces the deduction under Section 250 of the Internal Revenue Code

for FDII to 21.875 percent.

207

The proposed effective tax rate is still lower

than the regular corporate tax rate of twenty-one percent. However, recently

there has been some evidence that the FDII rule does induce intangible

property migration to the United States.

208

So, on balance, the revised rule

in the BBB Act shows improvement.

Nonetheless, the fundamental problem with FDII, besides its complexi-

ty, persists: Allowing a lower tax rate for U.S. MNEs with intangibles asso-

ciated with export is a blatant violation of the World Trade Organization

subsidies code.

209

The fact that FDII may be working increases the incentive

204. Daniel Bunn, Will FDII Stay or Will It Go?,TAX FOUND. (Aug. 10, 2021),

http://taxfoundation.org/will-fdii-stay-will-go/ (“Like a patent box, FDII was meant to en-

courage companies to keep their intellectual property (IP) in the U.S. or bring it back to the

U.S. from offshore locations.”).

205. I.R.C. § 250(a). The Foreign-Derived Intangible Income (“FDII”) deduction reduc-

es the effective tax rate from twenty-one percent to 13.125%. Frank J. Vari, Foreign-derived

Intangible Income Deduction: Tax Reform’s Overlooked New Benefit for U.S. Corporate Ex-

porters,T

AX ADVISER (Aug. 2, 2018), http://www.thetaxadviser.com/newsletters/2018/aug

/foreign-derived-intangible-income-deduction.html.

206. Alex Durante, Cody Kallen, Huaqun Li, William McBride, Alex Muresianu, Erica

York & Garret Watson, Build Back Better Act: Details & Analysis of Tax Provisions in the

$1.75 Trillion Reconciliation Bill,T

AX FOUND. (Nov. 5, 2021), http://taxfoundation.org/build-

back-better-plan-reconciliation-bill-tax (“[BBB] reduce[s] the deduction for Foreign-Derived

Intangible Income (FDII) to 21.875 percent, resulting in a tax rate of 15.8 percent, effective

for tax years beginning after December 31, 2022.”).

207.Id.

208. Martin A. Sullivan, Big Tech Is Moving Profit to the United States,T

AX NOTES

(Aug. 23, 2021), http://www.taxnotes.com/tax-notes-federal/corporate-taxation/big-tech-moving-

profit-united-states/2021/08/23/776cs; Daniel Bunn, Intellectual Property Came Back to U.S.

After Tax Reform, But Proposals Could Change That,T

AX FOUND. (July 21, 2021), http://

taxfoundation.org/intellectual-property-tax-proposals.

209. Agreement on Subsidies and Countervailing Measures,

Marrakesh Agreement on

Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 14; see also I

NT’L

TRADE ADMIN., TRADE GUIDE:WTOSUBSIDIES AGREEMENT, http://www.trade.gov/trade-

guide-wto-subsidies (last visited Mar. 2, 2022) (“A subsidy granted by a WTO member gov-

ernment is prohibited by the Subsidies Agreement if it is contingent, in law or in fact, on ex-

port performance, or on the use of domestic over imported goods. These prohibited subsidies

are commonly referred to as export subsidies and import substitution subsidies, respectively.

540 Michigan Journal of International Law [Vol. 43:3

for foreign trading partners to sue the United States in the World Trade Or-

ganization.

4. Base Erosion and Anti-Abuse Tax (“BEAT”)

The TCJA introduced the Base Erosion and Anti-Abuse Tax (“BEAT”)

to prevent base erosion and profit shifting.

210

It denies deductions for certain

otherwise deductible payments from a U.S. corporation to a related foreign

corporation and instead imposes a tax at ten percent (12.5 percent starting in

2026) payable to the United States.

211

This rule is intended to protect suffi-

cient taxation in source countries.

However, the BEAT has not been very successful so far in raising the

revenue that policymakers expected in 2017 when they introduced it.

212

But

there is evidence that BEAT revenue may be increasing and that this is like-

ly to continue, as the BBB Act increases the BEAT rate applicable to the

base erosion payments from ten percent in 2022 (12.5 percent in 2023, fif-

teen percent in 2024) to eighteen percent starting in 2025.

213

The BBB Act

also fixes some important problems with the BEAT by applying the BEAT

to, for example, interest expenses capitalized into inventory.

214

The most

important change is making the BEAT application by source countries con-

ditional on the tax rate of residence countries, which is consistent with the

single tax principle and the UTPR of Pillar Two.

215

5. Alternative Minimum Tax (“AMT”) for Corporations

A domestic tax provision in the BBB Act that is also relevant to the sin-

gle tax principle in the new international tax regime is the new book-

based

216

alternative minimum tax (“AMT”) for corporations, set at fifteen

They are deemed to be specific and are viewed as particularly harmful under the Subsidies

Agreement and U.S. law.”).

210. I

NTERNAL REVENUE SERV., IRS PROVIDES ADDITIONAL GUIDANCE ON BASE

EROSION AND ANTI-ABUSE TAX, (2020), http://www.irs.gov/newsroom/irs-provides-additional-

guidance-on-base-erosion-and-anti-abuse-tax.

211. I.R.C. §§ 59A(b)(1)(A), 59A(b)(2)(A).

212. Martin A. Sullivan, Economic Analysis: The BEAT Is Down but Not out,T

NOTES (Aug. 9, 2021), http://www.taxnotes.com/tax-notes-today-international/base-erosion-

and-antiabuse-tax-beat/economic-analysis-beat-down-not-out/2021/08/09/76zw8; see also U.S.

EP’T TREASURY,THE MADE IN AMERICA TAX PLAN 12 (2021), http://home.treasury.gov

/system/files/136/MadeInAmericaTaxPlan_Report.pdf.

213. BBB Act, H.R. 5376, § 138131(a)(3) (2021) (indicating that the BEAT rate will be

ten percent in 2022, 12.5 percent in 2023, fifteen percent in 2024, and eighteen percent in

2025 and thereafter); see also Sullivan, supra note 212.

214. BBB Act, H.R. 5376, § 138131(b)(2).

215. See infra Part III.A.1.

216. Referring to the amount of income corporations publicly report to shareholders in

financial statements. Durante, et al., supra note 206.

2022] The Promise and Pitfalls of the Global Minimum Tax 541

percent.

217

The AMT was designed to reduce a taxpayer’s ability to avoid

taxes by using certain deductions and other tax benefit items.

218

The TCJA

repealed the AMT for corporations, but the BBB Act reintroduces it.

219

The

new rule applies to MNEs with an average revenue of over $1 billion

USD.

220

The modified corporate AMT rule applies to both U.S. MNEs and

foreign MNEs whose U.S. revenue exceeds $100 million USD over three

years.

221

Thus, it is an important backstop to the BEAT as well as GILTI by

offering another minimum tax rate. It is also consistent with both the IIR for

residence country and the UTPR for source country.

222

6. A New Cap on Interest Expense Deduction

For domestic subsidiaries of foreign MNEs, the BBB Act contains a

new cap on net interest expense deduction. The provision limits deductions

of net interest expenses to 110 percent of the ratio of the domestic subsidi-

ary’s Earnings Before Interest, Tax, Depreciation and Amortization

(“EBITDA”) to the MNE’s EBITDA.

223

This is another protection in addi-

tion to the BEAT to prevent the base-erosion payments by MNEs.

7. Room for Improvement

Overall, the international tax provisions in the BBB Act show commit-

ment by the United States to the implementation of Pillar Two and a global

minimum tax. They also mark a substantial improvement over the TCJA’s

international tax provisions, as shown in the increased GILTI and BEAT

rates and the tightened FTC rules. They are likely to produce significant

revenue and therefore help strengthen the U.S. social safety net.

However, like any legislation that needs to receive a majority vote in

Congress, the provisions of the BBB Act represent a compromise. To better

realize the single tax principle and combat tax competition, the BBB Act

could have proposed a higher GILTI rate with more rigorous anti-base ero-

sion rules.

Furthermore, the BBB Act still lacks an anti-inversion rule. Corporate

inversion, also known as tax inversion, occurs when a domestic company

moves its headquarters or base of operations overseas to reduce its tax bur-

dens.

224

Inversion occurs when MNEs shop around countries looking for

217. BBB Act, H.R. 5376, § 138101(a).

218. I

NTERNAL REVENUE SERV., TOPIC NO.556ALTERNATIVE MINIMUM TAX (last up-

dated Jan. 21, 2022), http://www.irs.gov/taxtopics/tc556.

219. BBB Act, H.R. 5376, § 138101.

220. BBB Act, H.R. 5376, § 138101(a)(2), at 1733.

221. BBB Act, H.R. 5376, § 138101(a)(2), at 1733.

222. See infra Part III.A.1.

223. BBB Act, H.R. 5376, § 138111(a).

224. See Omri Marian, Home-Country Effects of Corporate Inversions, 90 W

ASH.L.

EV. 1 (2015); Cathy Hwang, The New Corporate Migration: Tax Diversion Through Inver-

sion, 80 B

ROOK.L.REV. 807 (2015).

542 Michigan Journal of International Law [Vol. 43:3

low(er) tax rates, resulting in tax competition among countries hoping to

host migrating MNEs. Before the TCJA, when the maximum corporate tax

rate was thirty-five percent, a lot of U.S. pharmaceutical companies with

valuable intangible assets inverted, and low-tax Ireland was a popular new

corporate home.

225

In 2004, Congress added Section 7874 to the Internal

Revenue Code, which significantly limits the tax benefits associated with

corporate inversions.

226

However, more than twenty high-profile inversions

were still reported in the early 2010s.

227

The number has reduced signifi-

cantly since the TCJA reduced the corporate tax rate to twenty-one percent,

and the BBB Act maintains the corporate tax rate as twenty-one percent.

228

But twenty-one percent is still higher than the global minimum tax rate of

fifteen percent, and U.S. MNEs may still want to relocate to other countries

with the minimum tax rate of fifteen percent. A corporate inversion that

manages to avoid Section 7874 will not be subject to GILTI or the anti-

inversion provisions of the BEAT, because that corporation will no longer

be a U.S. taxpayer. Such an inversion may keep tax competition going

among countries until the global effective tax rate hits fifteen percent. Given

that Pillar Two does not guarantee the full harmony of global corporate tax

rates, the BBB Act should have included a more robust anti-inversion

rule.

229

8. Compatibility with Pillar Two Model Rules

The proposed BBB Act was passed by the House of Representatives in

November 2021, but not by the Senate.

230

If the BBB Act is enacted in the

version that passed the House, the United States will be fully compliant with

Pillar Two Model Rules, because both the GILTI rate and the BEAT rate

would be raised to fifteen percent, and the BEAT rate would be made con-

tingent upon low taxation at residence, so that the BEAT operates as a

UTPR.

225. Zachary Midler, Quick Take: Tax Inversion,BLOOMBERG (Mar. 2, 2017, 4:35 PM),

http://www.bloomberg.com/quicktake/tax-inversion.

226. See I.R.C. § 7874(a)(1).

227. Midler, supra note 225.

228. Garrett Watson, Tax Base Opens More to Biden’s Proposed Rate Hike,T

FOUND. (June 22, 2021) http://taxfoundation.org/us-corporate-tax-base (indicating the TCJA

reduced the corporate income tax rate from thirty-five to twenty-one percent).

229. For example, policymakers may consider reducing the threshold in Section 7874 to,

for example, fifty percent and including a managed and controlled alternative definition of

corporate residency.

230. Christina Wilkie, House Passes $1.75 Trillion Biden Plan That Funds Universal

Pre-K, Medicare Expansion and Renewable Energy Credits, CNBC (Nov. 19, 2021),

http://www.cnbc.com/2021/11/19/biden-build-back-better-bill-house-passes-social-safety-net-

and-climate-plan.html; Yacob Reyes, Tim Kaine: Build Back Better Is ‘Dead’ But Core Provi-

sions Will Pass,A

XIOS (Jan. 16, 2022), http://www.axios.com/tim-kaine-spending-package-

6560dd77-b5bc-4d86-893e-dabfebc7e57a.html.

2022] The Promise and Pitfalls of the Global Minimum Tax 543

First, raising the GILTI rate to fifteen percent is consistent with the IIR,

for which the Pillar Two Model Rules require a top-up tax to fifteen percent

imposed at the parent level of a multinational. The QBAI exception to

GILTI is consistent with Pillar Two’s substance carve-out from IIR.

231

this context, the OECD stated in a recent document that—

As noted in the Preamble to the Pillar Two Model Rules, considera-

tion will be given to the conditions under which the US Global In-

tangible Low-Taxed Income (GILTI) regime will co-exist with the

GloBE rules, to ensure a level playing field.

232

This assurance suggests that the Biden Administration has obtained a con-

cession that the GILTI will be considered as satisfying the IIR as long as the

rate is raised to at least fifteen percent.

Second, making BEAT contingent on the level of taxation in the resi-

dence country will ensure that BEAT operates in practice in a way that is

compatible with the UTPR.

233

In addition, the fact that UTPR comes after

IIR makes it less crucial whether the U.S. BEAT rule will firmly comply

with Pillar Two, because most foreign MNEs that are potentially subject to

the BEAT rule in the United States will be subject to IIR in their residence

countries first.

234

If the BBB Act is not enacted, however, then it is less likely that GILTI

and BEAT as enacted by the TCJA will be considered compatible with Pil-

lar Two. First, the current GILTI rate of 10.5 percent is well below the IIR

minimum tax rate of fifteen percent in the residence country. As a result,

U.S. MNEs will in many cases be subject to UTPR in the source country.

Unfortunately, it is not certain whether those corrective taxes imposed by

the source country under UTPR would be creditable against the U.S. MNEs’

U.S. tax liabilities. Some commentators seem to believe that the source

taxation under UTPR is creditable, resulting in significant shifting of tax

revenue from the United States to foreign jurisdictions.

235

However, it is al-

so possible that the source taxation under UTPR is not creditable. The Unit-

ed States has recently amended its foreign tax credit rules to make it more

difficult to get a credit for foreign taxes in the absence of what the United

231. I.R.C. § 951A(b)(2)(A). Even though the BBB Act calculates the QBAI exception a

bit differently (based on assets rather than assets and payroll), it would be considered a minor

variation.

232. OECD, T

HE PILLAR TWO RULES IN A NUTSHELL 2 (Dec. 2021), http://

www.oecd.org/tax/beps/pillar-two-model-rules-in-a-nutshell.pdf.

233. BEAT was introduced as an alternative minimum tax in the TCJA and not a top-up

tax mechanism as envisioned by Pillar Two. However, the BBB Act’s revision of BEAT rule

may make it compliant to UTPR.

234. The BEAT has a $500 million USD revenue threshold. I.R.C. § 59A(e)(1)(B).

235. Dylan Moroses, US Could Lose Tax Revenue If It Neglects OECD’s Pillar 2,

AW360 TAX AUTHORITY (Mar. 18, 2022), http://www.law360.com/tax-authority/articles

/1475431/us-could-lose-tax-revenue-if-it-neglects-oecd-s-pillar-2.

544 Michigan Journal of International Law [Vol. 43:3

States considers adequate nexus to a foreign country.

236

This change was

designed to clarify that DSTs are not creditable.

237

But the scope of the new

foreign tax credit rule is broad and may apply to the source taxation under

UTPR to deny foreign tax credits, causing double taxation in the residence

(U.S.) and source countries.

Second, the current BEAT rate of ten percent is likewise too low for

UTPR purposes in the source country. In addition, the current BEAT is not

contingent on the level of the residence country taxation. As a result, it is

likely that BEAT will not be compliant with Pillar Two, and thus, foreign

residence countries will not respect the U.S. tax paid under BEAT rules

when they apply IIR, causing double taxation in the residence and source

countries.

238

Therefore, the tax consequences of not complying with Pillar Two

when the rest of the world does comply are likely to be tax revenue loss in

the United States and the increased risk of double taxation by taxpayers.

The results harm the single tax principle that the global deal aims to accom-

plish. Hence, the authors of this article hope that Congress will pass the

provisions relating to Pillar Two in 2022 as is proposed in the BBB Act, re-

gardless of how they are rebranded and repromoted.

In March 2022, the U.S. Department of the Treasury released the

Greenbook for fiscal year 2023.

239

This publication outlines and explains

the Biden Administration’s tax proposals. The budget released by Treasury

assumes that the BBB Act, as passed by the House of Representatives on

November 19, 2021, will be enacted.

240

However, if the corporate tax rate

would increase to twenty-eight percent, the GILTI rate would automatically

increase to twenty-one percent.

IV. PROMISES AND PITFALLS OF THE GLOBAL MINIMUM TAX

Pillar Two would significantly reduce MNEs’ incentives to change their

place of residence or the location of their headquarters to exploit tax compe-

236. 87 Fed. Reg. 276 (Jan. 4, 2022) (Guidance Related to the Foreign Tax Credit; Clari-

fication of Foreign-Derived Intangible Income).

237.Id. at 289–90.

238. Current BEAT may not only be incompatible with Pillar Two, but also has another

problem. Some commentators argue that BEAT is discriminatory because it applies only to

payments to related foreign parties by partially denying deductions, and thus may violate Art.

24 (nondiscrimination) of most tax treaties. See H. David Rosenbloom and Fadi Shaheen, The

BEAT and the Treaties, 92 T

AX NOTES INT’L 53 (2018); Reuven S. Avi-Yonah and Brett

Wells, The Beat and Treaty Overrides: A Brief Response to Rosenbloom and Shaheen, 6

NIV.MICH.LAW &ECON. Working Papers, 2018).

239. U.S.

EP’T TREASURY,GENERAL EXPLANATIONS OF THE ADMINISTRATION’S

FISCAL YEAR 2023 REVENUE PROPOSALS (2022).

240.Id.at iii (stating that the revenue proposals based on provisions of Title XIII of

H.R. 5376 as passed by the House of Representatives on November 19, 2021, except for Sec.

137601).

2022] The Promise and Pitfalls of the Global Minimum Tax 545

tition by source countries. However, it is important to note that Pillar Two

also offers measures for effective residence-based taxation. This Part dis-

cusses the promises and pitfalls of Pillar Two. First, we discuss the promise

of global tax reform, specifically, raising additional revenue and reducing

profit shifting. Second, we explore the various challenges facing Pillar Two,

notably, concerns of developing countries, various carve-outs, and the logis-

tical puzzle of implementation.

A. Promise of the New International Tax Regime

Many policymakers who participated in the global tax deal hail the

Statement as a long-waited international tax reform and an important step in

combatting tax competition, tax base erosion, and profit shifting. Mathias

Cormann, OECD Secretary-General said that “the deal would make the in-

ternational corporate tax system ‘fairer and work better.’”

241

We believe

that Pillar Two, in particular, would generate substantial revenue and lead to

behavioral changes in both countries and taxpayers to engage in less tax

competition. In short, Pillar Two is the modern embodiment of the single

tax principle.

1. Additional Revenue

Pillar Two, with its global minimum corporate income tax of fifteen

percent, is expected to generate approximately $150 billion USD in addi-

tional global tax revenues each year.

242

While the primary revenue effects of

Pillar One will be the reallocation of profits (about $100 billion USD) to

source countries annually,

243

Pillar Two is a true revenue generator. Hence,

from a global perspective, the global tax reform will benefit the world via

revenue generation.

244

The International Monetary Fund (“IMF”), represent-

ing an additional fifty-one countries, also backs the plan, indicating broader

global support outside the Inclusive Framework.

245

The additional revenue

241. Chris Giles, Emma Agyemang & Aime Williams, 136 Nations Agree to Biggest

Corporate Tax Deal in a Century,F

IN.TIMES (Oct. 8, 2021), http://www.ft.com/content

/5dc4e2d5-d7bd-4000-bf94-088f17e21936.

242. OECD,

WO-PILLAR SOLUTION TO ADDRESS THE TAX CHALLENGES ARISING

FROM THE

DIGITILISATION OF THE ECONOMY 5 (Oct. 2021), http://www.oecd.org/tax/beps

/brochure-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-

the-economy-october-2021.pdf.

243. 130 Countries and Jurisdictions Join Bold New Framework for International Tax

Reform, OECD (July 1, 2021), http://www.oecd.org/newsroom/130-countries-and-jurisdictions-

join-bold-new-framework-for-international-tax-reform.htm.

244. William Horobin, Global Tax Overhaul Endorsed by 130 Nations as Deal Gets

Closer,B

LOOMBERG (July 1, 2021, 9:57 AM), http://www.bloomberg.com/news/articles

/2021-07-01/global-tax-overhaul-endorsed-by-130-nations-as-deal-gets-closer.

245. Eric Martin, IMF Sees Room to Simplify Global Tax Deal to Boost Participation,

LOOMBERG (July 10, 2021), http://www.bloomberg.com/news/articles/2021-07-10/imf-sees-

room-to-simplify-global-tax-deal-to-boost-participation.

546 Michigan Journal of International Law [Vol. 43:3

generated by Pillar Two may be used to recover national economies from

the pandemic or to support sustainable tax policies relating to Environmen-

tal, Social, and Corporate Governance (“ESG”).

246

2. Reducing Profit Shifting and Tax Competition:

A Realization of the Single Tax Principle

Pillar Two mandates a fifteen percent global minimum tax, compelling

the global community to stop tax competition and the race to the bottom. As

a result, Pillar Two is expected to reduce profit shifting by MNEs. If enough

large economies agree to implement Pillar Two, there will be no incentive

for companies to move their businesses to low-tax jurisdictions. U.S. Treas-

ury Secretary Janet L. Yellen, who negotiated the deal, praised Pillar Two

as ending the race to the bottom on corporate taxation rates.

247

Therefore, Pillar Two resolves the traditional economics debate be-

tween advocates of capital export neutrality (“CEN”) and supporters of

capital import/ownership neutrality (“CIN”/ “CON”),

248

because this debate

rests on the assumption that corporate tax rates cannot be harmonized and

thus companies have different incentives for choice of location under each

theory.

249

However, if corporate tax rates are harmonized, as expected in

Pillar Two, then CEN, CIN, and CON can be achieved simultaneously.

250

Importantly, Pillar Two eliminates the main critique that has bedeviled

the United States’ attempts to raise taxes on its MNEs since the 1960s. The

argument that the unilateral adoption of higher rates of corporate tax on

MNEs’ foreign source income puts U.S. MNEs at a competitive disad-

246. Stephen Cooper, House Sends Biden’s $1.75T Budget Plan to Senate, LAW360

(Nov. 19, 2021), http://www.law360.com/tax-authority/federal/articles/1442179 (explaining

how the BBB Act plans to use revenue to pay for new or expanded tax incentives for child

care, renewable energy, and health care).

247. David J. Lynch, Global Minimum Tax Effort Moves Forward as Ireland and Hun-

gary Join Pact, W

ASH. POST (Oct. 8, 2021), http://www.washingtonpost.com/us-policy/2021

/10/08/minimum-corporate-tax-oecd-biden.

248. Capital export neutrality (“CEN”) refers to an investor’s choice between investing

her savings in her country of residence or in a foreign source country. CEN exists when resi-

dence and source country investments that earn the same pretax return also yield the same

after-tax return. On the other hand, capital import neutrality (“CIN”) requires that the earnings

from capital in a source country be taxed at the same rate for both domestic and foreign inves-

tors. Capital ownership neutrality (“CON”) is an alternative neutrality, demanding that taxa-

tion not influence who owns assets. See Mihir A. Desai & James R. Hines Jr., Evaluating In-

ternational Tax Reform, 56 N

AT’L TAX J. 487 (2003); Michael J. Graetz, David R. Tillinghast

Lecture Taxing International Income: Inadequate Principles, Outdated Concepts, and Unsat-

isfactory Policies, 54 T

AX L. REV. 261, 270–77 (2001); Daniel Shaviro, The David R. Tilling-

hast Lecture - The Rising Tax-Electivity of U.S. Corporate Residence, 64 T

AX L. REV. 377,

386–87 (2010).

249. Desai & Hines, supra note 248; Graetz, supra note 248; Shaviro supra note 248.

250. Reuven S. Avi-Yonah, Is It Time to Coordinate Corporate Tax Rates? A Note on

Horst (U. of Mich. Pub. L. & Legal Theory Rsch. Series, Paper No. 382, 2014), http://

ssrn.com/abstract=2389959 or http://dx.doi.org/10.2139/ssrn.2389959.

2022] The Promise and Pitfalls of the Global Minimum Tax 547

vantage vis-a-vis MNEs from other countries is often used.

251

This argu-

ment has never been persuasive because, both in the 1960s and today, U.S.

MNEs dominate their competition.

252

But it had political appeal, leading to

the TCJA reducing the corporate tax rate to twenty-one percent.

253

Howev-

er, such competitive rhetoric would disappear as a concern if all the G20

MNEs, which comprise over ninety percent of all MNEs, were subject to the

same minimum tax rate.

An important aspect of Pillar Two that is not addressed in the Statement

but is essential for successful implementation is the prevention of MNEs

from leaving the G20 and thereby escaping the IIR of residence country

(although perhaps not the UTPR/STTR). In most EU countries this is un-

likely because of their corporate exit taxes.

254

But the United States and the

United Kingdom do not have such taxes, making corporate exodus a viable

concern.

255

Furthermore, the United States has a different definition of cor-

porate residency from the rest of the world: A business incorporated in the

United States is a U.S. tax resident regardless of its domiciliary or place of

management,

256

whereas other countries, to a broad extent, use both the

place of incorporation and place of management tests.

257

Such mismatches

of corporate residence rules may aggravate the concern that, even if Pillar

Two firmly established the single tax principle in the G20, another form of

tax competition among non-G20 countries may emerge for hosting migrat-

ing companies.

B. Potential Challenges

So far, Pillar Two has received overall positive responses from the me-

dia and commentators. However, there have also been criticisms about the

specifics of the agreement. Common criticisms are that Pillar Two does not

251. Daniel Bunn, U.S. Cross-Border Tax Reform and the Cautionary Tale of GILTI,

AX FOUND. (Feb. 17, 2021), http://taxfoundation.org/gilti-us-cross-border-tax-reform/#Key.

252. Reuven S. Avi-Yonah & Nicola Sartori, Symposium on International Taxation and

Competitiveness: Introduction and Overview, 65 T

AX L. REV 313, 319 (2012); see also Big-

gest Companies in the World 2022,F

INANCECHARTS, http://www.financecharts.com/screener

/biggest (last visited Mar. 29, 2022) (indicating the top 10 companies are from the United

States).

253. I.R.C. § 11.

254. Sebastian Dueñas & Daniel Bunn, Tax Avoidance Rules Increase the Compliance

Burden in EU Member Countries,T

AX FOUND. (Mar. 28, 2019), http://taxfoundation.org/eu-

tax-avoidance-rules-increase-tax-compliance-burden (indicating that seventeen of twenty-

eight EU countries have exit taxes).

255. Reuven S. Avi-Yonah, For Haven’s Sake: Reflections on Inversion Transactions,

95 T

AX NOTES 1793 (June 17, 2002).

256.SeeDavid R. Tillinghast, A Matter of Definition: Foreign and Domestic Taxpayers,

NT’L TAX &BUS. L. 239, 252–53 (1984).

257. Christos Theophilou, Insight: Corporate Residence Post-BEPS and Global Mobili-

ty,B

LOOMBERG TAX (June 10, 2020, 3:00 AM), http://news.bloombergtax.com/daily-tax-

report-international/insight-corporate-residence-post-beps-and-global-mobility.

548 Michigan Journal of International Law [Vol. 43:3

go far enough to ensure MNEs are taxed fairly, that various carve-outs and

exceptions make the agreement unbalanced, and that it is unclear what

would happen to Pillar Two in the implementation stage. This Subpart dis-

cusses these challenges and offers possible responses.

1. Priority to Residence-Based Taxation and

Developing Countries’ Concerns

It is true that Pillar Two is quite complex and possibly flawed since it

accords primacy to the country of residence by giving priority to IIR for res-

idence taxation over UTPR and STTR for source taxation. Thus, the source

country’s tax will only be applicable if the residence country chooses not to

tax.

The precedence of the IIR over the UTPR/STTR in Pillar Two has also

led to critiques of Pillar Two—namely that it is not reflective of the con-

cerns of developing countries that largely consist of source countries. For

example, the Tax Justice Network and Oxfam criticized the global mini-

mum tax for unfairly providing advantages to the world’s wealthier coun-

tries.

258

Specifically, they argue that the imposition of residence-based tax

on MNEs under the IIR will make it impossible for developing countries to

attract FDI by granting tax concessions, and that the UTPR and STTR are

meaningless if all the income of MNEs is already subject to the minimum

tax rate of fifteen percent under the IIR.

259

Despite lofty goals of ending tax

havens and tax competition, the critiques highlight sizeable incentives for

profit shifting that still remain due to exemptions and loopholes that the

global tax deal was supposed to curtail.

260

This critique is only partially valid, however. The first criticism about

the ability to attract FDI assumes that developing countries actually wish to

grant tax concessions to MNEs based on a cost/benefit analysis. This is not

true. Most empirical studies suggest that the main reason to allow tax con-

cessions, tax holidays, and tax competition is the threat of the MNEs going

elsewhere.

261

If that is the case, developing countries would benefit from the

IIR because it neutralizes the MNE’s ability to conduct such an auction by

subjecting it to the minimum tax wherever it goes.

It is true that if the UTPR/STTR for source taxation were given primacy

over the IIR for residence taxation then developing countries might gain

more revenue. However, it is not clear that in the absence of the IIR, devel-

258. Hamish Boland-Rudder & Spencer Woodman, 136 Countries Agree to Global Min-

imum Tax for Corporations in ‘Historic’ OECD Deal,I

NT’L CONSORTIUM INVESTIGATIVE

JOURNALISM (Oct. 8, 2021), http://www.icij.org/investigations/paradise-papers/136-countries-

agree-to-global-minimum-tax-for-corporations-in-historic-oecd-deal.

259.Id.

260.Id.

261. Reuven S. Avi-Yonah, Bridging the North-South Divide: International Redistribu-

tion and Tax Competition, 26 M

ICH.J.INT’L L. 371 (2004).

2022] The Promise and Pitfalls of the Global Minimum Tax 549

oping countries would be able to impose taxes under the UTPR/STTR be-

cause, without the IIR for residence taxation, the MNE could threaten to go

elsewhere. In other words, the IIR neutralizes the behavioral incentives of

multinational taxpayers to engage in location shopping and the UTTR

/STTR neutralizes the incentive of source countries to engage in tax compe-

tition.

In addition, foreign tax credits will be available under the IIR just like

they are (with limitations) under GILTI. This means that, in practice, devel-

oping countries can impose source taxation on MNEs’ FDI, and those

MNEs will not suffer because these taxes will be credited against the resi-

dence taxation imposed by the IIR.

Finally, the substance carve-outs will enable developing countries to

engage in some level of tax competition for real investment. Large develop-

ing countries are also expected to gain significant additional revenue from

Pillar One. For all these reasons, we believe that the critique that Pillar Two

disadvantages developing countries is exaggerated.

262

Nonetheless, there might be an alternative to Pillar Two that imple-

ments the single tax principle more effectively with fewer concerns to de-

veloping countries. That is, Pillar Two may be tweaked in order to ensure

that countries can tax MNEs on both inbound and outbound investments.

This could be done by applying a substance-based test using a fractional ap-

portionment method in transfer pricing. This method would allocate MNEs’

profits that have not been effectively taxed amongst all countries in which a

MNE has a taxable presence. Once profits of MNEs are allocated among

relevant countries based on the substance-based test, each country would

impose taxes on such profits according to their own respective tax rates.

This alternative would not require the application of the complex IIR and

UTPR, and instead rely on fractional apportionment based on assets, per-

sonnel, and sales revenue (by locations of customers or users). While the

GloBE rules impose a top-up tax only in the country of residence,

263

this al-

ternative would allow all affected countries, either as residence or source, to

impose tax based on their respective shares of the undertaxed profits.

2. Various Carve-Outs

During the negotiation of Pillar Two in mid-2021, there were nine

countries that opposed it.

264

These countries included several in Europe,

262. For similar reasons, we respectfully oppose the argument that tax harmony and co-

operation envisioned in Pillar Two does not help developing countries. See Cui, supra note

31.

263.Statement, supra note 1, at 3–4.

264. Cliff Taylor & Ellen O’Riordan, Ireland One of 9 Countries to Hold Out on Signing

OECD Global Tax Deal,I

RISH TIMES (July 1, 2021, 5:08 PM), http://www.irishtimes.com

/business/economy/ireland-one-of-9-countries-to-hold-out-on-signing-oecd-global-tax-deal-

1.4609129; see also Jorge Liboreiro, Ireland, Hungary and Estonia Opt out of OECD

Tax Deal and Cast Shadow over EU’s Unified Position,E

URONEWS (Aug. 26, 2021),

550 Michigan Journal of International Law [Vol. 43:3

namely Hungary, Ireland, and Estonia. Although they account for just four

percent of the EU’s economic output, they were in a position to deal a sig-

nificant blow to the prospects of the OECD’s tax plan.

265

Tax directives in

the EU require the unanimous consent of all twenty-seven member states,

effectively giving a single EU member veto power over the agreement.

266

Statements made by officials in each country emphasized that Ireland,

Hungary, and Estonia did not present a united front or adhere to a common

core principle.

267

Ireland supported Pillar One but demanded that the fifteen

percent global minimum tax rate be lower because its corporate tax rate is

12.5 percent.

268

Hungary had issues with the plan’s industry carve-outs.

269

Finally, Estonia simply wanted to preserve its unique tax system.

270

Eventually, the EU hold-out did not occur. One hundred and thirty-

seven countries, including Ireland, Hungary, and Estonia, agreed to the

global tax deal, including Pillar Two. However, the global tax deal now in-

cludes various carve-outs and reservations. For example, Ireland agreed to

http://www.euronews.com/2021/07/02/ireland-hungary-and-estonia-opt-out-of-oecd-tax-deal-

and-cast-shadow-over-eu-s-unified-pos (indicating the nine countries that did not sign on to

the OECD global deal are Ireland, Hungary, Estonia, Kenya, Nigeria, Peru, Sri Lanka, Barba-

dos, and Saint Vincent and the Grenadines).

265. Zoltan Simon & Peter Flanagan, European Trio Cast Dissatisfied Shadow over

Global Tax Accord,B

LOOMBERG (July 2, 2021), http://www.bloomberg.com/news/articles

/2021-07-02/europe-s-new-awkward-squad-casts-shadow-over-global-tax-deal.

https://www.bloomberg.com/news/articles/2021-07-02/europe-s-new-awkward-

squad-casts-shadow-over-global-tax-deal

266. Christopher Condon, G-20 Finance Chiefs Back Tax Deal and Vow to Clear Hur-

dles,B

LOOMBERG (July 10, 2021), http://www.bloomberg.com/news/articles/2021-07-10

/yellen-optimistic-congress-will-back-part-of-global-tax-deal. Cf. Faulhaber, supra note 23

(suggesting that even if one of the member states remains a hold-out, the EU can possibly still

implement the global minimum tax portion of the OECD plan through the issuance of a di-

rective. Whether the directive would survive a legal challenge is uncertain, but the fact that

the tax is a minimum tax makes winning the challenge more likely).

267. Stephanie Soong Johnston & Sarah Paez, Ireland, Estonia to Join OECD Global

Tax Reform Deal,T

AX NOTES (Oct. 11, 2021), http://www.taxnotes.com/tax-notes-international

/base-erosion-and-profit-shifting-beps/ireland-estonia-join-oecd-global-tax-reform-deal/2021

/10/11/7bbn3?highlight=opposition%20to%20OECD%20g.

268. Liz Alderman, Ireland’s Days as a Tax Haven May Be Ending, but Not Without a

Fight,N.Y.

IMES (July 12, 2021), http://www.nytimes.com/2021/07/08/business/ireland-

minimum-corporate-tax.html.

269. Elodie Lamer, Growing Unease in EU Over Global Tax Deal’s Next Steps,T

NOTES (July 12, 2021), http://www.taxnotes.com/tax-notes-today-international/corporate-

taxation/growing-unease-eu-over-global-tax-deals-next-steps/2021/07/12

/76rz4?highlight=OECD.

270. Todd Buell, Estonian Official Airs Country’s Objections to Global Minimum Tax,

AW 360 (July 16, 2021), http://www.law360.com/tax-authority/international/articles/1403781

/estonian-official-airs-country-s-objections-to-global-minimum-tax. See also Kyle Pomerleau,

The Key Component of the Estonia’s Competitive Tax System,T

AX FOUND. (Oct. 6, 2015),

http://taxfoundation.org/key-component-estonia-s-competitive-tax-system (explaining that the

unique feature of Estonia’s corporate income tax system is a cash-flow tax, meaning corporate

income tax is only levied when business pay out to shareholders).

2022] The Promise and Pitfalls of the Global Minimum Tax 551

end its 12.5 percent corporate tax rate and join the deal at the last minute,

“with assurances sought and received from the EU that it would not seek to

increase the tax rate further down the line.”

271

Hungary obtained the ten-

year transition period, during which it may “offer a lower rate of tax for

tangible investments in its jurisdiction—such as automotive plants.”

272

Chi-

na also succeeded in having a clause inserted that would limit the effect of

the global minimum tax on companies who are starting to expand interna-

tionally—because of concerns that its growing domestic companies would

be clipped by the measures.

273

Commentators argue that these carve-outs and exemptions failed the

original ambition of the global tax deal. Instead of leveling the playing field,

the watered-down measures mean that only a “sliver of the profits” of

MNEs will become taxable, while incentives to shift profits remain siza-

ble.

274

Alex Coham, CEO of the Tax Justice Network, commented in a

statement that, “[i]t’s no wonder that Ireland and other havens have em-

braced the deal, especially after obtaining various concessions.”

275

Civil so-

ciety organization, Oxfam, also criticized that the global deal panders to tax

havens and multinational corporations with exemptions and loopholes that

meant the new measures have “practically no teeth” and will offer no reve-

nue help to the world’s poorest countries.

276

We also disfavor these carve-outs. Some level of compromise is inevi-

table to achieve a global tax deal and bring almost 140 member states to the

negotiation table. However, the purpose of seeking a global deal for Pillar

Two is to accomplish tax harmony to end tax competition. These carve-outs

clearly violate the single tax principle by offering various methods for cer-

tain countries to continue tax competition, especially among source coun-

tries. What is worse, the carve-outs disturb tax harmony, weakening the ef-

fectiveness of Pillar Two measures among countries who are fully

committed to the single tax principle.

3. Logistical Puzzle

There is an additional concern about whether the global tax deal con-

sisting of Pillars One and Two could actually be implemented, especially in

271. Lisa O’Carroll, Ireland Ends 12.5% Tax Rate in OECD Global Pact, THE

GUARDIAN, (Oct. 7, 2021), http://www.theguardian.com/world/2021/oct/07/ireland-poised-to-

drop-125-tax-rate-in-oecd-global-pact.

272. Giles, et al., supra note 241.

273. Id.

274. Boland-Rudder & Woodman, supra note 258.

275. Alex Cobham, OECD Tax Deal Fails to Deliver, T

AX JUST. NETWORK (Oct. 8,

2021), http://taxjustice.net/press/oecd-tax-deal-fails-to-deliver.

276. Press Release, OXFAM Int’l, OECD Tax Deal is a Mockery of Fairness: Oxfam

(Oct. 8, 2021), http://www.oxfam.org/en/press-releases/oecd-tax-deal-mockery-fairness-oxfam.

552 Michigan Journal of International Law [Vol. 43:3

the United States.

277

The goal is for countries to sign a multilateral conven-

tion during 2022 with an effective date of 2023, although most practitioners

view this timeline as highly unlikely. Political realities in the United States

illustrate the complexities of implementing the global tax agreement.

278

The

Biden Administration has a pretty thin majority in the Senate and in the

House of Representatives, so it is very doubtful that the G20/OECD interna-

tional tax plan will be passed by the U.S. Congress in a single bill, increas-

ing the difficulty of ratification in the U.S. Senate.

279

Considering that the

United States is important to have on board to ensure the effective imple-

mentation of both Pillars, the successful implementation of the global tax

deal is an open question.

Pillar One will alter U.S. treaties with other countries, and therefore will

need to be implemented through a multilateral treaty approved by two-thirds

of the U.S. Senate.

280

However, getting seventeen Republican senators to

support a treaty measure that many view as penalizing U.S. companies may

be a non-starter in the current economic and political climate.

281

The senior

Republicans on the tax-writing Senate Finance and House Ways and Means

committees already expressed opposition to Pillar One.

282

Furthermore, in a

joint statement, Senator Mike Crapo (R-Idaho) and Congressman Kevin

Brady (R-Texas) criticized the Biden Administration for pursuing the glob-

al tax deal agreement before Congress has acted on the administration’s

proposed changes to U.S. tax law, such as GILTI, calling into question how

quickly lawmakers may act on needed change.

283

They also mentioned in a

joint statement that “as other countries delay implementation and secure

side agreements and carve-outs to protect their own companies, U.S. busi-

nesses will be hit by tax increases ultimately borne by American workers,

277. Aime Williams, G7 Tax Deal Faces Opposition in US Congress, FIN. TIMES (June

9, 2021), http://www.ft.com/content/6c98b271-bd13-4517-81bb-6ef7f1798085.

278. James-Paul Galligan, Christine Green, Kevin Kelly & Kenneth Wear, OECD Tax

Deal: When Does it Become Law?, JDS

UPRA (Oct. 18, 2021), http://www.jdsupra.com

/legalnews/oecd-tax-deal-when-does-it-become-law-3448977.

279. Stephanie Soong Johnston, The End is Nigh: An Update on the OECD Tax Reform

Plan, F

ORBES (Oct. 19, 2021), http://www.forbes.com/sites/taxnotes/2021/10/19/the-end-is-

nigh-an-update-on-the-oecd-tax-reform-plan/?sh=353cdb891634.

280. Lilian Faulhaber, Will the OECD Plan Fix International Taxation?, L

AW360 (July

7, 2021), http://www.law360.com/articles/1400693.

281. Mindy Herzfeld, Pushing Pillar 1 Past Congress, T

AX NOTES (July 19, 2021),

http://www.taxnotes.com/tax-notes-today-federal/fundamental-tax-system-structure/pushing-

pillar-1-past-congress/2021/07/19/76vyv?highlight=base%20erosion.

282. Lynch, supra note 247.

283. Letter from Senator Mike Crapo, Ranking Member, Comm. on Fin. & Congress-

man Kevin Brady, Ranking Member, Comm. on Ways and Means, to Senator Ron Wyden,

Chairman, Comm. on Fin. and Congressman Richard Neal, Chairman, Comm. on Ways and

Means (Sept. 2, 2021).

2022] The Promise and Pitfalls of the Global Minimum Tax 553

savers and consumers.”

284

Hence, Senate approval of Pillar One in any form

will almost certainly require the inclusion of a ban on all current and future

DSTs, including the proposed EU digital levy.

285

Pillar Two, on the other hand, is generally compatible with existing tax

treaties and can likely be implemented with changes to domestic tax legisla-

tion.

286

Unlike Pillar One, Pillar Two can be implemented without any

changes in existing tax treaties as far as the IIR is concerned, as evidenced

by the United States unilaterally adopting GILTI.

287

UTPR and STTR may

require changes in tax treaties, but they are of secondary importance be-

cause they work conditionally. Since treaties are hard to change in the Unit-

ed States because of Senate ratification, this is an important advantage of

Pillar Two over Pillar One. We also anticipate that a lot of countries will be

implementing Pillar Two by domestic legislation, given the strong interest

in its development and the fact that it helps countries protect their tax base

by embodying a modern single tax principle.

Therefore, the Biden Administration may attempt to use the reconcilia-

tion process, only requiring a majority vote in the U.S. Senate, to push

through changes related to Pillar Two’s tax reform plan in the BBB Act and

negotiate with the Senate on Pillar One at a later time.

288

However, the $3.5 trillion USD BBB Act still faces obstacles in the

closely divided House and Senate. Some House Democrats have pushed

back against any increases to the GILTI tax.

289

Furthermore, the piecemeal

implementation of the global tax reform plan that will likely happen in the

United States will unfortunately create tension between the United States

and the EU when good faith and trust are required in order for the plan to be

fully implemented. Nonetheless, the logistical puzzle for implementing Pil-

lar Two in the United States is less significant compared to that for Pillar

One, which should go through treaty ratification process in the Senate.

284. Brady, Crapo: Biden Global Tax Deal Puts Politics Over Progress, Surrenders

Fate of U.S. Economy to Foreign Competitors,

U.S. SENATE COMM. ON FIN. (Oct. 8, 2021),

http://www.finance.senate.gov/ranking-members-news/brady-crapo-biden-global-tax-deal-

puts-politics-over-progress-surrenders-fate-of-us-economy-to-foreign-competitors.

285. Stephanie Soong Johnston, Crapo and Brady Urge Yellen to Push for Immediate

End to DSTs, T

AX NOTES (July 12, 2021), http://www.taxnotes.com/tax-notes-federal/digital-

economy/crapo-and-brady-urge-yellen-push-immediate-end-dsts/2021/07/12/76rtc?highlight=

OECD.

286. Faulhaber, supra note 23.

287. I.R.C. § 951A; see also Daniel Bunn, U.S. Cross-border Tax Reform and the Cau-

tionary Tale of GILTI, T

AX FOUND. (Feb. 17, 2021), http://taxfoundation.org/gilti-us-cross-

border-tax-reform (indicating that the U.S. adopted GILTI as an anti-base erosion rule).

288. Stephanie Soong Johnston, Reconciliation Bill May Have Global Minimum Tax

Provisions, T

AX NOTES (July 12, 2021), http://www.taxnotes.com/tax-notes-federal/politics-

taxation/reconciliation-bill-may-have-global-minimum-tax-provisions/2021/07/12/76rl1?highlight

=Pillar%201.

289. Alex Parker, How the Global Tax Agreement Could Backfire for Biden, L

AW360,

(Oct. 18, 2021), http://www.law360.com/tax-authority/articles/1431269/how-the-global-tax-

agreement-could-backfire-for-biden.

554 Michigan Journal of International Law [Vol. 43:3

Hence, the United States’ enacting domestic legislation to implement

Pillar Two is the key to solving the logistical puzzle for the overall success

of the global tax reform plan as well as the modern single tax principle. To

make it possible, the two Pillars could be severed. The objective of both the

OECD and the United States seems to be to adopt both Pillars One and Two

as a package deal.

290

Both address the tax challenges in the digitalized

economy and combat the base erosion and profit shifting by MNEs. Howev-

er, Pillars One and Two are conceptually separate from each other—Pillar

One modernizes source-based taxation, whereas Pillar Two embodies the

single tax principle by reinforcing residence-based taxation. There is no log-

ical reason to treat the two Pillars as “linked by more than just politics,” as

the United States argues.

291

Furthermore, Pillar Two can be implemented by the G20 even if Pillar

One collapses because some countries refuse to abolish DSTs. In other

words, Pillar Two does not need universal implementation by all IF member

states because it is a measure that a country can implement to protect its

own tax base, irrespective of what other countries do. Hence, it is less criti-

cal, although not desirable, if a low-tax jurisdiction does not implement Pil-

lar Two, because the domestic legislation resulting from Pillar Two will al-

low the residence country to essentially tax back the income that has not

been taxed in the low-tax jurisdiction. Moreover, over ninety percent of

large MNEs are headquartered in the G20,

292

so only a relatively small

number of countries need to agree to implement an effective global mini-

mum tax. However, Pillar Two still requires international cooperation

among the G20 countries to adopt the harmonized domestic legislation that

is essential to stopping tax competition, base erosion, and profit shifting.

Thus, the United States should cooperate with the G20 countries to enact

Pillar Two even if Pillar One fails. Risking Pillar Two to salvage Pillar One

is unwise and regrettable because Pillar Two would be the first global tax

harmony in substantive tax law guided by the single tax principle.

CONCLUSION

In L’ancien Regime et la Revolution (1856), Alexis de Tocqueville ar-

gued that the roots of the radical changes imposed by the French Revolution

could be found in the Old Regime it sought to replace.

293

Similarly, the

roots of the new international tax regime as embodied in the Statement can

be traced to the benefits principle and the single tax principle, both of which

290. U.S. Dep’t of the Treasury, Presentation by the United States to the Steering Group

of the Inclusive Framework Meeting (2021), http://www.politico.com/f/?id=00000178-b389-

d098-a97a-f79960510001 (slide seven).

291.Id.

292. Saez & Zucman, supra note 67.

293. A

LEXIS DE TOCQUEVILLE,L’ANCIEN RÉGIME ET LA RÉVOLUTION [THE OLD

REGIME AND THE REVOLUTION] (7th ed. 1866).

2022] The Promise and Pitfalls of the Global Minimum Tax 555

stem from the origins of the international tax regime a century ago. The

benefits principle was the compromise between the claims of residence and

source jurisdictions reached by the four economists in 1923,

294

while the

single tax principle can be traced to Thomas Adams in 1918 and the League

of Nations experts in 1927.

295

However, unlike what happened in the French

Revolution, the Statement does not entirely replace the old international tax

regime. Instead, the Statement is an evolution from, or improvement of, the

benefits principle and the single tax principle.

Nevertheless, the new international tax regime envisaged in the two Pil-

lars in the Statement is also revolutionary. Pillar One (if implemented) will

partially remove the two main obstacles to taxing modern MNEs operating

in the digital economy, namely the physical presence requirement and the

arm’s-length standard. Pillar Two will fully implement the single tax princi-

ple on a global level for the first time through strengthening both source and

residence taxation with various secondary corrective measures. It will raise

significant revenue for the participating countries, stop tax competition, and

reduce base erosion and profit shifting. However, the proposed global min-

imum tax rate of fifteen percent would be lower than the average G20 cor-

porate tax rate, and substance carve-outs would maintain some double non-

taxation. Additionally, it may disproportionately harm developing countries

more than developed countries.

However, these flaws in Pillar Two could be eliminated based on the

outcome of current negotiations in the United States over reforming GILTI.

The U.S. GILTI rule, together with BEAT, has been grandfathered as ful-

filling the IIR and UTPR of Pillar Two. President Biden has proposed rais-

ing the GILTI rate to twenty-one percent and eliminating the participation

exemption. Also, the President has proposed replacing BEAT with Stopping

Harmful Inversions and Ending Low-Tax Developments (“SHIELD”),

which is designed explicitly to fit the UTPR of Pillar Two, because it im-

poses withholding tax on U.S. source income only if there is not adequate

taxation at the residence country.

296

Unfortunately, the BBB Act did not in-

corporate all of the President’s proposals. If, however, the United States

adopts these reforms, it is likely to generate a race to the “top” as other

294.Seesupra text accompanying notes 62–64.

295.Seesupratext accompanying notes 73–74.

296. Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”)

would deny corporate deductions by reference to payments to foreign related persons that are

subject to a low effective tax rate, unless the income is subject to an acceptable minimum tax

regime. SHIELD is intended to more effectively target profit shifting to low-taxed jurisdic-

tions compared to BEAT, while simultaneously providing a strong incentive for other nations

to enact global minimum tax regimes. U.S.

EP’T OF THE TREASURY,THE MADE IN

AMERICA TAX PLAN 11–12 (2021), http://home.treasury.gov/system/files/136/MadeInAmerica

TaxPlan_Report.pdf.

556 Michigan Journal of International Law [Vol. 43:3

countries follow suit, especially since SHIELD will put pressure on resi-

dence countries to adopt the IIR.

297

Overall, Pillar Two promises to finally break the back of tax competi-

tion by implementing the single tax principle harmoniously. Successful im-

plementation of Pillar Two should enable both developed and developing

countries to maintain free trade and globalization while also retaining and

strengthening the social safety net from the added revenues extracted from

the world’s largest corporations. We should all hope that in the face of the

pressures of de-globalization and rising nationalism, the new international

tax regime seeking tax harmony will survive and enable all countries to

overcome tax competition and maintain a robust social safety net for their

citizens.

297. A similar race to the top occurred when the United States adopted the CFC rules in

the 1960s, followed by over thirty other countries, including most of the G20. Reuven S. Avi-

Yonah, Constructive Unilateralism: U.S. Leadership and International Taxation, 42 I

NT’L

TAX J. 17 (2016).