Select Country-Level Revenue Estimates for Pillar Two

Following international agreement on Pillar Two, the European Union unanimously adopted a directive implementing the global minimum tax in December 2022. The following month, the Organisation for Economic Co-operation and Development (OECD) released revenue estimates to assess the real impact of the tax on public finances.

The global rules are designed to raise revenue, but the question remains: how much? (This is particularly important because the new tax comes at the cost of international competitiveness and investment.) The OECD estimates these rules will raise corporate tax revenue by 9 percent, generating around USD 220 billion in additional global tax revenue annually. The International Monetary Fund (IMF) disagrees, pegging the rise in global corporate income tax revenue at 5.7 percent, more than one-third smaller than the OECD estimate. 

Estimating revenue from new taxes can be complex—and sometimes policymakers only know after a new proposal is implemented. Nonetheless, seven countries have produced individual estimates of corporate tax revenue increases, ranging from 2 percent in the Netherlands to 12 percent in France.

Canada

In 2022, the Canadian federal government proposed draft legislation to implement Pillar Two. In its estimation, national implementation would raise CAD 4.5 billion (USD 6 billion) in corporate tax revenue. This estimate, however, has only been publicly described in an interview with Finance Minister Freeland on October 16, 2021.

Between 2016 and 2020, Canada averaged USD 63.6 billion in annual corporate tax revenue. Full implementation of Pillar Two would therefore translate to a 9 percent increase in average corporate tax revenue, though it’s unclear whether the estimate cited by the finance minister is only for Pillar Two, or if it also includes potential Pillar One impacts on revenue.

Denmark

The Danish government is in the process of drafting Pillar Two implementing legislation. The Danish Ministry of Taxation estimates that this additional revenue will be between DKK 2 billion and DKK 3 billion (around USD 0.3–0.4 billion).

Between 2016 and 2020, Denmark averaged USD 10.1 billion in annual corporate tax revenue. The implementation of Pillar Two would then translate to a 3 to 4 percent increase in average corporate tax revenue (depending on the range of revenue).

France

France, one of the initial supporters of the Pillar One and Pillar Two proposals, is currently drafting a legislative proposal to transpose the EU directive into French law. According to the Council of Economic Analysis from June 2021, Pillar Two implementation will raise about EUR 6 billion (USD 6.8 billion) annually in the short term, decreasing to EUR 2 billion (USD 2.28 billion) annually over the long term. The difference between the short and long term is explained by the fact that other low corporate tax jurisdictions would have the incentive, in the long term, to also raise their effective tax rates. In this scenario, France would receive less revenue than in the early years of implementation.

Between 2016 and 2020, France averaged USD 58.4 billion in annual corporate tax revenue. Implementation at the national level would then translate to a 12 percent increase in average corporate tax revenue in the short term and a 3 percent increase in the long term.

Germany

The German government is also drafting Pillar Two implementing legislation that will likely include an official estimate of revenue raised. A 2022 report from the IFO Institute in Munich estimates this additional revenue will be between EUR 5.1 billion and EUR 6.7 billion (USD 5.8 to 7.6 billion).

Between 2016 and 2020, Germany averaged USD 74.1 billion in annual corporate tax revenue. The implementation of Pillar Two would constitute an 8 to 10 percent increase in average corporate tax revenue (depending on the range of revenue).

The Netherlands

The Netherlands held a public consultation on the implementation of Pillar Two in the fall of 2022. The consultation contained an evaluation of the transposition and implementation of the EU’s directive and estimated expected revenue to be about EUR 0.4 to 0.5 billion (USD 0.5 billion). A final estimate will be made once the Netherlands submits the transposition of the directive, and it will be certified by the Central Planning Bureau. 

From 2016 to 2020, the Netherlands averaged USD 29.6 billion in corporate tax revenue. Consequently, the implementation of Pillar Two would imply a 2 percent increase in average corporate tax revenue.

Switzerland

The Swiss Federal Council has proposed a supplementary tax to implement Pillar Two. In Switzerland, the expected revenue is meant to be distributed on a consolidated basis: between the cantons, communes, and the federal government. While overall fiscal estimates cannot be reliably estimated, the proposal suggests the measure would increase revenue in the short term. The proposal reports a range of CHF 1 billion to 2.5 billion per year (USD 1 to 2.6 billion) in additional revenue.

From 2016 to 2020, Switzerland averaged USD 22.7 billion in annual corporate tax revenue. Consequently, the implementation of Pillar Two would mean a 4 to11 percent increase in average corporate tax revenue.

United Kingdom

The United Kingdom estimated in its 2022 Autumn Statement that the implementation of Pillar Two would raise GBP 2.3 billion a year by 2027-28 (USD 2.7 billion). This estimate comes with the publication of the on or after 31 December 2023.

From 2016 to 2020, the UK averaged USD 68 billion in annual corporate tax revenue. National implementation of Pillar Two would equal a 4 percent increase in average corporate tax revenue. 

Conclusion

Pillar Two implementation is underway in many jurisdictions, and many governments are aiming to get their proposals approved before the end of 2023. However, estimating Pillar Two’s impact on government revenue is proving difficult. As a result, only a few countries have publicly presented their findings.

The Pillar Two revenue estimates of these seven countries (Canada, Denmark, France, Germany, the Netherlands, Switzerland, and the UK) represent USD 26.1 billion dollars of the total USD 220 billion OECD estimate for additional tax revenue—or 11.8 percent.

Given the uncertainty of these estimates, policymakers should be cautious about sacrificing their country’s competitiveness and ability to attract investment by implementing Pillar Two rules to chase revenue. An accurate revenue analysis on the effectiveness and magnitude of these new rules may only be possible years after their implementation. 

In the meantime, countries should continue to evaluate the revenue impact of the rules and weigh pro-growth options for reforming their tax systems overall to support investment and growth.