In recent years, the global tax landscape has undergone significant transformations, driven mainly by the rapid digitalisation of the economy. As the nature of business shifts and international trade becomes increasingly digital, traditional tax frameworks have struggled to keep pace, leading to growing concerns over tax avoidance and inequitable distribution of tax revenues (European Central Bank, 2023). Governments worldwide have been compelled to reconsider their tax policies as multinational enterprises (MNEs) often exploit gaps and inconsistencies in national tax systems to minimise their tax liabilities. This has heightened the urgency for a cohesive global response that addresses these challenges and ensures a fairer tax system for all jurisdictions involved.
In light of these developments, the Organisation for Economic Co-operation and Development (OECD) proposed the "Two-Pillar Solution” in 2019 (Simmons+Simmons, 2021) as a comprehensive framework to reform the global tax system. By focusing on the principles of fairness and efficiency, this initiative aspires to create a more balanced approach to taxation, promoting the idea that MNEs should contribute their fair share in the countries where they do business. The importance of this initiative cannot be understated, as it seeks to bring stability and clarity to an increasingly complex global tax environment, ultimately striving for a more equitable arrangement that benefits both governments and society as a whole.
The Two Pillar Solution
The Two Pillar Solution targets MNEs that operate globally (Congressional Research Service, 2022), particularly those benefiting disproportionately from tax structures that do not reflect where economic activity occurs. MNEs located in the digital economy are targeted by the first Pillar. However, this Pillar does not exclusively focus on technology and platform-based businesses. It also targets companies with annual global revenues exceeding €20 billion (Tax Policy Center, 2024) and profit margins above 10% (ibid.). These firms often generate significant income in countries without physical presence, exploiting gaps in the traditional tax system. This Pillar seeks to ensure that companies pay taxes where their consumers or users reside by reallocating part of their profits to market jurisdictions. Essentially, it increases the tax on corporations that conduct business internationally, mainly through the digital economy, even if the MNE does not have a physical presence in the country where it sells goods.
The G20 Framework
The OECD G20 Inclusive Framework, inaugurated in 2016, is essential for fostering international collaboration and ensuring equitable tax rights among its member states. This framework follows over 140 countries and territories (Thomson Reuters, 2023), each committed to upholding shared principles of fairness in taxation. The framework's operational methodology is anchored in a consensus-based approach, whereby all member nations are entitled to an equal voice in the decision-making process (OECD, 2020). Thus, the framework enhances democratic legitimacy and inclusivity in discussions concerning global taxation.
The primary objective of the OECD G20 Inclusive Framework is to tackle the complex global tax challenges that have arisen in an increasingly interconnected world. To achieve this, its consensus-based approach promotes extensive collaboration among member countries, allowing them to share best practices, harmonise tax policies, and engage in constructive dialogue to identify fair solutions. According to estimates, implementing these measures could generate an additional revenue stream of approximately 220 billion USD annually (IFC, 2024).
In pursuit of these objectives, negotiations and consultations are ongoing to achieve a unanimous resolution that satisfies all member nations' diverse interests and priorities. This commitment to collaboration underscores the framework's importance and highlights the necessity of a united approach to tackling the complex issues of global taxation today.
Pillar One
Pillar One's primary objective is to redistribute taxing rights, ensuring that nations where a company’s consumers or users (market jurisdictions) can participate in tax revenue, even without the company's physical presence within those localities.
“Pillar One seeks to adapt the international income tax system to new business models through changes to the profit allocation and nexus rules applicable to business profits. Within this context, it expands the taxing rights of market jurisdictions (which, for some business models, are the regions where the users are located) where there is an active and sustained participation of a business in the economy of that location through activities in, or remotely directed at that area.” (Sohu, 2020) Pillar One also seeks to remove economic loopholes in current tax systems to increase taxation certainty significantly.
This framework has been established to address the challenges posed by the digitalisation of the global economy. It specifically focuses on the disparity between the locations where multinational enterprises realise profits and where they meet their tax obligations. Conventional tax systems depend on physical presence to allocate taxing rights. Pillar One modernises this framework to accommodate the realities of the digital and globalised economy, where businesses can operate and generate value remotely.
Pillar One guarantees that nations with substantial consumer bases or users obtain an equitable share of tax revenues by redistributing a portion of MNE profits to market jurisdictions. This diminishes the inequities present in the current system.
Numerous nations have implemented or contemplated unilateral digital services taxes (DSTs) to secure revenue from technology corporations (Tax Foundation, 2024). Pillar One aspires to create a coordinated, multilateral framework to prevent trade disputes and fragmentation.
In summary, Pillar One facilitates international collaboration by promoting a standardised framework to address taxation in the digital era. It ensures that large and profitable MNEs contribute to the economies from which they derive value, thereby establishing a fairer and more equitable global taxation system.
Pillar Two
The second Pillar of the OECD Tax Reform Project presents a broader and more comprehensive strategy targeting MNEs with annual global revenues exceeding €750 million (Oecdpillars, 2025). This initiative is also designed to impose a minimum corporate tax rate of 15%, a measure intended to effectively address and mitigate the ongoing issue of tax avoidance practices that allow companies to shift profits to low-tax countries (National Taxpayers Union, 2024). By establishing a baseline level of taxation, the proposal seeks to ensure that irrespective of the geographical location of an MNE's operations, those global activities are subject to a foundational tax obligation.
Formally recognised as the Global Anti-Base Erosion Proposal, Pillar Two is pivotal in fostering a fair and equitable competitive landscape for nations worldwide. The initiative's aspiration to establish a standardised global taxation rate was crafted to deter the widespread practice of profit shifting to tax havens that undermine the integrity of national tax systems.
The operational dynamics of Pillar Two are underpinned by an increased likelihood of its establishment as compared to Pillar One. This is mainly attributable to the heightened consensus amongst participating nations regarding implementing a global minimum tax rate to thwart tax avoidance. While there is a substantial collective agreement on the necessity of this reform, it is crucial to consider that the internal political dynamics of influential countries, particularly the United States, may play a significant role in shaping the outcome of these initiatives. The capacity of these dominant economies to influence global tax policy cannot be understated, as their actions and decisions have far-reaching implications for their domestic frameworks and the international community at large.
In conclusion, implementing Pillar Two represents a transformative step towards establishing a more equitable global tax framework. By closing loopholes that have historically allowed for tax avoidance and ensuring fair taxation of multinational enterprises, this initiative embodies a commitment to fostering a level playing field for all nations. Through these comprehensive measures, it is anticipated that public trust in taxation systems will be restored, ensuring that all corporations contribute their fair share to the societies from which they derive benefit. As the global economy continues to evolve, establishing clear and consistent tax regulations will be integral to maintaining the integrity and sustainability of public finances across the globe, ultimately benefiting all stakeholders involved in the international marketplace.
Benefits of Increasing Tax
Increasing international corporate taxation is essential for guaranteeing that governments possess adequate resources to establish improved welfare schemes worldwide. MNEs capitalise on discrepancies within international tax regulations to transfer profits to countries with lower tax rates, depriving nations of substantial tax revenues. Governments can mitigate these practices by implementing a global minimum tax (Pillar Two) and reallocating taxation rights (Pillar One).
Corporate tax revenues are a reliable funding source for public services and welfare programs. Increasing international corporate tax rates enhances governments' financial capacity to finance healthcare, education, infrastructure, and social protection initiatives, particularly in developing and under-resourced regions.
Increased international corporate taxation facilitates a more equitable distribution of wealth by mandating that large, profitable corporations contribute appropriately to societal needs. This approach alleviates the tax burden on individuals and small enterprises, enhancing the political and social sustainability of welfare programs.
Developing countries, typically with less robust tax collection systems, derive substantial advantages from global frameworks designed to capture corporate revenues that evade their jurisdictions (International Monetary Fund, 2001). This incremental income has the potential to alleviate poverty, enhance public health, and strengthen educational systems.
Well-funded welfare programs significantly diminish inequality and economic instability, fostering social cohesion and facilitating long-term growth. Governments can effectively tackle global challenges such as poverty, climate change, and public health crises by ensuring that corporations contribute appropriately. Ultimately, equitable corporate taxation underpins the foundation for inclusive and sustainable development on a global scale.
Opposing Interests
Several groups are expected to contest the enactment of the Two-Pillar solution. These entities may include tax havens themselves, which rely on competitive tax rates to attract investments from MNEs. As articulated by Pillar Two, establishing a global minimum tax would undermine their ability to foster business through reduced taxation, potentially leading to a decline in foreign investment and economic activity.
Multinational Corporations will most likely oppose the Second Pillar, as large and profitable entities might encounter increased tax liabilities and heightened compliance costs, particularly within the digital and technological sectors. Pillar One aims to redistribute profits to market jurisdictions, diminishing the financial advantages of operating within low-tax regions. For certain entities, the minimum tax outlined in Pillar Two would eliminate opportunities for profit shifting and tax strategy planning.
Developing nations, characterised by limited administrative capabilities, stand to gain from the additional revenue generated under Pillar One (ibid.). However, implementing and enforcing intricate international tax regulations may require resources they do not possess. These nations might prioritise more straightforward reforms that deliver immediate benefits.
Tax advisors and professionals will likely oppose such a drastic alteration to the international tax framework. Introducing these new regulations would disrupt established tax structures, potentially diminishing the demand for aggressive tax planning services and revenue streams for numerous advisors.
Advisors and sovereignty proponents may also express concern, as they recognise that the Two-Pillar Solution necessitates substantial international cooperation, which could infringe upon national sovereignty. Certain countries or political factions may interpret these measures as constraints on their autonomy to establish tax policies tailored to their economic objectives.
Lastly, nations such as the United States have articulated reservations regarding how redistributing taxing rights through Pillar One might disproportionately favour other countries at their expense, mainly if their corporations dominate the MNE landscape. Political opposition to global tax harmonisation may also trigger resistance.
Pillar One has the potential to generate additional tax revenue for aid-dependent nations by reallocating a portion of the profits earned by multinational enterprises to market jurisdictions, including those in developing countries. This initiative would ensure that these nations benefit from the economic activities of significant corporations operating within their territories, even without a physical presence. However, the administrative complexity associated with implementing and enforcing the framework may pose considerable challenges, particularly for nations with limited resources. Without adequate support, the benefits may be outweighed by the costs of compliance and enforcement, thus preventing these countries from fully realising the expected advantages.
The solution could result in substantial revenue losses for corporations. Pillar One reallocates a portion to market jurisdictions, reducing overall profitability. Pillar Two imposes a global minimum tax rate of 15%, curbing the ability to shift profits to low-tax jurisdictions. These changes increase tax burdens and compliance costs, potentially forcing businesses to adjust pricing, investment strategies, or operational structures to mitigate the impact. While the framework seeks global fairness in taxation, its success depends on balanced implementation, ensuring developing nations gain meaningful benefits without excessively burdening corporations.
Examples
According to Oxfam America (2016), the top 50 United States companies have stashed over a trillion dollars in offshore accounts. They have also used more than 1,600 subsidiaries in tax havens to avoid paying billions of dollars annually. Brands such as Goldman Sachs, Pfizer, Walmart, IBM, Chevron, Dow Chemical and Procter & Gamble have participated in such acts.
One prominent case study is the Apple ‘Sweetheart Deal’ case that Paradise Papers (Wired, 2024) exposed. It was found that the tech giant Apple benefitted from two illegal Irish decisions, which artificially reduced its tax charge to as low as 0.005 per cent from 1991 to 2014 (Social Europe, 2024). As a result, in September 2024, the European Court of Justice ruled that Apple owes the Republic of Ireland €13 billion in taxes. As a result, Ireland may invest this into a sovereign wealth fund. This precedential ruling could potentially embolden competition regulators worldwide to tackle the perceived excesses of big tech companies.
Several nations, most notably Ireland and Hungary (International Tax Review, 2021), have expressed significant concerns regarding the potential adverse effects of the proposed initiative on their ability to attract foreign investment. These apprehensions underscore a broader dialogue about the implications of such policies on national economic interests. Additionally, Brazil and India (International Tax Review, 2024) have articulated their concerns about the equity of the proposal and its potential ramifications for nations within the Global South. This group is often underrepresented in international economic discussions.
Current Standing
As of January 2025, 136 nations have formally agreed to the proposals; however, this consensus is contingent upon the proposals successfully navigating their respective domestic legal frameworks (PwC, 2025). This precondition reflects the necessity for local compliance and legislative endorsement before the proposals can be fully implemented.
It is also noteworthy that certain nations, including Nigeria, Kenya, Sri Lanka, and Pakistan (ibid.), have yet to reach a conclusive decision regarding the initiative. These countries have indicated that the proposal does not sufficiently accommodate their unique needs and requirements, thereby calling into question the overall efficacy and inclusivity of the proposed measures.
Essentially, the Two-Pillar Solution strategically focuses on large, internationally operating companies. Its goal is to rectify the inequities observed within the existing frameworks of global taxation and ensure that these enterprises contribute positively to the economies in which they operate. The Two Pillars are designed to address the digital economy's myriad challenges effectively.
Pillar One of the Two-Pillar Solution aims to redistribute taxing rights to ensure that countries where MNEs have consumers or users can tax a portion of the profits, even if those companies do not have a physical presence there. It seeks to adapt international tax rules to modern business models and close loopholes, providing more clarity and fairness in tax obligations. The Second Pillar aims to combat tax evasion more effectively, ensuring that corporations meet their tax obligations within their business jurisdictions. Such measures promote fairness in international taxation and bolster the sustainable development of public finances across all nations.
The Two Pillars ensure that multinational corporations adhere to their obligations by contributing their equitable share of taxes. Still, they also promote stability in tax regulations and help significantly reduce the frequency and intensity of tax disputes that may arise between countries. Moreover, the inclusive framework has successfully brought together a diverse coalition of nations; nonetheless, it is imperative to acknowledge that substantial efforts must still be undertaken domestically and internationally before these proposed measures can be formally integrated into the fabric of international legal standards.
References
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European Central Bank (2023) Digitalisation and the economy. Frankfurt: European Central Bank.
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Wired (2024) Apple Must Pay $14.4 Billion to Ireland in Crackdown on ‘Sweetheart Deals’. Available at: https://www.wired.com/story/apples-tax-bust-up-in-ireland-is-a-warning-to-big-tech/#:~:text=7:31%20AM-,Apple%20Must%20Pay%20$14.4%20Billion%20to%20Ireland%20in%20Crackdown%20on,country%20and%20big%20tech%20companies.&text=Apple%20has%20been%20ordered%20to,court%20said%20in%20a%20statement. (Accessed: 21 Jan 2025).