INTRODUCTION Contributed by: Devon M. Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
global tax structures. It is also natural that this may cause a potential resurgence of tax competitiveness as US multinational groups may actually have, or are perceived as having, an advantage over non-US mul - tinational groups now that US multinational groups may have an exemption from the administrative and economic burden of Pillar Two. Continued threat of retaliatory taxes However, the issuance of the Side-by-Side Package does not end the potential for US retaliatory taxes in connection with the enactment of Pillar Two and digital services taxes. As with other OECD packages, the Side-by-Side Package requires implementation by individual jurisdictions (in particular jurisdictions that already have adopted such taxes). That takes time and there is no guarantee that most or all of the rele - vant jurisdictions will agree to adopt the Side-by-Side Safe Harbor. If there are deviations from the Side-by- Side Safe Harbor that are not favourable to the USA in such jurisdiction-by-jurisdiction implementation, that could further impact whether the USA contemplates enacting US retaliatory taxes. Additionally, the OECD Side-by-Side Package is not ideal in all respects from a US perspective, including that there is a stocktake in 2029 that may further impact the longevity of the Side- by-Side Safe Harbor. Thus, pending the outcome of future US elections and the stocktake, there remains significant uncertainty regarding the long-term viability of the OECD Side-by-Side Package. Accordingly, it is still possible that the Side-by-Side Safe Harbor is not fully implemented or is only tem - porarily implemented, thus raising the specter of US implementation of retaliatory taxes that could further destabilise the global tax system. Consistent and persistent problems of tax administration and enforcement Even though not compliant with all the specific require - ments of Pillar Two, the US system has significant features targeting base erosion, profit shifting, hybrid arrangements, information gathering and sharing and other features meant to limit tax avoidance and tax evasion. These challenges permeate the entire glob - al tax system and are present in most jurisdictions. These common, and persistent, challenges drove the very existence of base erosion and profit shifting initia -
tives, including the development of Pillar Two. As we see with the current state of the global tax system, the difficulty is how to address these persistent issues in a coherent and even-handed manner that also takes into account economic, political, geopolitical and other factors. One significant issue remaining in most tax systems is complexity. For example, Pillar Two is notoriously complex. As a result, the Side-by-Side Package’s inclusion of a Simplified ETR safe harbour (to simplify the operation of the global anti-base erosion model rules and ideally relieve multinational enterprises and taxing authorities from more complex computations) made some strides in simplifying some of Pillar Two’s application, but the system nevertheless remains highly complex. This complexity is particularly diffi - cult as countries grapple with funding for enforcement while still developing new tools (including artificial intelligence (AI)) and expertise to enforce these new rules. While some jurisdictions have already imple - mented portions of Pillar Two provisions for a couple of years, many are newly enacted and taxpayers in all of these jurisdictions generally are still figuring out the ramifications (positive and negative) of Pillar Two implementation. This challenge of complexity and tax administration is shared by the USA, which has generally reduced its funding for the Internal Revenue Service (IRS) and has greatly reduced its workforce over the past year. Some of these reductions may be mitigated by the increasing use of AI resources in tax administration and enforcement – for example, the IRS has greatly expanded its use of AI resources in audits and fraud detection. However, it remains to be seen just how effective AI will be in such a role and any such new technology and methods may have additional unfore - seen challenges. Stability (or lack thereof) in individual jurisdictions The USA recently enacted a new sweeping tax and spending legislation in the form of the One Big Beauti - ful Bill Act, and while it introduced a number of wel - come changes and clarifications, the vast majority of the tax-relevant changes were extending provisions from prior legislation that were going to expire, walking back certain tax incentives for energy production and
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