The OECD’s new “side-by-side” agreement for Pillar Two marks a decisive shift in the global minimum tax project—and not in Canada’s favor.
By exempting US-parented multinationals from Pillar Two, the deal widens the competitiveness gap between Canadian and US multinationals.
Canada should respond by designing its own side-by-side framework so that Canadian-headed groups can compete on equal footing, rather than remaining among the countries that shoulder Pillar Two’s compliance costs and complexity without enjoying material benefits.
The US introduced its global intangible low-taxed income, or GILTI, rules in 2017 as a unilateral measure to tax certain low-taxed income of foreign subsidiaries of US multinationals determined on a blended, worldwide basis. The GILTI rules decreased the competitiveness of US multinationals, leaving them with a uniquely complex system and increased tax burden.
The US then helped convince Canada and several other countries to adopt the more onerous Pillar Two rules—which, unlike GILTI, determine whether additional tax is owing on a jurisdiction-by-jurisdiction basis.
Rather than conforming with the Pillar Two rules, the US insisted that it be allowed to retain their more favorable unilateral measure and successfully negotiated a side-by-side deal that insulates US-parented groups from Pillar Two.
The Resulting Winners
Four distinct groups of countries are emerging.
The first are those in the US (and any other jurisdiction that may later be recognized as qualifying for the side-by-side safe harbor). They have a competitive advantage: Groups with parent entities in those countries are insulated from Pillar Two, except for any qualifying domestic minimum top-up taxes in jurisdictions where their subsidiaries operate, and the foreign income of those groups is taxed in a manner that allows global blending.
A second group is low-tax jurisdictions that have adopted Pillar Two qualified domestic minimum top-up taxes. These countries may be Pillar Two revenue winners as they have primary taxing rights if they can continue to attract investments in their jurisdiction. Of course, investments in those jurisdictions (particularly coming from the US or any other side-by-side jurisdiction) likely will decline.
The third group includes low-tax jurisdictions that don’t implement either Pillar Two or a domestic minimum tax. While those jurisdictions may not collect additional taxes, they likely will attract additional investments away from countries that implement qualified domestic minimum taxes.
Canada, however, finds itself in a fourth category that may not materially benefit from increased tax revenue or investments. Under the Global Minimum Tax Act, Canada has introduced Pillar Two’s income inclusion rule and a qualified domestic minimum tax (and has draft legislation for an undertaxed profits rule).
Canadian-headed multinationals face a strict jurisdiction-by-jurisdiction minimum tax, limited scope for blending, and added compliance burdens relating to reporting and Pillar Two calculations.
By contrast, a US-headed competitor can operate under GILTI—now net CFC tested income, or NCTI—which allows low-tax profits in one jurisdiction to be averaged with higher-tax profits elsewhere.
Canadian Side-by-Side Framework
Canada doesn’t have to accept this competitive disadvantage. A credible alternative is to design and pursue its own side-by-side framework, with the goal of having it recognized alongside Pillar Two in a way that shields Canadian-headed groups from the full force of Pillar Two.
Conceptually, such a system could move Canada from the strict jurisdiction-by-jurisdiction model under Pillar Two toward a blended approach. It could adopt a more streamlined, user-friendly minimum tax on foreign income rather than replicating the full complexity of Pillar Two or NCTI.
In exchange, Canada could seek recognition that in-scope groups subject to this domestic framework can rely on the Pillar Two side-by-side safe harbor.
There are genuine design questions and trade-offs that come with moving to a side-by-side model. Canada might have to give up certain features of Pillar Two, such as the substance-based income exclusion, in favor of worldwide blending.
The interaction with the existing Global Minimum Tax Act would need to be worked through, perhaps by making a side-by-side framework elective for in-scope groups, or by replacing the current rules entirely if a stable international accommodation can be secured.
But at the policy level, the choice is clear. Canada shouldn’t allow its multinational enterprises to become less competitive while gaining relatively little revenue. A Canadian side‑by‑side system designed for simplicity and competitiveness should protect the Canadian tax base and put Canadian multinational groups on at least an equal footing with their US neighbors.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Patrick Marley, partner at Osler, Hoskin & Harcourt, is former co-chair of the firm’s national tax group and former president of the International Fiscal Association’s Canadian branch.
Kaitlin Gray is a partner at Osler, Hoskin & Harcourt focused on tax controversy and international tax.
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