BEPS 2.0 at the Credibility Cliff: How Governance Can Save Pillar Two
BEPS 2.0 stands on a credibility cliff. This essay argues that governance - not more guidance - can save the OECD’s global minimum tax: peer review with consequences, radical transparency, and a rules-based U.S. on-ramp.
At Stresa, Italy in June 2025, G7 finance ministers endorsed what the U.S. Treasury christened a “side-by-side” accommodation, under which U.S.-parented groups could be recognised as meeting the spirit of the global minimum tax because of existing domestic rules, thereby being excluded from the Income Inclusion Rule and the Undertaxed Profits Rule. What looked like pragmatic housekeeping was, in truth, an institutional stress test: could the OECD’s two-pillar settlement survive great-power exceptionalism without slipping into a carve-out race? The question is not whether BEPS 2.0 has “failed”, but whether it is edging towards a credibility cliff. And credibility, we should admit frankly, is a design choice rather than a metaphysical condition.
The two-pillar architecture was never merely technical. Pillar One promised to modernise nexus and apportionment for a handful of the very largest multinationals, shifting limited residual profits towards market countries. Pillar Two aimed to end the zero-tax tournament by setting a coordinated 15 per cent floor. By the time the OECD delivered its Secretary-General’s Tax Report to G20 finance ministers in October 2024, this floor looked less like a thought-experiment and more like a developing fact: on the basis of laws already enacted, the OECD estimated that roughly 60 per cent of in-scope groups would fall under the regime in 2024, rising towards 90 per cent in 2025 as additional legislation took effect. Those figures mattered politically, because they suggested network effects: the more jurisdictions that implemented, the more irresistible the regime would become.
Yet the fault-lines were visible even then. On design, the OECD’s January 2024 economic impact work projected that the share of global low-taxed profit would fall by about eighty per cent after the transition - an extraordinary drop - but also that most of what remained would reflect the substance-based income exclusion, a deliberate carve-out for payroll and tangible assets meant to spare real investment from punitive top-ups. The same programme of work projected a large, recurring uplift in corporate tax revenues and, critically, a material reduction in the incentives to shift paper profits. In other words, the minimum was working, but it was working within political boundaries governments had themselves drawn.
The credibility problem is not abstract theodicy; it is the mismatch between a rules-based regime and a superpower’s claim to bespoke equivalence.
The stresses originate as much in politics as in law. After Inauguration Day 2025, the White House issued a memorandum clarifying that the “OECD Global Tax Deal” had no force or effect in the United States absent fresh legislation; a procession of practitioner notes and news alerts traced the implications for the international negotiations that had once commanded bipartisan rhetoric, if not votes. The same administration then pursued the G7 side-by-side, seeking recognition of domestic outcomes in place of formal alignment with the Pillar Two rule-order. None of this amounted to withdrawal from engagement with OECD committees (Washington remained in the room) but it did amount to a withdrawal of support for the previous consensus. The credibility problem, then, is not abstract theodicy; it is the mismatch between a rules-based regime and a superpower’s claim to bespoke equivalence.
Nor is this solely a transatlantic melodrama. Pillar One’s logic was to trade a narrow reallocation of taxing rights for a moratorium on unilateral digital services taxes and the tariff spats they provoke. That bargain has frayed. Canada legislated a three per cent DST retroactive to 2022, with first payments scheduled for 30 June 2025, before announcing, on the eve of payment, that it would halt collection and bring forward legislation to rescind the Act in order to clear a path for wider trade talks with Washington. One should not over-interpret Ottawa’s gyrations; rather, one should notice how swiftly countries revert to unilateral instruments when the multilateral bargain stalls. Failure to land Pillar One does not merely leave a gap; it catalyses re-fragmentation and legitimises a return to defensive trade politics.
A further legitimacy challenge is gathering at the United Nations. In 2025, UN member states launched an intergovernmental negotiating committee to draft a Framework Convention on International Tax Cooperation, a multi-year process backed by many developing countries who judge that distributional gains from Pillar Two skew towards higher-income jurisdictions and investment hubs. It is possible to dispute that diagnosis; it is not possible to ignore the politics it expresses. If a significant coalition concludes that Paris is stacked against them, New York becomes an attractive alternative locus of authority. The OECD can lament this, or it can compete with it by demonstrating that its framework can deliver fairness, voice and simplicity as well as coordination.
“A credibility regime for Pillar Two must therefore build on qualified-status review and add two missing limbs: radical transparency and graduated follow-up.”
What, then, does choosing credibility look like? It starts with honesty about the governance we already have. The OECD’s October 2024 report notes that the Inclusive Framework has established a peer-review process to confirm the “qualified” status of implementing jurisdictions’ legislation, thus anchoring consistency in the rule-order. That is a meaningful start. But it does not yet generate public consequences for poor implementation and it does not tell finance ministries or parliaments, in a way they can use, who is genuinely applying the rules and who is hiding behind transitional safety nets. A credibility regime for Pillar Two must therefore build on qualified-status review and add two missing limbs: radical transparency and graduated follow-up. The first step is a public, jurisdiction-level dashboard that reports comparable metrics without disclosing taxpayer data: how many in-scope groups in each jurisdiction are actually within the regime; how much top-up tax is being collected domestically via Qualified Domestic Minimum Top-up Taxes rather than abroad under IIR or UTPR; how reliant filings are on the transitional country-by-country safe harbour; and how much of the residual low-taxed profit is explained by the SBIE. The underlying administrative data already exist in the new GloBE Information Return architecture, with a 2025 XML schema designed primarily for administration-to-administration exchange; the dashboard would publish aggregates, not secrets, and would transform compliance from a private ritual into a reputational asset.
Transparency by itself is not a sanction. A second step is to make peer review matter, drawing on the OECD’s own experience in adjacent domains. The Financial Action Task Force’s grey-listing is often cited (not always with affection) because public evaluation plus graduated follow-up changes behaviour without supranational law. Something gentler, but recognisably similar, could serve Pillar Two. Start with the existing qualified-status review, add a published narrative and scorecard on implementation quality, and create a “largely compliant” threshold that opens doors to an initial voluntary club of jurisdictions willing to condition a narrow set of cooperative benefits on that standard. The Global Forum’s transparency ratings already shape treaty policy; a Pillar Two analogue could begin as a club good rather than a universal imposition, paired with serious capacity-building for lower-income administrations so that procedure is not a new vector of exclusion.
The U.S. question, which so often crowds out all others, is less insoluble than it appears if we take our own institutionalism seriously. A rules-based on-ramp to equivalence should be open in principle, but narrow in design. Equivalence must be measured by outcomes (effective rates and revenue patterns) not labels, be time-bound and revisited against published metrics, and include an automatic snap-back of the UTPR where outcome parity lapses. By treating the side-by-side as a corridor rather than an exit, the Inclusive Framework would replace discretionary carve-out with constraint and demonstrate that it can fold sovereign idiosyncrasy back into a rules-based order. The Treasury’s own summary of the Stresa understanding makes clear what Washington seeks: exemption from IIR and UTPR in recognition of its domestic regime. The trick for the rest of us is to accept the destination while insisting on rules for the journey.
Design, too, needs calibration rather than piety. The SBIE is not a loophole; it is a political choice intended to respect real activity. But because the OECD’s impact work shows that, after transition, most of the remaining low-taxed profit is explained by the SBIE, credibility demands a declining path (announced now, not improvised later) and hard sunset dates for transitional safe harbours, tied to the peer-review milestones just described. To concede this much to sceptics is not to embrace punitive taxation of substance; it is to ensure that a floor is, in fact, a floor.
“An honest Inclusive Framework would level with its members: either find a ratifiable landing zone for the Multilateral Convention or admit that the world must manage a regulated fragmentation rather than pretend that it does not exist.”
None of this should obscure the other half of the bargain. Without Pillar One, market states will reach for unilateral digital taxes again and again, each one rational in isolation and cumulatively corrosive. The Canadian DST episode, legislated with retroactivity to 2022, then suspended and earmarked for rescission a day before first payments fell due, was not an aberration so much as a parable of what follows when collective action falters. An honest Inclusive Framework would therefore level with its members: either find a ratifiable landing zone for the Multilateral Convention (tighter scope, clearer certainty, a credible end to DSTs) or admit that the world must manage a regulated fragmentation rather than pretend that it does not exist.
To those who argue that any move towards conditionality is coercion by other means, the answer is twofold. First, the OECD already uses peer review to shape behaviour (in tax transparency, in information exchange) without legislating over states, and qualified-status review for Pillar Two is explicitly in train; adding public metrics and a voluntary club that ties some forms of cooperation to “largely compliant” status is an incremental extension, not an imperial leap. Second, fairness demands scaffolding: any move towards conditionality must be phased, opt-in at the outset, and paired with genuine assistance for lower-capacity administrations that face the sharpest compliance burdens. The point is to make compliance the path of least political resistance, not to weaponise process against the very countries whose trust multilateralism needs most.
There is a final, wider lens through which to see this debate. The OECD’s Economic Outlook has been blunt this year: increased barriers to trade and persistent policy uncertainty weigh on investment and growth; raise the background noise, and firms defer decisions. A minimum tax that is broadly implemented, transparently monitored and predictably enforced is not simply a revenue-raiser; it is a stabiliser of expectations in an age of volatility. Perhaps this is the real competitiveness story: that clarity is itself a form of capital.
If the politics of tax cooperation need a popular narrative, the climate transition can supply one. Citizens will accept the technocratic grind of a global minimum if they can see where the money goes. Europe has already built the institutional plumbing to make such a link visible: the EU’s Emissions Trading System channels auction revenues into national budgets with legally required climate spending and into dedicated vehicles (the Innovation Fund for first-of-a-kind decarbonisation projects and the Modernisation Fund for lower-income member states) financed directly by ETS auction proceeds. This is not a perfect analogy, but it is a proof of concept: ring-fence a share of international-policy revenues for tangible public goods and you anchor legitimacy in the everyday. If jurisdictions earmarked a defined portion of Pillar Two proceeds for energy transition and resilience, they would convert arcane rule-making into visible assets (grid upgrades, heat-pump subsidies, adaptation works) while inviting a broader coalition of publics to treat tax cooperation as part of democratic resilience rather than an elite pastime.
Those who find this agenda naïve will say that tax cooperation in a multipolar world will always be second-best and uneven; that bespoke solutions are the price of sovereignty; that the UN track will inevitably peel away the exasperated; that no dashboard or peer review can discipline a superpower. Perhaps. But the empirical record on profit-shifting, the work of Tørsløv, Wier and Zucman over the last decade, alongside the OECD’s own impact studies, reminds us that the costs of inaction are real, measurable and borne, over time, by the very social contracts now stretched by climate, ageing and debt. Credibility is not conjured by communiqués; it is built by institutions that measure what matters and by coalitions that make non-compliance awkward. That is within reach. The Inclusive Framework does not need new theology; it needs governance worthy of the moment.
Works referenced in this piece include the OECD Secretary-General’s Tax Report to G20 Finance Ministers (October 2024), the OECD’s January 2024 Economic Impact Assessment of the Global Minimum Tax and related presentations, the OECD’s GloBE Information Return XML schema documentation (2025), the U.S. Treasury’s statement on the G7 side-by-side understanding (June 2025), official Canadian releases and Congressional Research Service analysis on the 2024 Digital Services Tax Act, the UN DESA hub for the intergovernmental negotiations on a Framework Convention on International Tax Cooperation, and European Commission materials on the ETS Innovation and Modernisation Funds.
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