The Pillars of Hercules: Globalisation, Taxation, Myths and…Trump
For decades, multinational enterprises (MNEs) and their advisers have wrestled with shifting international tax rules. Since the OECD’s “Pillar 2” initiative was launched in October 2021, that struggle has taken on Herculean proportions. Pillar 2 was designed to ensure that large MNEs pay a minimum level of tax in every jurisdiction where they operate. But its global reach, fragmented local implementation, and heavy compliance demands are already straining even the best-resourced tax teams. Whereas the Tax Insurance product has historically been effective at managing tax risks on discrete interpretative points, Pillar 2’s data-heavy, cross-border compliance challenges do not fit neatly into existing Tax Insurance models — but that may not be the end of the story!
Setting the scene
To set the scene for Pillar 2: In October 2021, 135+ jurisdictions (some 70% of all jurisdictions) signed up to OECD plans for a global tax system as part of the campaign against Base Erosion and Profit-Shifting (BEPS), ongoing since at least 2013. In the words of the OECD, “The Global Anti-Base Erosion Rules (GloBE) are a key component of this plan and ensure large multinational enterprise pay a minimum level of tax on the income arising in each of the jurisdictions where they operate.” In broad terms multinational enterprises (MNEs) with global consolidated revenues of €750m+ will be in-scope for compliance and potential ‘top-up tax’ liabilities to ensure – again very broadly – that a minimum rate of tax is applied in each jurisdiction across global revenue generation. As of today, in-force implementation of some form of the rules is ‘live’ in 56 jurisdictions, according to PwC (various other sources cite 60-72 jurisdictions as having draft or final legislation).
To set the scene for the mythology: Most readers will be somewhat familiar with the twelve labours of Hercules. His travels encompassed a visit to the island of Erytheia, beyond the western limit of the Mediterranean. In some accounts, Hercules split an imposing mountain range on his way out, creating the Straits of Gibraltar; in others he narrowed the Straits on his return (aiming to prevent the incursion of monsters from terra incognita). Regardless, two prominent mountains, one to the north and one to the south of the Straits have – for at least two thousand years - been referred to as the Pillars of Hercules and in that manner have been symbolic both of bridges between continents and sentries between borders.
The Tax Insurance product in the post-BEPS world
Decades of inventive (some might say aggressive) tax planning on the one hand, and an increasingly globalised perspective from national tax authorities on the other, led up to the BEPS initiative. Various measures under the initiative have been in place for the last ten years both in national and supra-national (e.g. EU) rules. The uncertainty created by the overlay of these rules on structures which were established in less-regulated times has been one of the drivers for the increasing uptake of the Tax Insurance product in the same period.
Tax directors and specialist advisers, whilst trying to right-size jurisdictional expertise, allocate profits in accordance with transfer pricing principles and otherwise comply with increasingly vague and complex rules in order to future-proof new structures, are also dealing with Tax Authorities freshly emboldened to challenge legacy structures. The monster is approaching the Straits…
One of the key hallmarks of legacy structures is leveraging differentials (in terms of rates of tax, taxable bases, recognition of entity tax characteristics etc.) between tax jurisdictions; and such arbitrage opportunities (together with the current burden of uncertainty) is fertile ground for the Tax Insurance product to prove its worth: removing or reducing provisions for tax in balance sheets, freeing up returns of cash to investors, facilitating transactions, absorbing the burden of contractual indemnities etc.
Pillar 2
The advent of Pillar 2 potentially diminishes the value of arbitrage opportunities for MNEs; potentially significantly. In parallel, the extent to which investment fund structures are - or will be - implicated by these rules is a highly complex and fact-specific question: certainly they cannot be ignored, and the implications of application will be significant.
What is clear is that MNEs most evidently targeted by the rules are: (a) taking them very seriously; and (b) discovering in real time the significant costs involved in complying with trans-national rules. In several forums over 2024 and 2025, senior figures in marquee-name organisations reported on implementation and initial compliance costs running to eight figure numbers (leaving aside the ongoing cost of compliance). “Dry run” applications of their new compliance infrastructure were reporting various levels of top-up tax liabilities: sometimes many orders of magnitude smaller than the costs of ascertaining the liability. Insurers in attendance were able to offer little by way of comfort: the volume of data, the proprietary systems, the differentiated implementation of the rules across jurisdictions all point away from the traditional structure of the Tax Insurance product; and towards something more akin to a “blind spot” or general liability policy. Is the monster through the Straits?
The US Position
On 20 January 2025, the Trump administration withdrew US support for the Pillar 2 initiative and issued instructions for retaliatory measures to be investigated (and potentially implemented) in relation to actual or potential foreign tax rules which are “extraterritorial or disproportionately affect American companies”: an explicit targeting of Pillar 2. Given the very significant levels of US outbound investment globally, the threat of such retaliatory measures puts a significant pressure on the local implementation of Pillar 2 in any given jurisdiction. Recently, we have seen the tumultuous economic effects of US unilateral tariff imposition, so there will be a justified wariness regarding US action in the Pillar 2 space. This unilateral action may indicate a narrowing of the Straits. No doubt, Mr Trump would be tickled by the Herculean parallels of keeping the monster of a globalised tax system at bay…
Efforts over the summer at the G7 level appear to have achieved a potential hybrid solution on some of the US concerns, putting to bed some of the harsher retaliatory measures initially under consideration, but leaving an unwieldy “side by side” model for implementation of the Pillar 2 rules in respect of US-headed MNEs. In the context of the obvious asymmetry in this application, the proposals will require ratification from a large number of countries (including very substantial economies such as China and India) which were not part of the US discussions. As at the time of writing, this process is incomplete.
Looking to the future
Whether US unilateral action (and the G7 process) will ultimately narrow the Straits; whether the current rise of nationalism across Europe will have further negative ramifications for globalist tax initiatives; or whether the monster is already past the Pillars, is yet to be seen. Where there is uncertainty, however, Tax Insurance will find its place. Certainly discrete national and cross-border tax issues will still need to be addressed. The parallel application of US and OECD rules may well present opportunities for risk transference and as the Tax Insurance product continues to develop and adapt, blind spot coverage (perhaps on a jurisdiction by jurisdiction basis) may be possible. The Pillar 2 rules will provide opportunities yet.
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Will Gay
Senior Partner
Toremis Specialty