Note 4: Unpacking the OECD Two-Pillar Solution

This note examines the OECD’s Two Pillar Solution International tax initiatives, presenting a general overview of both Pillars and focusing on clarifying their mechanism. Pillar Two establishes a global minimum tax of 15% for MNEs with revenues over EUR 750 million, using the Income Inclusion Rule (IIR), Qualified Domestic Minimum Top-up Tax (QDMTT), and Undertaxed Payments Rule (UTPR) to prevent the race to the bottom in corporate tax rates. Pillar One reallocates residual profits of the largest MNEs to market jurisdictions based on the final user location, to adapt the outdated tax system to the digital economy. The rules for each Pillars are explored with case study examples to explore factors influencing revenues such as carve-outs and tax credits for Pillar Two and the reallocation rules and elimination of double taxation for Pillar One. While Pillar Two has started to be implemented in several countries, Pillar One faces challenges and resistance from key countries, potentially limiting its effectiveness. This could lead to the rise of Digital Service Taxes (DSTs).