Policy Note: Assessing the Impact of Pillar Two on Developing Countries

The Pillar Two reform is designed to end the four decade long race to the bottom that persisted despite the minimum standards and best practices promoted by the Base Erosion and Profit Shifting (BEPS) Program. However, in the process of mending the inadequate international tax system, the Organisation for Economic Co-operation and Development (OECD) changed its agenda to addressing tax competition. With a wide objective of increasing the effective tax rates (ETRs) across jurisdictions to 15%, it disregards the constraints that it imposes on developing countries. This article demonstrates that the immediate revenue gains of developing countries remain limited, and the tax will restrict the ability to offer tax incentives and will undermine the sovereignty of states in its application to some extent. Pillar two, tax incentives, domestic minimum taxes, carve-outs, regulatory competition.