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Over 130 jurisdictions, representing more than 90 per cent of global GDP, joined the October 2021 Statement on a Two-Pillar solution to address the tax challenges arising from the digitalisation of the economy and broader base erosion and profit shifting (BEPS) issues. The Two-Pillar solution is an outcome of hundreds of meetings, thousands of pages of reports, commitments to a plethora of international instruments, and proposals that would see the amendment of double tax agreements (DTAs) and national legislation in more than 100 countries. The Two-Pillar solution will be constituted by both legally binding and non-binding international rules, expressed at different levels of specificity and with parts subject to different dispute settlement and compliance mechanisms. The regime is therefore complex and it is in some parts partially developed. Its success will in no small part depend on the implementation of and compliance with the package. Yet, the pathway to success does not seem clear.

In much of the tax literature, discussion of states’ compliance with their treaty obligations is generally framed by legal positivism and spoken of in pejorative terms as “tax treaty overrides”. The analysis is most often technical, taxpayer focused, and indifferent to the reasons for the state’s actions. It also does not indicate when and why states may not follow their international legal obligations; instead it often resorts to legal gymnastics to explain why an apparent treaty non-compliance is not an override.

The Two-Pillar solution consists of legally non-binding decisions, and scholars have begun to consider what incentives countries may have to carry out those decisions. A broader set of tools derived from international relations scholarship can help us to better understand and predict state behaviour in relation to the regime. Drawing on the international relations literature, our article explores some of the challenges to a full and harmonious implementation of the Two-Pillar solution. We conclude there are reasons to doubt both short-term implementation and compliance and the long-term stability of the regime.

The dispute about when and why states do and do not comply with international law is centuries old. The main theories that explain states’ compliance can be divided into three broad groups: rationalists, constructivists, and managerial traditions.

Rationalist lens

Rationalist neoliberal institutionalism argues that states weigh the costs and benefits of compliance, which may in turn be shaped by international institutions and agreements. States cannot be expected to implement rules, without coercion, where they do not benefit. International agreements are more likely to be complied with where reciprocity and reputation help states see past short-term gains from defecting from the agreement.

The Two-Pillar solution may not result in reciprocal commitments, despite Pillar One being intended to create a grand bargain where states give up the right to impose digital services tax in exchange for Amounts A and B. Amount A is a new taxing right for market jurisdictions with a binding dispute resolution procedure, which would be implemented through a multilateral convention and domestic legislation and allow to tax some profits of some large multinationals. Amount B is a new domestic transfer pricing rule for source jurisdictions. The costs and complexity of the implementation of Amount A and Amount B rules, the uncertain and possibly small tax revenue from Amount A, and significant revenue potential from unilateral digital services tax, may lead countries in time to conclude the deal is not one they will benefit from. The prospects of the United States entering in binding agreements under the regime that constrained its tax law and policy or subjected it to binding dispute resolution in our opinion are slim. Without the United States, many other participating countries are unlikely to ratify a convention giving effect to Pillar One.

The United States and few high tax jurisdictions that export significant capital and are home to many multinationals more likely than not will benefit from Pillar Two. The GloBE rules under Pillar Two are designed so these jurisdictions will benefit in terms of domestic investment and revenue collection regardless of the actions of other states. They are not dependent on reciprocity outside a small group. Notwithstanding the importance of “resource mobilisation” in developing countries, the net benefits of Pillar Two for most participating countries, especially if they import capital and are not high tax jurisdictions, are unclear. Indeed, the benefits of the entire Two-Pillar package, for most market jurisdictions that are not home to tech giants, are likely to be modest and difficult to quantify ex ante.

States generally value their reputation for complying with international commitments. However, reputation only matters where a bad reputation has consequences. It is difficult to see much reputational harm from non-compliance with the instruments that make up the Two-Pillar solution, especially for non-OECD members. The absence of an applicable binding dispute settlement mechanism for most elements of the regime will mean that instances of non-compliance will often be contested, which further dilutes any reputational consequences from non-compliance.

Constructivist lens

From a constructivist perspective, states are drawn to comply with international rules in part because they perceive them to be legitimate, and following legitimate rules is part of the identity of the state, or the rules have been internalised by the state or its decision-makers. The mere fact that commitments are made in binding legal instruments can exert a “compliance pull” on states. The Two-Pillar solution is a non-binding political agreement, and so concluded with little or no parliamentary scrutiny. It envisages an array of binding and non-binding instruments. The choice of instruments has been shaped by the interests of multinationals and the objectives of the United States, rather than good technical design. Only for the prohibition of digital services taxes and the introduction of Amount A have participating countries agreed that implementation should take the form of a multilateral convention. Securing implementation of and compliance with other aspects of the regime may pose challenges.

The fairness and legitimacy of the process by which Two-Pillar solution is elaborated, including by developing model treaty provisions and laws, guidelines and explanatory material, is also likely to affect implementation. During the negotiation process, the major powers dominate decision-making and use both persuasion and pressure to secure their preferred outcomes. If the balance of commitments achieved during the negotiation is not perceived to be fair, the perceived imbalance is likely to be compounded by concerns about the legitimacy of the process by which the agreement is made. Perceived illegitimacy will affect state decisions on ratification and implementation of the Two-Pillar solution.

Managerial lens

A “managerial” perspective on compliance posits that states often want to comply but fail to do so because they misunderstand their commitments or lack the administrative capacity or resources to comply.

The Two-Pillar solution consists of a set of complex international instruments. To make tax rules as precise as possible, the OECD intends to issue further guidance. By doing so, the OECD is trying to promote compliance and coordination, and resolve controversies. Complex rules and commentaries may, however, compound the ability of some jurisdictions to comply. Many participating countries lack the resources, in particular human resources, to fully implement all of the Two-Pillar rules. Many developing states may therefore see limited additional revenue from either Pillar One or Pillar Two. The domination of the process by which supplementary guidance is promulgated by a few large countries will produce rules that favour their interests.


The broader international economic law and international relations literature helps us identify the situations where states may not implement or comply with the Two-Pillar solution. Dispute settlement and enforcement mechanisms may potentially strengthen compliance. However, the prospect of a binding dispute settlement may make it harder to reach an agreement, and effective dispute settlement mechanisms may become victims of their success. The sabotage of the World Trade Organisation’s dispute settlement mechanism by the United States is a prime illustration of the latter.

Putting aside coercion, compliance of states with the Two-Pillar solution will primarily come down to a question of perceived self-interest. As a greater understanding of the costs and benefits of the regime emerges, we suspect the enthusiasm of some states for implementation of the Two-Pillar solution is likely to wane. Where a precise reckoning of costs and benefits is more balanced or unclear, compliance will be influenced, inter alia, by the perceived fairness of the package and processes by which international instruments were developed. This is also not helped by the lack of inclusivity and legitimacy of the processes by which the regime and its model treaty provisions, laws, guidelines, and explanatory material are developed and negotiated.


This blog is based on: Noonan, C and Plekhanova, V 2022 ‘Compliance Challenges of the BEPS Two-Pillar SolutionBritish Tax Review issue 5.

This article has 1 comment

  1. Why should a country with no income tax bother with all this? A sensible country collecting its land and resource rents, such as the Arab states or Pacific states using common land as a Social Security system does not need income taxes and can profit handsomely from not joining a tax cartel.

    As for sanctions, a smart response would be to impose a deemed income tax at 10% of the declared value of foreign-owned intellectual property such as patents and, if unpaid, forfeit the patents to the sovereign to be placed in the public domain. The patent income tax would be creditable to the overseas company and cost it nothing while the alleged tax haven could cheerfully reply to any criticism that it was countering profit shifting.

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