Bumpy road to modernisation of international taxation

In Short

In early July 2021, over 130 countries joined the “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy”. In a nutshell, Pillar One gives market jurisdictions (where products are marketed) new profit taxing rights while Pillar Two introduces a minimum corporate tax rate of at least 15%. In this report we summarize the points of the agreement most relevant to investors and sketch the likely impact on the economy and financial markets.


  • In early July 2021, over 130 countries agreed to reform international tax rules: Pillar One gives new taxing rights to market jurisdictions. Pillar Two introduces a minimum 15% global tax rate on corporate profits.
  • The “overhaul” of taxing rights became necessary to deal with the digitalisation of trade that allows large multi-national enterprises (MNEs) to engage in tax optimisation by shifting profits to low-tax jurisdictions. This raised questions about the fairness of taxation, amplified by tax competition and cherry-picking of tax havens. Moreover, the declining share of labour income spurred concerns about inequality. The proposed new tax order is a sign of renewed multilateralism.
  • The tax deal still faces political headwinds from key players. Thus, the current time schedule looks challenging. In the US, Senate Republications have strong reservations and within the EU tax havens like Ireland, Hungary and Estonia are opposing the agreement. That said, a failure to implement the deal would lead to the undesirable proliferation of unilateral digital service taxes, which could easily end up in a global trade conflict.
  • The new rules under Pillar One will only affect taxation of about one hundred of the biggest and most profitable multinational enterprises (MNEs). The OECD estimates that total corporate tax revenue could increase by 2.3%-4% while the detrimental impact on investment activity and economic growth is likely to be small.
  • With respect to countries, it is obvious that tax havens will lose, while high-tax countries with a big market for digital services will probably benefit. For the US, the net effect is ambiguous as it will lose profit taxing rights to market jurisdictions while the exact co-existence with US tax laws (GILTI) still needs to be clarified.
  • The high weight of tech giants in the S&P500 makes it more vulnerable than the MSCI EMU. That said, the short-term impact is likely to be small. Looking ahead, however, a shift in the willingness towards capital and profit taxation might exert more lasting negative effects on equity markets.

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Core Matters: Bumpy road to modernisation of international taxation

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