G7 Pillar Two Global Tax Deal a Good Start Toward Tax Simplicity

The June G7 agreement on the Pillar Two global minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. proposal is under fire: according to a document seen by Bloomberg Tax, 28 countries have critiqued the “side by side” vision for the US international corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. system to coexist with the 15 percent Pillar Two global minimum tax. But there is little to worry about: side-by-side coexistence does not seriously undermine Pillar Two.

If anything, there is some potential for Pillar Two to improve: the G7 statement commits to the spirit of the global agreement rather than a rote checklist of requirements. Simplifications for high-tax high-substance countries—that is, large countries with plentiful business operations and tax rates above 15 percent—would be a welcome improvement. So too would be a second look at nonrefundable substance-based credits. Both are consistent with the US negotiating position.

First, consider what the important objective of the agreement is: it is not to jawbone high-tax countries into following a rigid prescription. The important objective is to protect high-substance countries from base erosion. Unprecedented and coercive elements of Pillar Two like the UTPR should be applied to low-tax countries, not high-tax countries like the US.