Pillar Two and the Tax Policy Challenges of the Substance-Based Income Exclusion

Key Points

• The research aims to evaluate the limitations of the substance-based income exclusion under Pillar Two and propose improvements.
• Critically analyze the substance-based income exclusion framework
• Identify allocative distortions and biases in the current formula
• Suggest alternative approaches for determining routine returns
• The substance-based income exclusion exhibits significant conceptual shortcomings
• The current formula leads to allocative distortions favoring certain business models
• Proposed alternatives may better reflect economic realities of modern multinational activities