Pillar Two and DSTs: double taxation in the new era

The legal order of international taxation emerged from the aim to relieve double taxation seeking to foster cross-border trade by removing tax barriers. For decades, such was the cornerstone of international tax policy, to the extent that it predominantly manifested through a network of bilateral conventions explicitly directed at double tax relief. While there were some notable developments aimed at complementary objectives (e.g., curbing tax evasion and avoidance, as well as countering tax competition), these were relatively limited when compared to the overarching focus on countering the multiple impositions of tax.
Pillar Two, however, seems to depart from the traditional objective of abolishing double taxation. Under the Global Anti-Base Erosion (GloBe) framework, enforcing the minimum effective tax rate (ETR) may require imposing an additional levy on income that has already been taxed, albeit below the established threshold. To this effect, GloBe model rules introduce terms like “low-taxed constituent entity,” “minimum rate,” and “top-up tax” to ensure substantial taxation over double tax relief. Such a realignment of priorities suggests that the (rising) academic aspiration to “break the double tax paradigm” is becoming a legal reality.
While such linguistic expansion is already informative, it is not the main indicator of the transformation we observe. As elaborated below, Pillar Two’s treatment of Digital Service Taxes (DSTs) deliberately typifies scenarios where in-scope Multinational Entities (MNEs) will likely be levied twice on the same item of income. Although this situation provides ample grounds for normative assessments—such as evaluating increased tax burden on MNEs or the sufficiency of the established minimum ETR—our endeavor here is more modest: to showcase a manifest example of the paradigm shift implicit in Pillar Two.
Although measured in its scope, our pursuit remains relevant. Academic literature often considers Pillar Two and DSTs independently or in comparison with Pillar One, typically emphasizing the latter’s deficiencies. However, that approach does not fully address the inherent overlap between both sets of rules and its wider potential implications. As the world debates the need for structural reform of the international tax legal order, it is crucial to identify the principles that should inform such reform. In that context, gathering evidence of a positivized departure from the long-standing paradigm of double taxation is essential to determine if and which other objectives should serve as the normative foundation for the revision of the current order. This paper seeks to make a modest contribution to this broader dialogue.