All Roads Lead to Ireland: Pillar 2 and the Path of Least Resistance


APR. 30, 2021


Time for a pop quiz. What’s the central purpose of the OECD inclusive framework’s pillar 2 proposal? The available responses are:

A. To shut down the most egregious forms of profit shifting while preserving a reasonable degree of global tax competition.

B. To establish an effective floor on the race to the bottom, so that governments around the world can extract a bit more tax revenue from the corporate sector without resorting to less savory measures.

C. To placate the United States as international standard-bearer since the IRC already contains an equivalent measure in section 951A.

D. To keep Ireland’s corporate sector alive and kicking, without expressly acknowledging the country’s improbable role in setting global norms.

E. All of the above.

With only a hint of irony, this article suggests the correct answer is option D. Leniency would allow partial credit to those readers who selected option E.

Time to put down another prediction: When the dust settles on the pillar 2 deliberations, don’t be surprised if the same magical tax rate that has worked wonders for the Irish economy (12.5 percent) has been repurposed to serve the rest of humanity as our shiny new global minimum tax. Don’t proclaim this observation too loudly, though, or people may second-guess it.

There’s no inherent reason why Ireland’s statutory corporate rate should serve as an international standard for an acceptable level of tax competition. Yet I detect that this is where pillar 2 is headed. It isn’t a matter of reasoned policy or sophisticated economic analysis. I have no calculus equations to offer you. This is unabashed pragmatism.

The OECD inclusive framework has decided that now is the time for a global minimum tax on corporate profits. No disagreement there. Thus far, though, they’ve danced around the thorny matter of the threshold rate. Set it too low and pillar 2 will be rendered a feckless creation. Set it too high and the OECD will have gored the wrong ox.

In case you haven’t noticed, the OECD has become rather adept at inflicting minimal offense against key stakeholders. The last time I checked, the U.S. government was providing roughly 22 percent of the OECD budget. Whatever the final rendering of pillar 2 looks like, significant consideration will be given to appease mainstream U.S. political preferences — although it’s impossible to please everyone.

My opinion is that, in due time, the relevant policymakers will realize they don’t need to conjure up the perfect threshold rate for pillar 2 because it already exists. It was determined years ago by some clever people in Dublin. The rate is 12.5 percent. This outcome doesn’t reflect my personal tastes. I’d be fine with a heftier minimum tax, but I don’t see how that comes to pass given the lay of the land.

Let’s give credit to resiliency. It’s an admirable characteristic. For a generation, nobody else in the EU has looked favorably at the Irish corporate rate — and it persists. At the same time, I’ll acknowledge that this outcome is attributable to the lack of qualified majority voting among EU member states on matters of direct taxation. The EU had little difficulty harmonizing the range of acceptable rates for indirect taxes, as seen in the VAT area. Not so for income taxes.

It’s not that Ireland’s tax code is somehow immune to international pressure, from Brussels or elsewhere. Other controversial elements of the country’s tax system have fallen by the wayside (for example, the rules that enabled the so-called double Irish sandwich structure). The 12.5 percent statutory rate is different. It is a proven survivor. Tapping the Irish rate for pillar 2 is a no-brainer when you think about it. Why reinvent the wheel?

I can project a similar outcome for U.S. rules for global intangible low-taxed income. That President Biden has a proclivity to quote Irish poets and wears a green tie on St. Patrick’s Day should have absolutely nothing to do with how the Treasury Department plans to reform the GILTI rules. Everyone knows that’s not how tax policy is determined. But again, don’t be surprised if the forthcoming revisions to section 951A conveniently defer to Ireland’s rack rate — especially once moderate Senate Democrats are done tweaking whatever bill emerges from the House of Representatives. The luck of the Irish, indeed.

The architecture of pillar 2 requires that a line be drawn. That’s a contentious act, fraught with political sensitivity. The path of least resistance is to rely on a line that already exists and was drawn by somebody else.

The Slides Heard Round the World

We’re back to obsessing over a slide deck. That would be the April 8 presentation by Treasury officials to a steering committee meeting of the OECD inclusive framework. Last week’s column dissected the contents of the slides as they relate to pillar 1.1 Note, however, that these unidentified Treasury officials chose to open their presentation by focusing on the importance of pillar 2. When somebody begins their discussion of pillar 1 by emphasizing the critical importance of pillar 2, they are telegraphing their priorities. Treasury has a domestic legislative agenda to fret over, and it just happens to overlap with cooperation at the international level on pillar 2.

This is a subtle point. Not everything in the OECD project is about fending off digital services taxes. The U.S. trade representative has separate weaponry to address unilateral measures in the event our twin pillars go kaput. First and foremost is domestic politics. The Biden administration has made a priority of going big on infrastructure, coupled with strategic corporate tax hikes.

This plan has the potential to work, despite its size. Infrastructure spending continues to poll well with a majority of U.S. voters, including Democrats and Republicans. (Here, we shall leave aside the pesky details about how broadly one defines “infrastructure” spending.) Raising taxes on large and profitable multinational corporations polls well with a majority of Democratic voters. The plan is viable, but just barely because of the balance of power in the Senate.

The idea is to raise the U.S. statutory rate to 28 percent and bump the nominal GILTI rate to 21 percent.2 The outcome has potential consequences for U.S. competitiveness, unless the rest of the world (or a sizable chunk of it) goes along with a mighty minimum tax. On that point, the Treasury slides read as follows3:

Pillar 2 Blueprint (Slide 4)

  • We wish to end the race to the bottom over multinational corporate taxation and establish a tax architecture in which countries work together toward more equitable growth, innovation, and prosperity.

  • Pillar 2 Blueprint provides a framework for that generational achievement. We wish to work robustly to complete this important work.

Biden-Harris Administration legislative proposals (Slide 5)

  • We are committed to reforming the U.S. minimum tax through legislation and working to establish a robust global minimum tax through Pillar 2.

  • Our legislative proposals would, among other things: strengthen U.S. minimum tax for U.S.-headquartered multinational corporations by increasing the minimum tax rate on foreign earnings to 21 [percent]; replace current global basis for our minimum tax on foreign earnings with a country-by-country system; remove current law 10 [percent] carve-out tied to qualified business asset investment.

  • Plan will return corporate tax revenue for the United States as a share of our economy back to its 21st-century average before the 2017 corporate tax cut.

Biden-Harris Administration legislative proposals (Slide 6)

  • By working together we can improve how countries around the world tax big corporations.

  • Accordingly, the President has proposed U.S. legislation intended to repeal the [base erosion and antiabuse tax] and replace it with a regime intended to encourage other countries to adopt strong minimum taxes in line with the global agreement we seek on Pillar 2, and consistent with the general concept of the [undertaxed payments rule].

  • The time has come to level the playing field.

Relationship between Pillar 2 and Pillar 1 (Slide 7)

  • Pillar 2 cannot be fully successful absent a stable multilateral international tax architecture.

  • Pillar 1 provides the opportunity to stabilize the architecture.

  • Stabilizing the architecture requires, among other steps, addressing the proliferation of unilateral measures that gave rise to Pillar 1: Requires a “standstill and rollback” workstream; Can help establish a stable and equitable allocation of taxing rights.

  • Via the stabilization question, Pillar 1 and Pillar 2 are linked by more than politics.

What should we make of this? For starters, the United States has taken over as lead cheerleader for pillar 2. That makes sense given how it wants to reform the GILTI regime, as referenced above in slide 5. We know that many market jurisdictions regard pillar 1 as the key to expanding their taxing rights, to the point that the thought of pillar 2 as a stand-alone proposal doesn’t spark much interest. Even the United Kingdom (which doesn’t spring to mind when one speaks of market countries) has stated the success of pillar 2 depends on reaching an international consensus on pillar 1.

Other countries will prioritize pillar 1 as a means of killing off the permanent establishment doctrine, which is commonly viewed as an agent of fiscal disenfranchisement. The U.S. Supreme Court had the wisdom to ditch Quill when it became clear that a physical presence requirement was antiquated for the purposes of operating a multistate sales tax system. Pillar 1 can be seen as the rest of the world doing the same thing as to corporate income taxes.

The United States will prioritize pillar 2 to mitigate the anti-competitive ripple effects of a meatier GILTI regime. The extent to which those anti-competitive effects are a meaningful problem will remain a source of disagreement, but Treasury is aware they may influence how a few key members of Congress (including Sen. Joe Manchin, D-W.Va.) will perceive Biden’s tax package.

Is support for a global minimum tax an act of economic self-sabotage? A recent letter to the editor thinks so:

the U.S. Treasury has the temerity to ask the world to help it out by adopting GILTI (through a pillar 2 minimum tax hit) in order to bring everybody down to the diminished competitive level of corporate America — rather than scrap GILTI and bring corporate America up to the competitive level of Canada and like-minded countries.4

While I hold a kinder view of Biden’s GILTI proposals, I must agree with the commentator’s description of Treasury support for pillar 2 as an attempt to get the rest of the world to jump on the GILTI bandwagon. It’s one thing to fortify your global minimum tax as part of a coordinated global campaign; it’s another thing to do so in isolation — even if you are an economic superpower.

I’ve long viewed some of the popular arguments about tax competition as being overhyped. There can be no doubt that competitive pressure is a real thing, but its influence strikes me as highly contextual. Tiny places (think Singapore) have no choice but to be competitive. The United States isn’t the size of Singapore; neither is the EU. Size matters, as the saying goes.

Despite all that, it’s a mistake to assume away global tax competition as we discuss the pros and cons of a global minimum tax. Far too many people believe in tax competition for it to be easily dismissed. The OECD surely knows this, and I’m willing to bet they’re more worried about setting the pillar 2 rate too high, than setting it too low.

As for Canada being a juggernaut of global tax competition — and corporate America being a relative laggard — OECD statistics for 2018 inform us that Canada’s taxation of corporate income and gains amount to 11 percent of GDP, slightly above the OECD average of 10 percent. In contrast, OECD statistics for U.S. taxation of corporate income and gains for 2018 came to 4 percent of GDP. Relative to the size of their national economies, these figures suggest corporate America is substantially undertaxed compared to our neighbors to the north. There’s more than one way to gauge competitiveness.

Regarding the need for a minimum tax, the Treasury slides pull no punches. They open with a blanket assertion that the race to the bottom needs to stop, framing it as thematically consistent with the desire for equitable growth, innovation, and prosperity. All the details on pillar 2 follow from this stance.

If you regard the race to the bottom as a positive force for taxpayers, it follows that you don’t want the GILTI regime beefed up, and you probably don’t see the need for further progress on pillar 2. Just know that without an accompanying pillar 2, it’s doubtful the United States would support pillar 1. The status quo ante is no longer the alternative to what the OECD is trying to accomplish. DSTs have reset the baseline understanding of what normalcy looks like.5

The Celtic Tiger Is an Apex Predator

Something else emerges from the Treasury slides. You can feel the love for the undertaxed payment rule (UTPR), which will provide the foundation for whatever replaces the BEAT regime under section 59A. More on the “stopping harmful inversions and ending low-tax developments” (SHIELD) base protector in a future column.

The OECD’s October 2020 blueprint envisions the UTPR as existing alongside an income inclusion rule. Some countries, such as Japan, prefer the UTPR to serve as a backstop to the income inclusion rule.6 Perhaps that’s Japan’s way of signaling they’re not thrilled with the BEAT. You’d think the world’s biggest and third-biggest economy would have much in common when it comes to protecting their corporate tax base. The BEAT serves as an irritant in that sense. It will be interesting to see how Treasury goes about replacing it.

Under the blueprint, pillar 2 compliance has the potential to get burdensome on taxpayers. For example, if they must perform effective tax rate (ETR) calculations for every jurisdiction in which they’re active. It’s not clear to me this inconvenience should be an obstacle to progress, though. The concept of the tax is inherently burdensome on taxpayers. Still, the OECD should build pillar 2 to be manageable. One suggestion that brings comfort is to use a multinational’s country-by-country reporting data to establish safe harbors — and not the kind to which former Treasury Secretary Steven Mnuchin was referring.

CbC data could produce two pools of jurisdictions, those with an ETR that exceeds the threshold rate and those that don’t. There could be some modifications to the CbC data for aligning ETR figures with what’s needed for an UTPR mechanism. The conforming adjustments shouldn’t go overboard, or they will defeat the purpose of having available data points that companies are already producing. Another approach is for each country’s revenue body to issue an angel list of jurisdictions for which there’s confidence that a UTPR mechanism would rarely apply. With such a risk-based approach, taxpayers wouldn’t need to produce ETR calculations for jurisdictions on the angel list, unless specifically asked to do so on the request tax administrators.

You can imagine that countries would do some heavy lobbying to get themselves placed on these angel lists. That the composition of these lists can be manipulated though diplomatic dialogue (just horse trading by another name) is a good reason to think twice about relying on them.

Pure tax havens might not be able to talk themselves on to angel lists, but what about the facilitators of corporate tax planning? These might be places like Luxembourg, the Netherlands, and Switzerland — just to pull some names out of the air. Would multinationals still make use of these jurisdictions if affected payments attracted a top-off tax? The conventional wisdom is that no country would have any incentive to allow ETRs below the threshold rate because it would do nothing for taxpayers and implies a forfeiture of tax base to the residence country.

Whatever approach is taken under a UTPR mechanism, there’s no avoiding the need to delineate adequately taxed payments from the offending variety. This brings us back to Ireland. Irish Finance Minister Paschal Donohoe is insisting that Ireland’s 12.5 percent corporate rate won’t budge, regardless of what happens at the OECD level.7 I suspect it won’t need to.

Those seeking a hot take need look no further. Ireland won’t need to conform its tax laws to pillar 2, because the inclusive framework will conform its work product to them. None of that will be spelled out in an OECD communiqué or stated as a matter of overt policy. It will transpire by osmosis, as perceptions of adequate corporate taxation coalesce around the peculiar figure of 12.5 percent.

What’s so noble and righteous about 12.5 percent? Nothing in particular. What explains the rate’s irresistible appeal to the global tax community? I can’t really say. Like beauty, visceral suitability is in the eye of the beholder.

Do you need a more concrete answer? Fine. Then I’ll tell you 10 percent is too low for purposes of pillar 2, and 15 percent is too high. We can split the difference and agree that Ireland has nothing to do with it. Except you realize that would be a fib. The Irish rate has everything to do with it — even if we’re unable to articulate why that should be so.

Still not satisfied? The last straw is to invoke the Celtic Tiger. Dig out your passport and travel to Ireland (once we’re past the pandemic, that is). When you get there, gaze up and down the streets of Dublin — taking in the degree of legitimate business activity that’s going on there, aided by an attractive tax environment. The place doesn’t feel like a tax haven. You sense economic substance, not artifice. Your intuition tells you that Ireland’s corporate tax base has been cultivated in the right way, not poached from foreign shores — at least not entirely.

We could say the same nice things about places like Amsterdam or Zürich. But the success of those locations is less clearly tied to the host country’s tax rate. In terms that your marketing department would understand, Ireland’s 12.5 percent corporate rate is a brand attribute.

What about Washington? Treasury wants the pillar 2 threshold to be 21 percent, matching the nominal GILTI rate under the Biden administration’s proposed revisions (achieved by reducing the GILTI deduction and raising the statutory rate to 28 percent). Let’s call that an opening bid. Another scenario has moderate Democrats who sit on the Senate Finance Committee declining to push the U.S. statutory rate beyond 25 percent. Let’s further assume the GILTI deduction (50 percent) stays right where it is. That would result in a nominal GILTI rate of — you guessed it — 12.5 percent. Sens. Ron Wyden, D-Ore., Sherrod Brown, D-Ohio, and Mark R. Warner, D-Va., have already shown a willingness to push back against Treasury’s plans for reforming GILTI.8 There you have it: a U.S. statutory rate of 25 percent and a GILTI rate of 12.5 percent. The Celtic Tiger roars again. Stranger things have happened.

Don’t underestimate the Irish rate. It punches above its weight class. It’s already a de facto standard for fiscal legitimacy. For purposes of the OECD inclusive framework, the path of least resistance would make it a de jure standard as well.


1 Robert Goulder, “Treasury’s Pillar 1 Reset: In Praise of Comprehensive Scoping,” Tax Notes Int’l, Apr. 26, 2021, p. 553.

2 Here, I speak of the nominal GILTI rate (10.5 percent) without regard to the haircut on available foreign tax credits that can generate an effective GILTI rate closer to 13.125 percent. This sacrifices a bit of technical precision for the sake of simplicity, which also happens to be what the OECD inclusive framework should be doing with the pillars generally.

3 Presentation by the United States to the steering committee of the inclusive framework meeting, U.S. Department of Treasury (hereinafter, “Treasury slide deck”), Apr. 8, 2021.

4 See Nathan Boidman, “GILTI: Dragging Tax Competition Down to the U.S.’s Level? Tax Notes Int’l, Apr. 26, 2021, p. 443.

5 For related analysis, see Michael J. Graetz, “A Major Simplification of the OECD’s Pillar 1 Proposal,” Tax Notes Int’l, Jan. 11, 2021, p. 199.

6 Japan Business Federation, “Japan Business Federation Responds to OECD Consultation on Pillars 1 and 2” (Dec. 14, 2020).

7 Stephanie Soong Johnston and Kiarra M. Strocko, “Global Tax Reform Deal Must Respect Irish Rate, Donohoe Says,” Tax Notes Int’l, Apr. 26, 2021, p. 521.

8 Andrew Velarde, “Executive Concerns Over Rate Hike Take Back Seat to GILTI Worries,” Tax Notes Int’l, Apr. 26, 2021, p. 542.