An Analysis on Expropriation Risks of Top-Up Tax under Pillar Two

As Pillar Two moves closer to implementation, its potential clashes with international investment agreements (IIAs) are gaining attention. Among other possible claims, the possibility of top-up taxes under Pillar Two amounting to expropriation under them is often mentioned. This article examines whether a potential investor-state dispute settlement (ISDS) claim on expropriation against top-up taxes is likely to succeed. The analysis begins with jurisdictional issues and concludes that all implementing states, including ultimate parent entity (UPE) jurisdictions, might face challenges for expropriation. Most IIAs provide a definition only on lawful seizure but not expropriation per se. Therefore, the criteria used to ascertain it vary across ISDS tribunals. The key criterion is the substantial deprivation test that is likely going to be the main difficulty in demonstrating the expropriatory nature of top-up taxes in a majority of cases. Even if expropriation risks are not imminent, Pillar Two is leading international tax law down a dangerous and irreversible course with more clashes with other parts of international law. In designing new international tax rules, careful consideration of compliance with the larger international legal framework would be crucial for preventing disputes.