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  • Joon Young Lim

Will the OECD’s Two-Pillar Solution Better the Global Economy?

There has been a massive tax competition among international society for the last couple of decades.[1]  Between 1985 and 2018, the global average statutory corporate tax rate fell from 49% to 24%.[2]  Some countries competed as tax havens and presented extremely low tax rates to foreign corporations which resulted in multinational enterprises (“MNEs”) shifting “close to 40%” of profits to tax havens. [3]  This raised concerns that such a trend is a “race to the bottom” where tax havens will have minimal tax revenue due to such low tax rates whereby MNEs pay less and less tax.[4]  During the same period, countries all over the world have seen huge budget deficits and it is projected that by 2030, most of the Organisation for Economic Co-operation and Development (“OECD”) members will undergo a budget deficit—as much as 8.7% of GDP in Japan, for example.[5]  Thus, countries clearly need more money to sustain their system and existence.[6] 

Increasing tax revenue by curbing international tax competition is an attractive remedy to the inequity in global distribution of wealth and the global budget deficit problem.[7]  In 2021, the OECD passed the “Two-Pillar Solution” in which 136 countries and jurisdictions that represent more than 90% of global GDP are participating.[8]  Pillar One seeks to achieve a more equitable distribution of profits and taxation rights among countries concerning the largest multinational enterprises (MNEs), with an anticipated annual reallocation of USD 125 billion to market jurisdictions.[9] Pillar Two establishes a global minimum corporate tax rate of 15%, aiming to generate an estimated USD 150 billion in additional tax revenues worldwide annually.[10] Collectively, the pillars seek to redistribute the profits of the largest and most profitable multinational enterprises to countries across the globe.[11] 

However, critics of the Two-Pillar Solution argue that limiting tax competition, particularly by restricting tax havens, will take away the opportunity for equal distribution of wealth.[12]  That is, developing countries offering low corporate taxes benefit by way of increased employment, for example, as MNEs boost employment of local workers.[13] And “the importation of technology and other intangibles” can “increase the capital base of the host country and assist the country in developing its own industry.”[14]  Accordingly, tax incentives might be essential to enable developing countries to remain competitive with wealthier nations over time.[15]  In fact, tax havens continue to generate substantial revenue by imposing low but positive tax rates on the significant foreign profits they attract.[16]

            Furthermore, even though tax havens include prosperous countries like the Netherlands and Switzerland,[17] the global society often focuses on developing country tax havens when discussing the detrimental patterns of the global decrease of corporate tax rates and distributional injustice to the international society.[18]  The global push to reduce CO2 emissions, which gained momentum after many developed nations had already benefited from unregulated CO2 emissions, is likely to have a negative effect on the industrialization and economic progress of developing countries.[19] Similarly, constraining tax competition could stifle the growth of developing nations and widen the disparity between developed and developing economies.[20]

The leading OECD members’ intent in adopting the Two Pillars may be no more than a pursuit of their own interests.[21]  Nations that do not benefit from participating as tax havens may seek to level the playing field by regulating tax competition and preventing others from gaining advantage. The Income Inclusion Rule (IIR) of Pillar Two enables the residence country to collect the shortage in tax revenue that the host country did not impose, up to the minimum tax threshold.[22]  This aspect supports the notion that developed countries prioritize maximizing their own share of the tax revenue rather than promoting a fair redistribution of wealth on a global scale.[23]

That said, if current tax competition intensifies, detrimentally decreasing tax revenue and increasing inequity,[24] it would be meaningless to defend the benefits of tax competition anymore because the global society may not be sustainable at that point.[25] Also, considering factors such as rapidly aging populations, there may be no choice but to raise more tax revenue through curbing tax competition.[26]  Certain forms of tax reform that betters the global economy while still improving a competitive atmosphere would be ideal and the Two-Pillar Solution will be a part of the trial and error process toward this goal.[27]

[1] Thomas R. Torslov, Ludvig S. Wier & Gabriel Zucman, The Missing Profits of Nations 22 (Nat'l Bureau of Econ. Research, Working Paper No. 24701 (2020), available at

[2] Id. at 1.

[3] Id. at 27.

[4] David Elkins, The Merits of Tax Competition in a Globalized Economy, 91 Iɴᴅ. L.J. 905, 937 (2016).

[5] Reuven Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Hᴀʀᴠ. L. Rᴇᴠ. 1573, 1632 (2000).

[6] Id. at 1648.

[7] See Reuven Avi-Yonah & Young R. Kim, Tax Harmony: The Promise and Pitfalls of the Global Minimum Tax, 43 Mɪᴄʜ. J. Iɴᴛ'ʟ L. 505 (2022).

[8] Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, OECD (Oct. 2021),

[9] Id.

[10] Id. 

[11] Id.

[12] See, e.g., David Elkins, The Merits of Tax Competition in a Globalized Economy, 91 Iɴᴅ. L.J. 905 (2016).

[13] Id. at 918.

[14] Id. at 918.

[15] Id. at 950.

[16] Torslov, Wier & Zucman, supra note 1, at 32.

[17] Id. at 18.

[18] Elkins, supra note 12, at 949.

[19] Sarah Paez, U.N. Report Warns CBAM Could Hurt Developing Countries, Tax Notes Int’l (July. 16, 2021),

[20] Elkins, supra note 12, at 905, 954.

[21] Avi-Yonah & Kim, supra note 7, at 548.

[22] Id. at 531.

[23] Id. at 548.

[24] Torslov, Wier & Zucman, supra note 1; Avi-Yonah, supra note 5.

[25] Avi-Yonah, supra note 5, at 1632.

[26] Id.

[27] Elkins, supra note 12, at 905.

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