Pillar Two is no longer hypothetical. It’s now time for Pillar Two “readiness.”

In this episode of the “GILTI Conscience” podcast, hosts David Farhat, Nate Carden, Eman Cuyler and Stefane Victor discuss Pillar Two with Eric Sensenbrenner and Paul Oosterhuis. The group delves into the current state of Pillar Two, which has shifted from a source of concern to a challenge being actively addressed. Companies will have to remain nimble as changes and adjustments are likely during the implementation process. 

💡 Featured Guests 💡

Name: Eric Sensenbrenner

What he does: Eric is the head of Skadden’s Global Tax Group and represents clients on a broad range of U.S. and international tax matters, with a particular emphasis on transactional tax planning in the international context.

Organization: Skadden

Words of wisdom: “You've got to think more about systemic and operational changes.” 

Connect: LinkedIn 

Name: Paul Oosterhuis

What he does: Paul is an internationally recognized senior practitioner in the area of international tax. He has extensive experience in mergers and acquisitions, post-acquisition integration, spin-offs, internal restructuring and joint ventures. He also represents multinational companies in non-transactional international tax planning and assists clients in resolving high-stakes, complex tax controversies.

Organization: Skadden

Words of wisdom: “ I think we all need to just kind of keep our seat belts tight until we see the outcome of the 2024 election to see if we're going to be part of the Pillar two community or if we're gonna be bucking the Pillar two community.”

Connect: LinkedIn 

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GILTI Conscience is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP, and Affiliates. Skadden’s tax team is recognized globally for providing clients with creative and innovative solutions to their most pressing transactional, planning, and controversy challenges. The insights and views presented in GILTI Conscience are for general information purposes only and should not be taken as legal advice for any individual case or situation. The information presented is not a substitute for consulting with an attorney, nor does tuning into this podcast constitute an attorney-client relationship of any kind.

This is GILTI Conscience. Casual discussions on transfer pricing, tax treaties and related topics, a podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts and tax administration trends. We also dig into the innovative approaches companies are using to navigate the international tax environment and address the obligation everyone loves to hate. Now your hosts, Skadden Partners, David Farhat and Nate Carden.

Hi everyone. Welcome to GILTI Conscience. As always, Nate Carden here with David Farhat, Eman Cuyler, Stefane Victor. Today we're going to talk about pillar two, but from an implementation perspective rather than a policy perspective. We're joined by our DC partners, Eric Sensenbrenner and Paul Oosterhuis. We're going to talk a little bit about what they're seeing now that pillar two is transitioning from something that people are worried about to something that people are dealing with. Eric and Paul, welcome.

Thank you.

Thanks.

What are you seeing as folks transition from a hypothetical pillar two world to a real pillar two world, especially given what I think is a wide range of familiarity in the tax community with the rules and how they're going to be implemented?

I think the transition, the reference to transition is important here because from my perspective, what I've seen, it's really been quite interesting if we kind of rewind back to last December. Early on in this year, I'm talking about 2023, I think there was still a lot of reticence on the part of many taxpayers. You talk to clients about pillar two and I think there was an acceptance like "Yes, we are going to have to deal with that. We're going to have to deal with that." But it was a deferral, right? It was sort of pushing things off and really coming in the late spring into the summer, and it's all happening now from my perspective really in real time, right? This is all coming online in stages, but coming online at the first of this coming year, I'm really now seeing a focus by large multinationals, what I think of as pillar two readiness, which is sort of, okay, we've got these regimes, what are they doing?

We're obviously looking at the transition rules, we're looking at the recent guidance that's come out, and I take very much a tax planner's sort of perspective and approach to this, which is I kind of look at it as, "Okay, here's the regime. I've got to understand sort of how it works, what it does, how the pieces interrelate." But then I'm very much focused on, "Okay, so what are we going to do with this," right? "And how are we going to deal with this? How are we going to implement this?" And I think there's kind of stages there. There's sort of short run solutions moving out towards longer systemic operational changes. That's going to obviously involve transfer pricing and more business level changes.

But I think it's really very much a process and the transition from my perspective at least, has been one that's really been happening over just the last couple of months from sort of acceptance to like, "Okay, now what do we actually do? How do we comply with this? How do we deal with this? How's it going to affect us?"

Going off what you said there is a lot of moving parts, so if we're talking a company, where would you say somebody should start? Do you think operational readiness, data strategy? There's so many different things that folks could start with. What would you say would be your recommendation as far as how to address this?

Look, just looking at the design of the system, right? I think the first thing from my perspective we're doing is just going through global structures and identifying pockets of income that's susceptible to top-up tax. I mean, figuring out if you've got in your structures based on whether it's intercompany debt or other things that are going on in your global structure, you've got low tax sort of pools of income, identifying first off in a steady state, where are your problem areas? And then trying to figure out how to address those.

And as I said, I think to me, it's kind of a transition in the sense of there's sort of levels of how you can address them. Ultimately, I think long-term it's going to be more systemic operational changes, transfer pricing changes, et cetera.

And I think one of the good things about where we are as people start thinking about implementation is that the OECD process has given us a lot of detail. Now, some of the detail may be wrong, some of it may be confusing, but it's not like it was after the TCJA at the end of 2017. When it's the beginning of 2018, you had to start implementing it. You didn't have any regs. You really didn't know what a lot of the statute was about. And you had to guess.

Between the model rules, the administrative guidance and the commentary that we've gotten, we effectively have regs already. And so I think companies can determine with some degree of reasonable accuracy where they stand. The big thing is you have to anticipate what's going to happen in various jurisdictions as they adopt their own QDMTTs and how that's going to play out. But I think you can come up with baselines as to what the profile's going to look like in various countries and then decide where you need to do some things to avoid consequences that you'd prefer not to have.

And I would just add to that all the while remaining nimble because I think clearly things are coming online. There are going to be changes, there's going to be a need to pivot I think, or in many cases there may be a need to pivot. And so I think it's having your baseline planning lined up and at the same time understanding how you can adjust it as necessary and then that's going to be a process. That's not going to end. There's going to be continued adjustments as we move forward.

Yeah, that's right. Yeah, and it's going to be interesting to see how it develops. I mean, again, to stick with the TCJA parallel treasury and the IRS found out some planning that was happening because of gaps in TCJA, right? And they ultimately started to issue regs to try to close those gaps. Whether they're valid or not's another issue, but there was an iterative process.

It's going to be interesting to see whether OECD can establish effectively a comparable iterative process because OECD, the inclusive framework is definitely getting the complaints from taxpayers, which is fair. That always happens. That happened to treasury and TCJA as well. But they're not necessarily uncovering planning opportunities that may be there because they don't have the same feedback mechanism that the IRS and the treasury have, particularly with cap taxpayers in the United States to find out what we all are doing out there to try to minimize our liabilities under pillar two, which is a perfectly appropriate thing to do once you know what the rules are.

And so it'll be interesting to see if they can actually come up with some things that curtail what otherwise might be planning opportunities that they may not think is the way it should be.

Not to mention how that plays out over a hundred plus jurisdictions, right? And the timing of that. And far, if you look at the design of the system and how it's been set up to operate, there's been a great deal of homogeneity here, right, in terms of the approach and even the implementation of various things like how AUTPR would function, for instance. It's really been pretty consistent across the board as subsequent rounds of guidance are issued, how that actually gets implemented into local domestic law is going to be a challenge and there may be opportunities there, but it's going to be interesting to see how that plays out. That's going to be a big piece of this I think.

I think so.

Yeah, let's keep going down that road, right? One of the things we've talked about as we've talked about BAPS 2.0, pillar one, pillar two, amount B is, the havoc some of this can cause, and I think what you've pointed out kind goes towards that direction as well. OECD may not have the mechanism the US Congress has. You get the rules, you look at the planning, and then you have regs. You have this process where you have to have this guidance that you send to other countries they implement.

Now, some of the planning opportunities may come with the implementation and specific jurisdictions. It may come with the wholesale adoption of this homogeneity, but one, do they have the mechanism to pivot? And I think you're alluding to that a little bit, Paul. Do they have the mechanism to pivot and catch this? And two, how does that play with the goals of all of this, right? They're saying, "Hey. We want to get singular rates. We don't want to have tax competition. We want to collect more revenue."

What happens when smart people like yourself, Eric and Paul, look at these rules and go, "Hey, I know what I can do." What happens with that frustration? Do we kind of go down the road where you just have a lot of unilateral measures again? Does the inclusive framework try to develop this kind of agility? And if they do, what does that say about sovereignty?

Yeah, yeah.

Right. As we were prepping for this, we kind of talked about the problems that came about with arbitration and around that. So what happens?

Yeah, well, I would think most countries would not want to be in a position of automatically adopting administrative guidance that comes down two years from now for example. Maybe they would build that into their legislation just like some countries build the OECD transfer pricing guidelines into their local transfer pricing rules. But there surely would be a large number of countries that wouldn't want to do that, that would want to evaluate things or have to incorporate them in their own law for them to be effective in that jurisdiction.

But I think there's a big difference between the leaves on the trees and the forest here because most of these opportunities will be ones that have to do with what you do with financial accounting and how you allocate income, as Eric said, transfer pricing. Those are likely to be around the edges. We're not going to have a world where Ed Kleinberg can write an article about stateless income that comes up under pillar two, right? It's going to be all trying to maximize the income that seemed to be taxed under country by country reporting, for example, at a 15% rate.

Well, that's pretty tame stuff, and that may take the political heat off of this. I mean, after all, we only got pillar two because finance ministers insisted on governments getting together and going through a process.

One interesting thing about what you're saying, Paul, is that a way to view the goal of pillar two from a macro perspective is not so much to design a perfect international tax system that results in the collection of 15% tax, but in some sense to take international tax off the front page and put it back where it was before when nobody cared. And to the extent that it accomplishes that it may be viewed as a win, even if there's a lot of planning that can be done around the edges. Is that fair?

I think from a business community point of view, that's a win, right? Because you don't want it to be on the front page, then it gets to be political and you get something like BEAT, right? Because you get irrational provisions or something like CAMT that satisfy political needs without being rational tax policy. First of all, the 15% level is not outrageously high, so paying tax at a 15% rate is hard to complain about. But second of all, if there are planning opportunities so that you can minimize what's shown to be a 15% rate tax, that's a good thing too.

So it's one reason from my perspective why the US needs to keep a seat at the table and not just walk away from the pillar two process because it's incredible how much influence our treasury department has had on behalf of our multinationals in trying to get at work in ways that work for us domestically. And I do worry that to the extent there is continuing attention paid to some of these things over the next few years, the US needs to be an important part of that process in order to make it work well here.

How much does the success of that project depend on pillar one, right? Because it's easy to say, well, multinationals will collectively be paying 15% across the board in various jurisdictions, but if I'm an individual jurisdiction, right, I want 15% paid to me. And that's really what pillar one's about.

Yeah, yeah. Right. I agree. I mean, in fact, Nate, I can see a scenario where pillar two accomplishes its political purpose, moves those issues back to the business pages of the newspaper, not the front pages, and the real focus is on pillar one or other measures that have to do with allocating taxing jurisdiction like withholding taxes on services, which I think is a growing issue even outside of the digital services area.

And that's where the real money is, and that's where countries who don't have multinationals that are domestic parent companies see getting revenue not from a QDMTT in pillar two, so much. I could see a scenario where five years from now we're still having ferocious battles about allocation of income, but that pillar two is seen as pretty stable and not something that people worry about that much.

And I take it, Paul, the thinking is that in that context, so pillar two, let's say achieves its purpose, it takes that out of the political narrative, the pillar one, the sourcing the allocation questions that can all be handled in a much more constructive context is the real point you're making.

Well, I would hope so, but I mean that's basically a fight over revenue among the governments, right? And once there's no nowhere income so that you can all be grabbing income that is stateless, it becomes a fight over revenue among parties that all care about it.

It's a strange thing to have that because I in many respects feel like stateless income was a throwback to 2005, 2010 anyway. So I'm not a hundred percent sure that pillar two has really solved that problem, but I actually do wonder if it's going to make reallocation of taxing jurisdiction harder because like you say, people are now on both sides.

Exactly.

Exactly. Stateless income is a unifying concept. We can all together fight against stateless income, but now I'm fighting you versus [inaudible 00:14:53].

Yes, that's right. And you won't be able to point to two percent tax rates in Singapore or in Ireland for example, or if the United States adopts a pillar two, even in Puerto Rico, you won't be able to point to two percent income. So that does make it a lot harder because you're dealing with real battles over allocation.

So two quick questions there, Paul. Is it that there won't be two percent income anymore or is it that you just won't be able to point to it? And the other question is then looking at, I know these are two very unrelated questions, so apologies there. Going back to the point you made about the US having a seat at the table and doing something about that, what are the potential impacts if we just got to stay on the sidelines?

Well, on the first question, I think it is a perception issue and if country by country reports end up being public either by statute or by leak, that's the metric that people will use. But that doesn't mean you're actually paying that much tax. I mean, take the classic example of the grandfathered basis of step-up transactions. We all know that many of our multinationals and other and non-US multinationals moved assets around before the grandfather date ended for OECD pillar two purposes. And so they get the benefit of that step up even though the gain may not have been heavily taxed at the time they did the basis step up in an intercompany transaction. And that's going to work its way through for some companies maybe another couple of years for other companies, maybe five, six years. But that won't necessarily be picked up, and that's fair enough because that's just a transition into the system.

I'm not criticizing the decisions. I think they made the right decisions. And that leads to your second point, David. I think if the United States doesn't adopt it so that eventually U T P are possible tools of other countries we're facing a pretty big potential calamity in international tax was companies trying to grab our income with us having trade disputes. And when I sketch out that world compared to a world where we sign up for it and then pillar two kind of moves everything out of the front page, seems to me some in the business community at least might prefer to sign up for it and get it behind us rather than have the kind of fights that you would have if we don't sign up for it and other countries are trying to grab us with UTPRs.

Eric, you mentioned being nimble in the business community, and can you talk about what that nimbleness would look like or what are some of the things we should be thinking about given, "Okay, will the US be part of this? Will the US not be part of this?" What's going on with planning, right? So what are some of the thoughts there?

I think from the US business community, they feel very much in the crosshairs. This is a system where the deck is stacked against them or at least pointed towards them. And I think in terms of the nimbleness, again, we've got some transition rules, we've got some other relief that's been provided. We've got the transition safe harbor on the UTPR, that's all going to run out. And I think being able to understand what you can do as a permanent matter, assuming that this regime stays, which I think is the only thing you can do if you're planning, I think you've got to think more about systemic and operational changes. That's where I think this ultimately leads. And I think it sort of comes back to more business changes and transfer pricing work that's going to be part of this.

So I mean, there's the immediate sense of, "Okay, what do these rules do and how do they work and how do I measure my GLOBI income and all that?" And that's sort of the process that I'm seeing that's going on right now.

But I think there ultimately has to be longer term. First of all, that nimbleness may be in the short run that something that you thought worked ultimately guidance shakes out in a way that it doesn't. And so you need to understand first off, do you have a backup plan or if you've already implemented something, can you pull out of it relatively tax efficiently? But also I think the nimbleness part of that has to be the systemic operational changes that you may well have to make to comply in a world where you essentially, at least under the rules as they exist now under the model rules, you've got to essentially get to 15% in each and every jurisdiction.

The other thing that I would add to that is while the UTPR has been delayed to 2026, a lot of companies have IIRs from holding companies underneath their US companies that would kick in more quickly than that, right? And so you really need to be focused on, if you have a Dutch holding company, don't you have to be ready more quickly than you have to be for UTPRs because the Dutch could actually try to impose their IIR if you had a subsidiary underneath it that still had a low tax rate.

So how should businesses be thinking about this? These I guess events seem pretty macro and out of their individual control?

Well, they have to first get down and kind of calculate what material jurisdictions will there be an impact, right, by just doing accounting based on the globe accounting rules in various jurisdictions, taking your most material jurisdictions where the tax rate's close and see where you may have problems. And then as Eric said, you start thinking about what are some ways of addressing that problem without increasing your overall tax rate.

I'd be interested in Nate being interested in your reaction too. Seems to me those companies that have substantial operations in Puerto Rico are ones where from a tax rate point of view with either an IIR if that's their structure or a UTPR, there's kind of the biggest piece that's at risk because I think QDMTTs by the end of '25 will be in place in Ireland, Singapore, the Netherlands, most of the places where substantial pockets of income. Even Bermuda is talking about adopting a QDMTT type tax. They say it's not going to be QDMTT, but similar. And so in those jurisdictions, the problem may be solved for you rather than you're having to solve it.

I think there's a lot of different countries that are confronting this problem. They have various kinds of grants, incentives, even APAs, right, which can serve a similar purpose to the extent that they are a tool that the country uses to essentially attract foreign investment. So Puerto Rico is certainly, I'm sure among the various places that's trying to figure out how to remain competitive. Whether they're going to be uniquely situated vis-a-vis other capital importer jurisdictions is less clear to me. But certainly I think all of these countries are trying to figure it out, and from the looks of things, the OECD is also watching them. I think one of the more puzzling things that I've seen in recent weeks is some reports coming out of discussions allegedly are happening in Vietnam regarding their incentive system and then very strange press reports that might not even be true, that effectively amount to OECD is watching to try to figure out what kinds of credits are compatible with the system and which ones aren't.

I strongly suspect that we're going to see various jurisdictions try to come up with innovative ways to figure out how to get credit mechanisms that qualify either as transferable or refundable or one of the various other kinds of preferred credits without putting their countries at significant fiscal risk, right? A straight up big refundable credit obviously can put your overall fiscal situation in harm's way, but people are clever. They'll figure things out, and I strongly suspect, whether it's Puerto Rico or anywhere else, that there's going to be an ongoing whack-a-mole game that happens as folks in suburban Paris decide they like this kind of credit and they don't like that one.

But Nate, what about outside of the tax area, right? I mean, the other thing is to simply take the incentives out of scope, right? And we've started hearing about that as well.

Absolutely. It's all money.

Which is what refundable credits do because they're not booked as a tax reduction. So I'm not sure you're going to know about them in the same way. I don't know, Nate. I mean because they're just showing up as income, right?

Yeah, absolutely. It really depends on, back to your macro point, whether you think that the point of pillar two is to actually reduce competition or rather to change the terms of competition either in a way that favors certain countries or in a way that is less publicly obvious or both.

Ironically, what it does do is it shifts the environment or if you will, the legal framework of international agreement from tax to trade because after all the trade has a code on subsidies, and refundable credits are subsidies. Now the WTO process is pretty broken, so maybe the answer is, well, you don't care about whether you're violating the international trade agreements that you signed, but that's where the field becomes. And it could ultimately lead to more of a focus on what our trade rules are and how should they be enforced.

But we touched on this briefly in the last pillar two session we did with Vikram, right? Are we moving from tax competition to incentive competition and there might be clear winners and losers there. So we've been talking macro a bit and taking it up. Does that really achieve the goals the folks at the OECD are trying to get to or are you just changing where the game is played?

Well, I mean, I've been public on this for a while, partly because one of the first things I was involved in as a lawyer when I was on the joint committee staff was enacting section 9-36. That was a credit, but it wasn't based on spending, it was based on income. And from a governmental point of view, that was a huge mistake. It didn't get that many jobs in Puerto Rico, but it got a hell of a lot of income in Puerto Rico because you're incentivizing income. You're not incentivizing jobs. And if we're talking about incentives, David, that are incentives to do spending, like to build a plant, an investment credit or like an R&D credit to have R&D performed in your country, to my mind, that can move the needle a little bit in terms of encouraging investment locally, but it's nowhere near the impact if you have a 10% tax rate, for example, on unlimited income or a tax credit like 9-36, that automatically reduces your income.

And it's the latter that pillar two should be seen as mitigating and not necessarily the former. I mean, if a textile manufacturer wants to build their next plant in Columbia instead of in Argentina because they've got a better investment credit, God bless them. That's just not what this is all about. This is about companies that have 30, 40% operating margins, billions of income, and we're paying taxes at very low rates in many jurisdictions. And if pillar two can be at least perceived as putting a floor under that at 15%, I think that's accomplishing a lot.

Paul, can you talk a little bit about how developing countries will be impacted when pillar two was implemented? Mainly because there is a divergence in economies and the goal of each of these countries, so could pillar two harm the international tax competition when it comes to these developing countries?

Yeah, I don't see it helping them much, and they're not shy about collecting taxes for folks who are distributing and marketing in their jurisdiction. They are shy about collecting taxes potentially for folks who are making investments in their country and things like manufacturing that's mobile. And so they could be hurt in that respect, but they haven't been particularly successful. I mean obviously Singapore has been very successful, but most other less developed countries haven't been particularly successful in attracting those kinds of activities. So I really think for them it's more about the coming battles and how you allocate income and not so much about incentives for investment. I could be wrong. That's what I think.

Got it.

Are there any big winners?

Well, the government of Ireland, the government of Singapore. I mean the irony of this, and this is one point that's been made frequently lately, that our treasury department has basically signed off on a program for them to raise revenues without losing economic activity because the difference between a 21% rate and a 15% rate for many companies is still material. And so doing planning to expand your 15% rate taxed income and reduce your 21% rate taxed income is still worth paying attention to, and yet the tax rates are going to be at least once the basis step up transition issue goes behind us, the tax revenues are going to rise there unless economic activities subsides and I wouldn't bet on the economic activities subsiding in those countries.

So then do we fix anything?

Well, yeah, I mean the tax rate is 15%, not 2%, right? And that's the front page issue.

I guess that's my question, right? Because you could say, "Okay, the tax issue is 15 and not two," but I don't think individual countries just want company A to pay 15% and not two, they want you to pay 15% to me, right? Or is everyone just happy that we're taxing people fairly now and then it's the end of the game.

Look, they thought that we wanted to align transfer pricing with value creation. That lasted what, two years? Then they decided they didn't like that. Now they say they want to have people just pay 15% tax anywhere. How long is that going to last? Year, two years, three years?

But again, if it does away with a perception that when you're arguing for a bigger allocation of income to your country, it's coming from nowhere as opposed to coming from a country that's really taxing it at 15% makes the discussion of why country A should have more income allocated to it, a much more difficult discussion. And I think that's accomplishing something worthwhile.

I mean, let's face it, minimum taxes, which this is, are always in the nature of political, right? I mean, why did we have GILTI? We had GILTI because the Republican congressmen in ways and means, and Republican senators in senate finance knew they couldn't go to a territorial system without some floor under the tax that US multinationals were paying. And so GILTI, you just couldn't do it. And they knew that. They learned that they weren't happy with it in the beginning, but they learned it.

It's the same thing here globally, and once you come up with something that you can say and that the public evidence is consistent, has addressed the issue, you've accomplished what you can accomplish with a minimum tax and then you go on to other things.

With the number of jurisdictions involved-

But is that just temporary?

Maybe we're saying a different thing, but I was just going to say with the number of jurisdictions involved, how long can the center hold? Right?

Exactly.

Okay, so you start day one. It kind of reminds me in some ways of the '86 act was probably the flattest, the code was, right, elimination of preferences, et cetera, and then it just sort of expanded again. I would just predict based on history, experience, human nature, that there's going to be divergence in the rules ultimately as they get refined, as they get elaborated on in different jurisdictions. And I just don't know how long that can hold as a practical matter. And we're going to find out. I mean-

No, I agree there, right? Because the political argument is always a chicken in every pot, and the reason tax gets in there, that's how you afford the chicken. But if I get everyone up to 15% and I've got no more money for the chicken to put in the pot, we're going to have a problem, right? You're still going to have the critique of the politician. So you're right Eric. So as all of these jurisdictions come in and kind of pat themselves on the back a little bit, if this gets passed and they're like, "Okay, we're sticking it to those folks that aren't paying taxes, "two or three years, and I think going back to Nate's point about tax where value creation two, three years go by, I look at my books, I'm like, "Hmm, I'm not getting more money," frustration comes back.

Fair enough.

Since implementation is going to be through domestic methods legislation, there's likely going to be difference from one jurisdiction to another. So that kind of leads me to the question which we haven't really touched on is the topic of dispute resolution. I know that there is a lot of talk around existing double tax treaty procedures such as MAP, but what else are we thinking about besides what we have currently? Are there any discussions around this? What are your thoughts on it? Anything on this?

Am I allowed to say star chamber?

Yeah. Yeah, Nate, I know that's what you're going to say. Look, I mean that is the huge, I think in some ways, elephant in the room here. How does this work, right? Ultimately, how does this get implemented? Let's say that we actually do end up in a situation where there's some UTPR that's being asserted by seven different countries, and how do they fight over that? Some treaty jurisdictions, maybe some not treaty jurisdictions, right?

That to me is the place where I think David, Nate, you're going to be seeing a lot of it's international controversy. It's whether you can resolve that through a MAP process, whether it's something where you're going to have sort of multi-jurisdictional dispute resolution. That is going to be a mess. And I think Paul, you would probably come back and say, "Well, if that's where this ends up, then the ultimate goals have really been kind of lost," because if the idea here in part is to sort of diffuse the situation, take some of the pressure out of the context, right, in which you're ultimately going to have a fight around allocation, if all pillar two ends up doing is just in many ways blowing up that process, that resolution process, you haven't really even gotten to your essentially pillar one discussion, right?

Putting UTPRs as part of pillar two was a gamble, right? It was a gamble that you could use that as the stick, if you will, to get countries to go along with it. And if that gamble works, then UTPRs will kind of disappear from the landscape. If it doesn't work, you could have the whole system blow up. Because for example, as we talked about before, if the US doesn't join, we could have the imposition of UTPRs being seen as trade violations. And we're not talking here, Eman, about the kind of disputes that would go to MAP because the law in the country is clear, and the argument under the treaty is not anything that is necessarily resolvable by arbitration. For example.

On prior shows, I've referred to UTPR as mutually assured destruction, right? It's not designed to work. It's designed to get countries to do something else because it would be so chaotic. But the fact that it might actually happen does make me ask an institutional question, which is has the OECD bitten off more than it can Chew? Right?

You're right, Nate. It is a gamble. The UTPR is a very bold gamble, and if a number of countries adopt pillar two, and they're important countries like the United States so that other countries are attempting to impose UTPR on them, in hindsight, from that point, the OECD may say, "We shouldn't have tried it in the first place," because they've created more of a mess than what they could have ever intended. So we just have to see how this thing plays out. But I do think that if the US doesn't sign up for all of this and we do start having UTPRs apply to us, then at some point the US is probably going to retaliate. Right?

I think you have to assume that.

Yeah. Yeah. And so what have you got? You've got kind of writ large. What we saw could have happened and may still happen with DSTs, that pillar one has forestalled at least, which is trade sanctions on the United States' part and unilateral imposition of taxes on foreign governments' parts.

Before we wrap Eric and Paul, any kind of final thoughts on where you see this going, whether at a large policy perspective or from a day-to-day tax practitioner perspective?

I think this is increasingly going to be a focus. I mean, there's just no question about that. I think for the next two years, I think there's going to be a lot of activity. Obviously, there's going to be a lot of change. That's the one thing we have to assume. And I think from what I'm seeing with counseling clients on these matters, I think it's, again, I go back to the nimbleness. I think you've got to take the rules head on. You've got to understand how they work, figure out what they mean and what you can do with them. And I really do think that part of this is being flexible because where it stands right now is clearly not where it's going to be probably even as of 1/1/24, let alone 1/1/27. Right?

Any final thoughts, Paul?

I agree with that from an implementation perspective, and I think we all need to just kind of keep our seat belts tight until we see the outcome of the '24 election to see if we're going to be part of the pillar two community or if we're going to be bucking the pillar two community. And depending on the outcome of that, that could affect a lot of the work that we all do for a substantial number of years after that.

Awesome. Well, thank you all. Paul and Eric, thank you very much for talking to us and once again, this has been GILTI Conscience.

Thank you.

Thank you for joining us for today's episode of GILTI Conscience. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Skadden's Tax Team is recognized globally for providing clients with creative and innovative solutions to their most pressing, transactional planning and controversy challenges. Additional information about Skadden can be found at skadden.com.