Faculty Author Type

Current Faculty [Wei Cui]

Document Type

Working Paper

Publication Date



Global minimum tax, international taxation, OECD BEPS, Pillar Two


International agreements on the taxation of multinationals emerged rapidly in the last two years, as exemplified by an EU directive on a global minimum tax (commonly known as “Pillar Two”) and other countries’ announcement to implement similar rules. According to a popular narrative, the speed of Pillar Two adoption may be partly attributable to certain enforcement mechanisms that elicit the participation even of those not sympathetic to Pillar Two’s stated goals. Such mechanisms, acting on nations’ self-interest, make Pillar Two “incentive compatible” and characterizes it with a “devilish logic.”

This Article examines this narrative by systematically analyzing strategic incentives for adopting or retaining Pillar Two’s three components: the Income Inclusion Rule (IIR), the Qualified Domestic Minimum Top-Up Tax (QDMT), and the UTPR or under-tax profit rule. It finds that such incentives are surprisingly weak for national-income-maximizing governments. Specifically: (1) IIR adoption is irrational conditional on QDMT adoption by other countries in response; (2) QDMT adoption is rational if and only if in response to IIR adoption, and the combination of IIR and QDMT adoption is therefore unstable; (3) in many policy-relevant circumstances, QDMT adoption is not an effective response to UTPR adoption, and IIR adoption is generally not an effective response to UTPR adoption. In addition, the Article draws an important distinction between two interpretations of the UTPR (extraterritorial v. non-extraterritorial), and identifies conditions under which they are equivalent (generating weak enforcement effects) and where they diverge.

The Article’s findings suggest that if countries are motivated by national self-interest, then even after many adopt Pillar Two, the regime may still unravel. Indeed, the fact that Pillar Two contemplates very substantial wealth transfers among countries makes its “incentive compatibility” highly unlikely. The Article also shows the extraterritorial and non-extraterritorial interpretations of the UTPR raise distinct normative questions about international law; normative debates about the UTPR should therefore pay closer attention to the UTPR’s positive features.



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