Pillar Two and Developing Countries: The Perils of Jurisdictional Blending

In this article, the author analyses the jurisdictional approach to blending for the calculation of the ETR, which is an essential feature of the IIR according to the model rules on GloBE. The author supports that the jurisdictional approach to blending raises a major issue by providing incentives for transferring preferential tax regimes from low and middle-lower economies to middle-higher and high-income economies in certain circumstances. Therefore, considering the need to strike a better balance on safeguarding the tax sovereignty of all jurisdictions involved (i.e. not just the tax sovereignty of large, rich economies, but also small, poor economies), the author argues in favour of other approaches on blending. In this context, from the perspective of developing countries, given the perils of the jurisdictional approach and lack of measures that are sufficient to compensate for the loss of tax sovereignty that the GloBE proposal may cause, the global approach on blending would be preferable as a first-best option, and an entity blending or even a no-blending approach would be a second-best option.