Tax News & Views International Weekly: Giving Credits Where Due

Throughout the process of negotiating the Organization for Economic Cooperation and Development’s Pillar Two 15% global minimum tax, the question of how to treat nonrefundable tax credits—such as the U.S. credit for research and experimentation—has been a difficult sticking point.

Under the original framework announced in 2021, refundable credits were treated more favorably than nonrefundable ones in the calculation of whether companies have an effective tax rate of 15% or below. That reflected basic thinking among the delegates that refundable credits are closer to government subsidies than the types of tax benefits that contribute to the “race to the bottom” that they hoped to stem.

Many U.S. companies feared that use of the R&D credit would result in Pillar Two taxes, and the issue was one of the main reasons the Trump administration threatened to retaliate against countries which used the system against U.S. taxpayers.

That issue is now mostly moot following last week’s announcement of a side-by-side agreement between the OECD and the U.S., which exempts U.S.-based multinational companies from the Pillar Two system. So long as the agreement holds, U.S. companies won’t have to worry about whether the R&D credit would put them over the line.

But the agreement also included a new safe harbor for “substance-based” incentives, like the R&D credit, which will give other similar credits around the world better treatment in the Pillar Two system. (It will also allow foreign-based companies to face less of a tax risk if they use U.S. credits.) This safe harbor was likely critical in getting the overall side-by-side agreement across the finish line, by leveling the playing field between the U.S. and the rest of the world and making it easier for the other countries to stomach an exemption only available (for now) to the United States.

It also demonstrates how the goals of the project have evolved. Participants in Pillar Two have had different views of its goals since the beginning—with some seeing it as a tool against blatant tax avoidance, and others who wanted to disincentivize all forms of tax competition. There’s still that basic tension in the design, but this latest addition tilts it more firmly towards allowing incentives and tax benefits that are tied to real-life economic activities, instead of on-paper profits.

In essence, the OECD is saying there are proper and improper ways for a country to use its tax code to spur new investments—and those who opt for the improper path will face escalating new taxes from enforcers of the Pillar Two system.

There was already a “substance-based carveout” in the Pillar Two measurement, an exemption equal to the amount of payroll and tangible property in a jurisdiction. The new substance-based incentive guidance takes this logic one step further, stating that expenditure-based credits will be disregarded entirely–up until a “substance cap” based on, again, payroll and tangible assets. The treatment is mainly available to expenditure-based credits, as well as those whose value is tied to production–another way the definition aims to pair tax benefits with real substance.

While there seems to be some new clarity about Pillar Two’s goals, expect it to continue to evolve as the agreement is implemented around the world in the years to come.

Noteworthy Items This Week

China Intensifies Tax Crackdown on Vast Wealth Stashed Overseas – Bloomberg News ($):

But even in Beijing’s tightly controlled society, the crackdown is proving spotty. While local authorities can to some degree pinpoint who has cash stashed abroad, they are largely in the dark about the amount.

The dragnet has involved the use of “big data” by local authorities from Beijing to Shenzhen to track down scofflaws. They’re demanding a broadening part of the population to self declare any offshore income from 2022 to 2024. It has spurred a flood of people seeking tax planning and wealth advice, as well as triggering no small amount of anxiety over how much to fess up to.

The size of overseas investments is hard to calculate. An estimated $940 billion of so-called hot money flowed out of the country in just the first 11 months of 2025, according to an index compiled by Bloomberg Intelligence. That’s on track to be the second biggest yearly outflow since data began in 2006.

OECD Makes Case for Developing Countries to Adopt Minimum Tax – Lauren Vella, Bloomberg Tax ($):

Developing countries will want to adopt the global minimum tax because they will collect revenue, and further work is being done to make the levy more administrable, a top OECD official said Tuesday.

“There’s a simplification agenda we’re pursuing, there’s revenue in this, and there’s an opportunity to rethink tax incentives,” said Achim Pross, deputy director of the Organization for Economic Cooperation and Development’s Center for Tax Policy and Administration.

U.S. to Revoke Funding for U.N. Tax Bodies, but Questions Remain – Sarah Paez, Tax Notes ($):

The Trump administration announced it would cease funding for several U.N. and other international bodies that work on tax policy, casting uncertainty over the future of U.N. work on an international tax convention.

The White House's January 7 memorandum, which ordered executive departments and agencies to withdraw the United States from 66 international organizations, came just days after the OECD touted a pillar 2 guidance package complete with a side-by-side safe harbor to shield U.S. multinational enterprise groups from some global minimum tax rules.

Pillar 2 Notice Gives Fresh Hook for CJEU Challenge – Elodie Lamer, Tax Notes ($):

Academics and some member states have been cautioning against the use of article 32 for months, saying that it would basically amount to letting a non-EU body dictate binding EU law without due process within the bloc. Dennis Weber of the University of Amsterdam and Loyens & Loeff N.V. again deemed it a “constitutional Trojan horse” in a January 8 blog post.

Jasper Korving of Maastricht University and Deloitte Tax & Legal B.V. presented a fresh angle in a January 12 blog post. Korving noted that invoking the invalidity of article 32 of the pillar 2 directive appears “to be a ship that has left the port, as an action for annulment can only be initiated within two months from the publication of the legal act.” The directive was published in December 2022.

Opinion: US’ Global Minimum Tax Carveout Is an Illusion of Sovereignty – Adam Michel, Bloomberg Tax:

Treasury Secretary Scott Bessent called the agreement a victory for US sovereignty, saying it will shield domestic companies from extraterritorial taxation.

That claim deserves closer scrutiny. If the agreement works as intended, it doesn’t preserve congressional sovereignty over domestic tax laws; it constrains it.

The agreement’s statutory and effective tax rate safe harbors lock in current tax rules, binding future Congresses to a narrow range of acceptable tax policies—unless they’re willing to expose US firms to the Organization for Economic Cooperation and Development’s extraterritorial undertaxed profits rule, or UTPR.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Captain Battle

Debut Year:1941

Debut Publication: Silver Streak Comics #10

Origin Story: A wounded WWI veteran who answered the call of WWII by developing new technology in his mountain laboratory.

Superpowers: His advanced technology includes the Dissolvo Gun and a jetpack giving him the ability to fly.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

Tax News & Views International Weekly: Giving Credits Where Due

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Alex Parker