As Puerto Rico becomes the first U.S. locality to navigate the global minimum tax agreement known as Pillar Two, the Tax Foundation just released a fact sheet detailing crucial insights for U.S. federal policymakers to navigate this policy transition.

Having officially began its progressive worldwide rollout on January 1st, 2024, the Pillar Two agreement, a project of the Organization for Economic Co-operation and Development, aims to eventually raise up to $220 billion globally by levying top-up taxes on large multinational companies that pay an effective tax rate of less than 15 percent. As many jurisdictions around the world now transition their policies, Puerto Rico provides policymakers with insight into how this worldwide protocol will begin to impact cross-border taxes for the United States in particular.

The Tax Foundation’s latest one pager stresses that Puerto Rico – not unlike many other low-tax jurisdictions around the globe – risks an adverse outcome if it does not respond to Pillar Two. Because Pillar Two has a cascading series of backstop taxes to enforce a 15 percent minimum on global companies, failure to comply will likely prompt other countries to enforce higher taxes on Puerto Rican companies. Simultaneously, Puerto Rico, which has recently been through bankruptcy and is constrained by a fiscal oversight board, is also positioned to face consequences should it comply fully – this includes reneging on legally binding contractual obligations promising tax adjustments to global companies.

Understandably, Puerto Rico is currently pursuing a middle ground approach other low-tax jurisdictions have taken; it will attempt to create a qualified 15 percent tax, but then return cash to companies in another way. Because this not-yet-passed legislation may generate scrutiny from international lawmakers, the Tax foundation is encouraging the federal government to advocate for Puerto Rico’s compliance as needed, given its legal constraints.

“The US should ask for leniency on minor variance from Pillar Two rules and could further ask for Puerto Rico to be blended with the US for Pillar Two country-by-country calculations,” said Tax Foundation’s Senior Economist Alan Cole. “Given the complexity faced by jurisdictions like Puerto Rico, black-and-white compliance may not achieve its intended goals of replacing tax rate competition with tax incentive competition.”

The Tax Foundation is the leading nonpartisan research institution shaping tax debates and policy. For more information on the Tax Foundation, please visit https://taxfoundation.org.