The Two-Pillar Tax System, proposed by the Organization for Economic Co-operation and Development (OECD), represents a paradigm shift in international taxation, aiming to address the challenges posed by the digital economy and profit shifting. Pillar One of the system focuses on the digital economy, introducing the concept of Amount A, which allocates a percentage of residual profits to market jurisdictions based on a revenue-based allocation key. Pillar Two is designed to establish a global minimum tax rate to prevent profit shifting to low-tax jurisdictions. It employs a mechanism where the effective tax rate of each jurisdiction is calculated, and if it falls below the minimum, a top-up tax is charged to the head office.
The implications of the Two-Pillar System are far-reaching. The fair taxation of digital businesses under Pillar One levels the playing field and ensures that multinational corporations pay their fair share in the markets where they operate. However, the implementation of the Two-Pillar System is not without challenges. Enforcing the rules uniformly across diverse jurisdictions requires international cooperation, and ensuring compliance may be a complex endeavor. The system may also prompt adjustments in global investment patterns as businesses navigate the new tax landscape, raising uncertainties about its long-term impact.
This article delves into the concept of Two-Pillar Taxation, an emerging framework in international taxation. It critically examines the pillars, their objectives, implications, and the challenges they pose to global tax policy. Through an in-depth analysis, we assess the potential benefits and drawbacks of this approach, highlighting its impact on multinational corporations, governments, and international tax norms. Additionally, we explore the policy implications and future of the global taxation and how the OECD & G20 would implement the two-pillar taxation system.