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U.S. critics of Pillar 2 of the Organisation for Economic Co-operation and Development (OECD)/Inclusive Framework (IF) Base Erosion and Profit Shifting (BEPS) 2.0 project have focused on the impact of the Undertaxed Profits Rule (UTPR) on tax credits such as the ones included in the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors and Science (CHIPS) Act. In fact, those credits are unlikely to be affected because they are refundable. But this raises a broader question of why the line between qualifying and non-qualifying credits should be drawn at refundability. This article addresses this question and argues that while refundability is a reasonable proxy, the line is intended to distinguish between tax expenditures that merely shift the location of investments that would be made somewhere in any case, and tax expenditures that address a market failure and therefore would not be made but for the subsidy. It would be better if the OECD made this explicit and subjected tax expenditures to a peer review that is not focused solely on refundability.


Reprinted from International Tax Journal, 48, 2022, 13-18, with permission of Kluwer Law International.