Pillar Two in Latin America Is Trying to Find a Path Forward

The status of the OECD Pillar Two or the so-called global minimum tax is going through a defining moment, cemented in part by the Outcome Statement issued by 138 members of the Inclusive Framework on July 12 giving some oxygen to the two-pillar solution.

Pillar Two has proven to have relevant early adopters, championed by the EU, Japan, and South Korea who jumped into the fray, energized in part by the (now fading) commitment of US leaders to support a 15% effective global minimum tax.

However, as the Biden administration seems to be losing legislative momentum the closer they get to the 2024 election cycle, and with American trade unions, representing roughly 48% of the world’s multinational enterprises, not actively lobbying in favor of doing anything concerning Pillar Two, the notion of its coordinated global enactment may seem, for some of us, to be at risk.

The cost of inaction has already been quantified by the US Joint Committee on Taxation, estimating a price tag of $120 billion in lost tax revenue for the US should it do nothing—and even in the best-case scenario, of $60 billion should the Biden administration’s plan on Pillar Two be implemented. Either way, the US stands to lose, something that voters may not be willing to tolerate.

A Latin American Perspective

Also on the losing team is the always aspiring Latin America region, where regional tax professionals seem to agree on Pillar Two that:

• It’s of little interest to developing economies.
• Its implementation isn’t expected to generate substantial tax revenue (roughly 3% of the total) and yet it entails a challenging compliance burden for both tax administrations and taxpayers.
• Adhering to it will take away from developing economies one of the few tools they have to attract foreign direct investment.
• Not doing anything to counter it implies shifting tax revenue from developing economies to developed countries.

Unsurprisingly, some of the concerns of Latin America were echoed by the UN in a draft report published on Aug. 8, recognizing issues such as a clash between Pillar Two and tax sovereignty, and even acknowledging that procedural issues “prevent developing countries from full participation in the agenda-setting and decision-making process,” which ultimately limits the effectiveness of certain substantive rules.

Contributing to the debate, a recent webinar organized by Latin American tax practitioners seems to have agreed that the best alternative for their economies—so they don’t forgo tax revenue in favor of richer regions—is to implement a qualified domestic minimum top-up tax.

The purpose of such a QDMTT is in no way a political adherence to the objectives of Pillar Two, either as the publicized remedy to the tax race to the bottom, or as the well-known yet not acknowledged desire by tired developed economies to further boost their tax revenue based on income that has no nexus to them.

In essence, a proper Latin American QDMTT is a defense mechanism against the tax revenue appropriation intended by early adopters of the income inclusion rule and the undertaxed profits rule. Hence, its configuration should be strictly limited to making sure that the tax base of an IIR or UTPR elsewhere on the planet comes down to zero, and thus target solely those global businesses with revenue in excess of 750 million euros ($810 million).

An alternative approach to tackle the effects of Pillar Two is the implementation of a subject to tax rule. This tax placebo can be summarized as a treaty-based rule whereby developing countries—classic “source countries”—can impose a tax on intra-group payments of interest, royalties, and other covered payments (including services fees) equal to the difference of 9% and the nominal corporate income tax rate of the countries where the income beneficiary resides.

Nonetheless, the international tax revolution, initiated by the politically driven Pillar Two and in the process of being implemented by over 50 countries, can be an opportunity for Latin America, a region that has spoken against the “abuse” of globalization and big international corporations, and that has deliberately eluded any substantial discussion of taxation of individuals.

Leveling the field for Latin America might entail a few approaches, including securing that large foreign investors do pay an effective 15% effective minimum tax, but not necessarily more than that.

For instance, should the mining royalty approved by Chile with an effective tax burden of 46.5% be revised? Countries such as Colombia may wish to use this additional revenue to further expand their “simple tax regime” in order to support new ventures.

Argentina, characterized by a high corporate income tax burden that can reach up to 39.55%, could consider a new source of revenue as an opportunity to balance the budget needs of local administrations and ease the pressure on entrepreneurs associated with local taxes, or further boost its lithium industry with enhanced targeted incentives.

Ultimately, the impact of Pillar Two can’t be avoided, but its effects can be shaped. Latin America offers a fertile field for innovation that should be supported with a reasonable tax burden: It has a young booming population to propel itself into the future, and a richness of resources that few regions can be said to possess.

If developed economies did indeed embrace stopping the race to the bottom by establishing a clear floor, an assertive Latin America might wish to bring the ceiling down to the bare minimum and resume a race that, politics aside, it might be well-positioned to win. As the saying goes, nothing is certain except death and taxes, and Latin America is young.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ignacio Gepp is a partner with Puente Sur in Chile.

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