July 10, 2023
US QUEST report estimates widespread Pillar Two adoption outside the United States would result in an 18% increase in US multinationals' corporate tax liability, fewer jobs and less investment
A recent report from EY's Quantitative Economics and Statistics (QUEST) practice finds that, even if the United States does not adopt the OECD's BEPS 2.0 Pillar Two proposal, widespread adoption by other jurisdictions could increase the tax liability of in-scope US multinational enterprises (MNE) with operations both inside and outside the United States. It also found that Pillar Two adoption will have significant impacts on the US economy, with the potential to permanently reduce domestic MNE jobs by roughly 370,000 and annual domestic MNE investment by almost $22 billion.
Widespread adoption of Pillar Two outside the United States is estimated to increase the corporate income tax liability of US MNEs, on average, by 18%. These tax increases would likely lead to reduced US economic activity. Research generally finds that overseas businesses of US MNEs are complementary to US domestic operations. Thus, tax increases on the foreign operations of US MNEs can be expected to reduce their economic activity — jobs and investment — in the United States. In addition, effectively increasing the corporate income tax liability of domestic MNE operations through undertaxed profit rules (UTPRs) and foreign income inclusion rules (IIRs) (for foreign-parented MNE operations) would further reduce the economic activity of domestic MNE operations.
The higher corporate income tax liability for US MNEs under widespread adoption of Pillar Two outside the United States would translate into, on average, a 2.6 percentage point increase in US MNEs' cash tax effective tax rate (ETR). Their ETR on foreign income could rise by 4.5 percentage points and their ETR on domestic income could increase by 1.4 percentage points.
Under the scenario of widespread adoption of Pillar Two outside the United States, there are ways the United States could lessen its negative economic impact. The EY QUEST analysis considers, as illustrative examples, several commonly discussed changes to international tax rules, such as changes to the global intangible low-taxed income (GILTI) rules, which have been suggested by others as possible avenues for offsetting this negative economic impact. The report estimates that, by eliminating the GILTI haircut and expense allocation, the United States could offset approximately 40% of the economic harm of widespread adoption of Pillar Two outside of the United States. If, however, the United States were to instead use retaliatory tariffs in response to other jurisdictions adopting Pillar Two, the tariffs would further add to the economic harm associated with Pillar Two outside the United States. Retaliatory tariffs are estimated to further reduce US jobs by 90,000 (raising the total to 460,000) and US investment by approximately $7 billion (raising the total to $29 billion).
Activity on Pillar Two has increased and many jurisdictions around the world are enacting laws and considering legislative language to implement Pillar Two provisions. As the debate on Pillar Two and the OECD's BEPS project continues in the United States, MNEs need to model how implementation outside the United States could impact their operations across the globe, determine how they will gather and track the information needed to perform Pillar Two calculations, and consider discussing with policymakers how these changes may shape or otherwise influence business decisions.
The EY Quantitative Economics and Statistics (QUEST) practice produces EY-branded reports for public use at the discretion of clients. This report was previously publicly released by the client.
Published by NTD’s Tax Technical Knowledge Services group; Kathy S. Schatz-Guthrie, legal editor