Tax News & Views International Weekly: Pillar Two Headaches

It’s been something of a mantra from the business community—Pillar Two, the Organization for Economic Cooperation and Development’s 15% global minimum tax, will be a compliance nightmare. But when all of the work is done, it will likely not create any significant new tax payments for most companies.

Cathy Schultz, vice president for tax and fiscal policy at the Business Roundtable, reiterated this point during an April 10 panel discussion at a Tax Foundation event, and delved into why this is.

“For companies, you have to pay attention to every country that you’re doing business in—which rules have they adopted, how are you going to comply with those, what are the rules for doing that?” Schultz said. “It's going to be very expensive for companies to comply. It's going to be very expensive for tax administrations to figure out how to take this information, what to do with it, how to use it, and what it actually is. And there's very little tax revenue being generated from this.”

This is partly because, while the overall Pillar Two scheme includes requirements for every participating country to follow, jurisdictions have some choices about which policies to adopt. The “Chinese menu,” as Schultz put it, means that companies will need to keep track of which combination each country is using, along with the particular variations in local laws.

They also have to “prove a negative”—that they owe nothing in additional Pillar Two taxes. Overall, it means transmitting “billions and billions of bytes of data” to tax authorities, according to Schultz.

Now to be fair, the OECD in 2024 estimated that Pillar Two would increase global corporate tax revenue by between $155 billion to $192 billion annually. And that estimate may not totally include indirect effects, such as the incentive for countries to raise tax rates and roll back benefits that run afoul of the Pillar Two rules.

But this is a central point of frustration for multinationals—and why there’s been persistent hope for some kind of permanent safe harbor that could make compliance easier. It’s exactly the kind of situation where safe harbors typically apply, when there’s uncertainty about enforcement but also potential areas of agreement.

That’s not to say that there’s reason to expect an announcement soon. Despite a joint statement from the OECD and Inclusive Framework from last week’s meeting suggesting some areas of consensus, there still are significant divides between the different sides. Many of those involved in the OECD process believe the final plan is the simplest way to implement its objectives, and a safe harbor isn’t possible without gaping loopholes.

The dynamic also demonstrates why half-measures wouldn’t be enough. Even if the OECD agreed on tweaks that would prevent increased taxation on U.S. multinationals most of the time, the risk and necessity of compliance still hangs over them. And that still could be enough to trigger a trade war.

A Tariff Pause, But No Reprieve

Despite the 90-day pause in President Trump's new reciprocal tariff regime announced last week, tariffs continue to draw attention and confusion. Some recent items on the topic:

U.S. Tariff Investigations Target Pharmaceuticals and Tech – Michael Smith, Tax Notes ($):

The pharmaceutical consultation requests comments on the state of domestic production and demand for pharmaceuticals and pharmaceutical ingredients. The consultation said pharmaceuticals are produced by a small number of suppliers, and foreign government subsidies and “predatory trade practices on United State pharmaceuticals” may harm U.S. competitiveness.

What Role for International Tax in a Trump Tariff World? – Mindy Herzfeld, Tax Notes ($):

The disruption to cross-border trade and global supply chains prompted by President Trump’s April 2 tariff announcements — and April 9 adjustments — has been so dramatic, it makes many of the heated debates over international tax almost irrelevant. Questions about country-by-country global intangible low-taxed income, increases or reductions to the qualified business asset investment, and revisions to the base erosion and antiabuse tax pale in comparison with tariffs of higher than 60 percent on many business inputs — let alone corresponding retaliatory measures. And speculation about what role the United States may play in OECD negotiations over a two-pillar solution and other topics seems extraneous given the administration’s apparent disinclination for multilateral coordination as a means of ensuring free trade and open borders.

Trump's Tariff Reprieves Buy Lawyers Time To Strategize – Dylan Moroses, Law360 Tax Authority ($):

Yet U.S. companies are bracing for uncertainty to continue even after Trump's recent actions. Lawyers told Law360 firms are assisting clients in assessing operations and evaluating how the tariff regime continues to pose risks for business decisions.

Tariff Turmoil Opens Door to Insider Trading Suspicion, Lawsuits – Martina Barash and Gillian R. Brassil, Bloomberg Tax:

President Donald Trump‘s tariff rollout has spurred market-wide volatility as the administration has shifted how much, when, and what its policy targets. It’s included a tit-for-tat with China, with the US announcing a 145% tariff on Chinese imports and China raising its tariff to 125% on US goods, as of Tuesday.

Classic securities fraud suits alleging that misrepresentations or omissions propped up a company’s stock price will almost surely follow Trump’s announcements, but will be hard to prove, Dean Conway of Carlton Fields PA said.

Other International Tax Items

Tech Sector Urges IRS to Drop Proposal on Cloud Transactions – James Munson, Bloomberg Tax ($):

The Information Technology Industry Council said the proposal is inconsistent with existing rules and would lead to double taxation. The group, which represents major US tech companies, also said the regulations (REG-107420-24) would create an excessive and needless administrative burden, trigger substantial unintended consequences, and cause companies to move intellectual property rights and research activities offshore.

Pillar 2 Guidance, EU Directive Face Compatibility Questions – Elodie Lamer, Tax Notes ($):

“We're in the process of analyzing if some parts of the administrative guidance with the Pillar two model rules would be in breach with secondary EU law [the pillar 2 directive] when implemented by Member States. If so, taxpayers might challenge this if the implemented [administrative guidance] would lead to a higher top-up-tax,” Edwin Visser, deputy global tax policy leader at PwC and a member of the board of the Tax Foundation Europe, told Tax Notes in an April 10 email.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Fantomah

Debut Year:1940

Debut Publication: Jungle Comics #2

Origin Story: Unclear, other than being the "Daughter of the Pharaohs" and protector of the jungle.

Superpowers: She has virtually unlimited, omnipotent powers, including to transform herself and her victims.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.