What Is the Substance‐Based Carve‐Out under Pillar 2? And How Will It Affect Tax Competition?

On 8 October 2021 Secretary of the Treasury Janet Yellen claimed that: “As of this morning, virtually the entire global economy has decided to end the race to the bottom on corporate taxation.” Tax competition threatens the long‐term viability of the existing international corporate tax system and bringing it to an end would thus be a veritable game‐changer. But is Secretary Yellen correct? Will the OECD/G20 Inclusive Framework’s “Two Pillar Solution” that has now been agreed by 137 jurisdictions, in particular the global minimum tax found in Pillar 2, bring competition in corporate taxation to an end? This note examines one of the factors that will determine the impact of Pillar 2 on tax competition: the design of the substance‐based carve‐out.