Why Pillar Two Top-Up Taxation Requires Tax Treaty Modification

On 20 December 2021, the OECD published the announced Pillar Two Model Rules, as part of the envisaged establishment of a global 15% minimum level of company taxation for large multinationals (Pillar 2). No mechanism has been considered to provide for a parallel adaptation of countries’ tax treaty networks to support the top up taxation mechanism with a corresponding distribution of additional taxing powers. This raises the question as to whether the envisaged top-up taxation under the income inclusion rule (IIR) and the undertaxed payments rule (UTPR) can be effectuated in tax treaty scenarios. That is important, because if the treaty compatibility proves problematic here, the complication arises that any Pillar Two top-up taxation charge under domestic law would become a paper tiger in those countries that do not allow for treaty overrides under their constitutional law. Please read further below for some analysis.