Fall 2025

The Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Cooperation and Development (OECD) was set up in 2013 to evaluate the current taxation of multinationals and to develop a framework for member countries to negotiate and implement new tax laws to combat tax avoidance. Among other changes, these efforts resulted in model rules divided between two pillars: Pillar 1 and Pillar 2. 

The Pillar 1 framework, which has faced implementation challenges, focuses on reallocating a fraction of reported profits from very large multinationals, based on where their consumers are. Pillar 2 establishes a global minimum tax of 15% as well as several tools and mechanisms for implementation. Pillar 2 is now effective in many jurisdictions worldwide.

Although the United States has indicated it will not join the global tax deal, the Tax Cuts and Jobs Act of 2017 did implement changes to the taxation of U.S. multinationals’ foreign income, some of which helped design key elements of Pillar 2. Notably, it established a minimum tax on foreign earnings, called the global intangible low-tax income (GILTI) regime. In 2025, the GILTI regime imposes a tax rate of 10.5% on pooled foreign income, allows specific deductions for investment in tangible capital (which has been repealed effective for calendar year taxpayers beginning in 2026), and allows most foreign taxes as foreign tax credits that can reduce or eliminate a firm’s GILTI tax liability.

The GILTI regime follows key principles of the BEPS efforts, but falls short of being fully aligned. At 10.5%, which is scheduled to increase to effectively 12.6% in 2026 due to changes made by the One Big Beautiful Bill Act (OBBBA), the GILTI tax rate is lower than the global minimum tax of 15%. But the key difference is how the two measures define the tax base. Under Pillar 2, the minimum tax is computed in each country, but the GILTI regime uses a global averaging method. Pillar 2, with its wide implementation in most countries, will surely impact taxes on U.S. multinationals.

In early versions of the OBBBA, Section 899 was effectively a retaliatory tax aimed at countries that implemented Pillar 2 Top-Up Taxes and so-called digital services taxes. Just prior to the OBBBA final passage in July, the Group of 7 (G7) countries indicated that they would essentially exempt U.S. multinationals from Pillar 2. Therefore, Section 899 was withdrawn.

A press release by the UK government (a country that has enacted Pillar 2 legislation) on June 28, 2025, is informative regarding what the G7 agreement means in practical terms. In summary, it says the G7 would allow the U.S. minimum tax system to operate alongside Pillar 2 rules, but would take steps to ensure that any substantial risks to a level playing field or base erosion and profit shifting are addressed.

So, the next step for the G7 will be to integrate a “side-by-side” solution. Notably lacking in the statement is any comment by the UK government about the applicability of the United Kingdom’s already-enacted Pillar 2 legislation on U.S.-based multinationals. Herein lies the dilemma: while there is a stated intent to exempt U.S.-based companies from Pillar 2, action to actually do so has not yet been taken. We believe that, for now, U.S. multinationals will need to continue to monitor legislative developments around the world, consult with their financial auditors regarding the financial statement and disclosure implications of Pillar 2 generally and the G7 statement specifically, and continue to work on their capabilities to measure, and possibly ultimately report on tax returns, the extent to which they have a Pillar 2 liability.

Overview of Pillar 2

Under Pillar 2’s global anti-base erosion (GloBE) rules, multinational enterprises (MNEs) that generate more than 750 million euros (approximately $885 million) in revenue are required to bear a GloBE effective tax rate (GloBE ETR) of at least 15.0% in each jurisdiction in which they operate.

The GloBE ETR, calculated on a jurisdictional basis, is based on an MNE’s financial statements to which various adjustments are made to arrive at a jurisdiction’s “GloBE income or loss” and “covered taxes” for purposes of determining that jurisdiction’s GloBE ETR. Where an MNE’s GloBE ETR for a jurisdiction in which it operates does not reach the minimum 15%, GloBE rules impose a Top-Up Tax equal to the amount of tax necessary to bring the GloBE ETR up to 15%. An underlying aspect of Pillar 2 is that the GloBE rules are less concerned about which country collects a Top-Up Tax than that the Top-Up Tax is ultimately collected among the countries in which a MNE operates.

GloBE rules establish a reporting framework, the cornerstone of which is the global information return (GIR). The GIR is intended to be a standardized tax return, different portions of which are provided to the taxing authorities of the jurisdictions in which the MNE operates. The GIR requires detailed presentation of information and requires collection of significant amounts of data.

While the OECD has issued model rules and commentary, as well as a sample GIR, the GloBE rules are only effective in jurisdictions that affirmatively enact Pillar 2 legislation. Such legislation has been enacted in the European Union, United Kingdom, Canada, Japan, and South Korea, among other jurisdictions. Others, such as Israel, are in the process of enacting Pillar 2 legislation. The United States and China are two notable countries that have neither introduced nor announced an intention to introduce Pillar 2 legislation. Broadly speaking, most substantive provisions of enacted Pillar 2 legislation were effective in 2024, with some provisions becoming effective in 2025. The earliest GIR reporting is due in mid-2026 (which relates to 2024).

An important aspect of Pillar 2 is that while the OECD’s GloBE rules were written at a universal level and ostensibly reflect the consensus of the approximately 140 countries participating in the Inclusive Framework (IF), various deviations from the model GloBE rules are emerging as countries enact their Pillar 2 regimes. As a practical matter, this means taxpayers may face a certain level of risk if they only focus on the guidance issued by the OECD.

It is important to realize that Pillar 2 is an evolving phenomenon, and guidance continues to be provided.

Scope

Whether, or to the extent to which, a particular taxpayer (or situation) is subject to GloBE rules is driven by the applicability of an array of definitions. But, generally, GloBE rules apply to the constituent entities (CEs) of an MNE group that have annual revenue of 750 million euros or more in the consolidated financial statements of the ultimate parent entity (UPE) in two of the four years immediately preceding the year under review.

Taxpayers and their advisers cannot assume that determining the group of entities to which the Pillar 2 rules may apply will be a straight-forward exercise. Moreover, care is required to identify each CE, as any jurisdiction in which a group has a CE brings into play considerations regarding the applicability of various charging provisions (discussed below).

Jurisdictional ETR

The GloBE ETR for a jurisdiction is calculated by dividing the amount of covered taxes borne by the MNE and allocable to the jurisdiction by the GloBE income or loss attributable to the jurisdiction. These calculations are first done for each CE in a jurisdiction and then essentially aggregated to arrive at jurisdictional amounts.

The GloBE rules set forth their own calculations by which GloBE income or loss and covered taxes are determined, which are fundamentally based on the MNE’s books and records used for financial statement purposes (e.g., U.S. GAAP, IFRS). Broadly speaking, GloBE income or loss is determined by making certain adjustments to the profit before tax (PBT) attributable to a CE. The model rules require adjustments for net tax expense, excluded dividends, excluded equity gain or loss, included revaluation method gain or loss, gain or loss from disposition of assets and liabilities excluded by other elements of GloBE rules, asymmetric foreign currency gains or losses, policy disallowed expenses, prior period errors and changes in accounting principles, and accrued pension expense.

In addition, special rules relate to adjustments required for, among other things, the treatment of stock-based compensation, transactions that are not at arm’s length, and qualified refundable tax credits. Further, there are specific rules with respect to when adjustments are required related to intragroup financing arrangements that cause significant complexity. As a result, GloBE income or loss can vary significantly from PBT.

Similarly, covered taxes are determined by making various adjustments to the provision for income taxes related to each CE. In general, covered taxes are taxes imposed on the income or profits of a CE itself, on distributed profits, imposed in lieu of a generally applicable corporate income tax, and levied by reference to retained earnings. Notable required reductions to covered taxes include any amounts of current tax expense that relate to uncertain tax positions and any tax that is not expected to be paid within three years. The GloBE rules have detailed rules regarding the treatment of deferred items, the effect of which are combined to arrive at the total deferred tax adjustment amount. Assessing the applicability and appropriate treatment of various items of deferred taxes under the GloBE rules is often a qualitative exercise. GloBE rules also include a number of rules regarding the allocation of covered taxes to various CEs. For example, taxes imposed by a parent company’s jurisdiction’s controlled foreign corporation (CFC) regime on the income of a subsidiary are allocated to the country of the subsidiary.

Under the GloBE rules, the GloBE income or loss and covered taxes for a jurisdiction are determined by combining the GloBE income or loss and covered taxes for each CE located in the jurisdiction. For example, if a U.S. parented company (USP) has two subsidiaries located in a country, Sub X-1 and Sub X-2 both based in Country X, then the GloBE income or loss and covered taxes of Sub X-1 and Sub X-2 are separately determined and then aggregated to determine the jurisdictional GloBE income or loss and covered taxes for Country X. If USP also had a branch in Country X (USP X-PE), the GloBE income or loss and covered taxes of USP X-PE would be independently calculated, and then combined with the results of Sub X-1 and Sub X-2 to arrive at the jurisdictional GloBE income or loss and covered taxes for Country X. In this situation, the results of USP X-PE would not be included in the calculations of USP’s jurisdictional GloBE income or loss and covered taxes for determining the U.S. GloBE ETR.

As noted above, the income or loss and covered taxes of a CE are generally attributed to that CE (including CEs that are PEs), and thereafter the results of the CEs located within a jurisdiction are aggregated to determine that jurisdiction’s GloBE ETR and any potential Top-Up Tax liability.

Special rules apply, however, to CEs that are flow-through entities. In general, these rules can result in the GloBE income or loss or covered taxes of a CE located in one jurisdiction being attributed or allocated to one or more CEs located in other jurisdictions.

Charging Provisions

As noted previously, where a jurisdiction does not reach the minimum 15% GloBE ETR, the GloBE rules impose a Top-Up Tax equal to the amount of tax necessary to bring that jurisdiction’s GloBE ETR up to 15%. The GloBE rules include a series of “charging provisions” that set forth the order in which a jurisdictional Top-Up Tax can be assessed by the various countries in which the MNE operates.

Under these rules, the general OECD guidance states:

• The jurisdiction that generated the Top-Up Tax is given priority to collect the Top-Up Tax via a Qualified Domestic Minimum Top-Up Tax (QDMTT).
• To the extent the jurisdictional Top-Up Tax is not collected by a QDMTT (because, for example, they have not enacted a QDMTT), the jurisdiction of the ultimate parent entity (UPE) or that of an intermediate parent entity (IPE) is permitted to collect the Top-Up Tax under an income inclusion rule (IIR). It is important to note that the IIR applies to those countries that have enacted an IIR in a top-down fashion, such that the UPE’s IIR applies first and then down the relevant chain of holding companies.
• Any amount of Top-Up Tax not otherwise collected by a QDMTT or IIR can be collected by other countries in which the MNE group has a presence and that have enacted an undertaxed profits rule (UTPR).

The QDMTT essentially operates as an alternative minimum tax applied by a jurisdiction on all the CEs of a MNE group located in that jurisdiction, and as such can be viewed as a jurisdiction preserving its own tax base. To those ends, QDMTTs have not met with much resistance, and the U.S. Treasury in 2024 indicated that QDMTTs would be treated as creditable taxes for U.S. foreign tax credit purposes.

IIRs, which were originally conceived as the backbone of Pillar 2 rules, are more complicated. First, unlike QDMTTs, multiple jurisdictions’ IIRs are potentially applicable in any situation. Second, once IIRs below the UPE jurisdiction come into play, both the corporate holding structure and the individual CEs that generated the jurisdictional Top-Up Tax are relevant to the analysis as different holding company jurisdictions may have rights to different portions of a single jurisdictional Top-Up Tax. Third, and perhaps most importantly, an IIR applies to a holding company jurisdiction that has enacted Pillar 2 legislation and applies those rules to income generated in another jurisdiction. Put simply, IIRs require a recalculation of another jurisdiction’s GloBE ETR for purposes of applying the IIR. This is one of the areas where a jurisdiction’s actual enacted legislation may deviate from the OECD’s guidance and can have particular significance.

Within this framework, UTPRs are the most contentious. UTPRs were conceived as a backstop to the IIR. In general, the UTPR accumulates all of the jurisdictional Top-Up Taxes not previously collected through QDMTTs or IIRs and allocates the right to collect that remaining overall Top-Up Tax liability among jurisdictions that have enacted a UTPR (UTPR jurisdictions). The UTPR is allocated by means of a formulary apportionment. Broadly speaking, the amount of a UTPR allocated to a UTPR jurisdiction for collection is the sum of 50% of the ratio of that jurisdiction’s relative payroll expense as compared to the aggregate payroll expense of all the UTPR jurisdictions and 50% of the ratio of that jurisdiction’s relative tangible asset base as compared to the aggregate tangible asset base of all the UTPR jurisdictions. A key element of this is that these fractions are based only on the metrics of the UTPR jurisdictions. This was done to ensure that if there is a remaining UTPR liability that it would be collected. In the broadest terms, what a UTPR represents is the low-taxed income of a jurisdiction being taxed by the UTPR jurisdiction without any connection to the income.

The means by which a jurisdiction may collect the UTPR illustrates the importance of checking with local foreign tax advisers to review the details of legislation adopted in a jurisdiction. In its guidance, the OECD outlined a process whereby a UTPR jurisdiction would collect the UTPR allocated to that jurisdiction by denying deductions to the MNE group’s CE(s) located in its jurisdiction up to the point where the UTPR jurisdiction would collect additional cash taxes equal to its allocated UTPR. In general, where a UTPR jurisdiction could not collect its allocated UTPR from one year through a denial of deductions, the UTPR jurisdiction would not be allocated a share of the MNE group’s subsequent year’s UTPR until it had collected its first allocation. While the OECD’s guidance outlined a denial of deduction mechanism, it left the door open for other approaches. Several countries have opted out of the denial of deduction approach and instead instituted a direct charge.

The UTPR is particularly contentious because its rule applies with equal force to a UPE jurisdiction. This means that unless the UPE jurisdiction has a QDMTT, it could find itself directly liable under the UTPR. This is in contrast to a subsidiary where the Top-Up Tax could be collected via either a local QDMTT or an IIR before a UTPR could apply. This extraterritoriality applied to UPE jurisdictions was a key driver for the introduction of the proposed Section 899, so if negotiations fail to exempt the United States from Pillar 2, it would not be a surprise to see it reappear in future legislation.

Conclusion

Pillar 2 is a significant departure from historical international taxing norms. Through its 750 million euros revenue threshold, Pillar 2 is geared to apply to larger MNEs that presumably have the sophistication and resources to address its requirements and complexities. MNEs that find themselves subject to Pillar 2 face a significant level of data collection, analysis, and monitoring. The relevance of Pillar 2 to U.S.-based MNEs may dramatically decrease if the United States’ tentative agreement with the G7 is enacted.

However, foreign-based multinational companies with U.S. subsidiaries still must contend with Pillar 2. Consider, for example, undertaking a U.S. R&D or energy tax credit study for a U.S. subsidiary of a foreign-based multinational that is subject to Pillar 2. If the U.S. ETR of the subsidiary group falls below a 15% ETR because of these credits, what may end up happening under Pillar 2 is that some or all of the benefits generated by the credits may be absorbed by one or more of the Pillar 2 Top-Up Tax countries in the group, resulting in just a shifting of the tax savings from the United States to an additional tax in another jurisdiction that has enacted a Top-Up Tax within the foreign MNE’s group. Therefore, U.S. tax advisers and tax professionals need to be familiar with Pillar 2 rules because they may apply to U.S. subsidiaries of foreign MNEs when engaging in any tax planning studies and strategies, not just credit-type engagements. This will require close communication and integration with foreign tax advisers of

U.S. tax planning strategies and engagements for U.S. subsidiaries of foreign-based multinationals to avoid situations where tax planning results in no, or limited, net positive tax results to the group as a whole. In other words, the U.S. MNE group should make every effort to avoid unpleasant surprises after the fact by ensuring that they are aware of how the Pillar 2 Model Rules in some cases essentially undo the effect of tax credits or other tax planning strategies when determining each jurisdiction’s GloBE ETR. 

Adam Packer, JD, LLM, is managing director with Andersen in Seattle where he is the head of quantitative modeling for international tax. He can be reached at adam.packer@andersen.com.

Mark Klitgaard, JD, LLM, is a director with Andersen in Silicon Valley, Calif., where he works with clients on international tax and transfer pricing matters. He can be reached at mark.klitgaard@andersen.com.

The Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Cooperation and Development (OECD) was set up in 2013 to evaluate the current taxation of multinationals and to develop a framework for member countries to negotiate and implement new tax laws to combat tax avoidance. Among other changes, these efforts resulted in model rules divided between two pillars: Pillar 1 and Pillar 2. 

The Pillar 1 framework, which has faced implementation challenges, focuses on reallocating a fraction of reported profits from very large multinationals, based on where their consumers are. Pillar 2 establishes a global minimum tax of 15% as well as several tools and mechanisms for implementation. Pillar 2 is now effective in many jurisdictions worldwide.

Although the United States has indicated it will not join the global tax deal, the Tax Cuts and Jobs Act of 2017 did implement changes to the taxation of U.S. multinationals’ foreign income, some of which helped design key elements of Pillar 2. Notably, it established a minimum tax on foreign earnings, called the global intangible low-tax income (GILTI) regime. In 2025, the GILTI regime imposes a tax rate of 10.5% on pooled foreign income, allows specific deductions for investment in tangible capital (which has been repealed effective for calendar year taxpayers beginning in 2026), and allows most foreign taxes as foreign tax credits that can reduce or eliminate a firm’s GILTI tax liability.

The GILTI regime follows key principles of the BEPS efforts, but falls short of being fully aligned. At 10.5%, which is scheduled to increase to effectively 12.6% in 2026 due to changes made by the One Big Beautiful Bill Act (OBBBA), the GILTI tax rate is lower than the global minimum tax of 15%. But the key difference is how the two measures define the tax base. Under Pillar 2, the minimum tax is computed in each country, but the GILTI regime uses a global averaging method. Pillar 2, with its wide implementation in most countries, will surely impact taxes on U.S. multinationals.

In early versions of the OBBBA, Section 899 was effectively a retaliatory tax aimed at countries that implemented Pillar 2 Top-Up Taxes and so-called digital services taxes. Just prior to the OBBBA final passage in July, the Group of 7 (G7) countries indicated that they would essentially exempt U.S. multinationals from Pillar 2. Therefore, Section 899 was withdrawn.

A press release by the UK government (a country that has enacted Pillar 2 legislation) on June 28, 2025, is informative regarding what the G7 agreement means in practical terms. In summary, it says the G7 would allow the U.S. minimum tax system to operate alongside Pillar 2 rules, but would take steps to ensure that any substantial risks to a level playing field or base erosion and profit shifting are addressed.

So, the next step for the G7 will be to integrate a “side-by-side” solution. Notably lacking in the statement is any comment by the UK government about the applicability of the United Kingdom’s already-enacted Pillar 2 legislation on U.S.-based multinationals. Herein lies the dilemma: while there is a stated intent to exempt U.S.-based companies from Pillar 2, action to actually do so has not yet been taken. We believe that, for now, U.S. multinationals will need to continue to monitor legislative developments around the world, consult with their financial auditors regarding the financial statement and disclosure implications of Pillar 2 generally and the G7 statement specifically, and continue to work on their capabilities to measure, and possibly ultimately report on tax returns, the extent to which they have a Pillar 2 liability.

Overview of Pillar 2

Under Pillar 2’s global anti-base erosion (GloBE) rules, multinational enterprises (MNEs) that generate more than 750 million euros (approximately $885 million) in revenue are required to bear a GloBE effective tax rate (GloBE ETR) of at least 15.0% in each jurisdiction in which they operate.

The GloBE ETR, calculated on a jurisdictional basis, is based on an MNE’s financial statements to which various adjustments are made to arrive at a jurisdiction’s “GloBE income or loss” and “covered taxes” for purposes of determining that jurisdiction’s GloBE ETR. Where an MNE’s GloBE ETR for a jurisdiction in which it operates does not reach the minimum 15%, GloBE rules impose a Top-Up Tax equal to the amount of tax necessary to bring the GloBE ETR up to 15%. An underlying aspect of Pillar 2 is that the GloBE rules are less concerned about which country collects a Top-Up Tax than that the Top-Up Tax is ultimately collected among the countries in which a MNE operates.

GloBE rules establish a reporting framework, the cornerstone of which is the global information return (GIR). The GIR is intended to be a standardized tax return, different portions of which are provided to the taxing authorities of the jurisdictions in which the MNE operates. The GIR requires detailed presentation of information and requires collection of significant amounts of data.

While the OECD has issued model rules and commentary, as well as a sample GIR, the GloBE rules are only effective in jurisdictions that affirmatively enact Pillar 2 legislation. Such legislation has been enacted in the European Union, United Kingdom, Canada, Japan, and South Korea, among other jurisdictions. Others, such as Israel, are in the process of enacting Pillar 2 legislation. The United States and China are two notable countries that have neither introduced nor announced an intention to introduce Pillar 2 legislation. Broadly speaking, most substantive provisions of enacted Pillar 2 legislation were effective in 2024, with some provisions becoming effective in 2025. The earliest GIR reporting is due in mid-2026 (which relates to 2024).

An important aspect of Pillar 2 is that while the OECD’s GloBE rules were written at a universal level and ostensibly reflect the consensus of the approximately 140 countries participating in the Inclusive Framework (IF), various deviations from the model GloBE rules are emerging as countries enact their Pillar 2 regimes. As a practical matter, this means taxpayers may face a certain level of risk if they only focus on the guidance issued by the OECD.

It is important to realize that Pillar 2 is an evolving phenomenon, and guidance continues to be provided.

Scope

Whether, or to the extent to which, a particular taxpayer (or situation) is subject to GloBE rules is driven by the applicability of an array of definitions. But, generally, GloBE rules apply to the constituent entities (CEs) of an MNE group that have annual revenue of 750 million euros or more in the consolidated financial statements of the ultimate parent entity (UPE) in two of the four years immediately preceding the year under review.

Taxpayers and their advisers cannot assume that determining the group of entities to which the Pillar 2 rules may apply will be a straight-forward exercise. Moreover, care is required to identify each CE, as any jurisdiction in which a group has a CE brings into play considerations regarding the applicability of various charging provisions (discussed below).

Jurisdictional ETR

The GloBE ETR for a jurisdiction is calculated by dividing the amount of covered taxes borne by the MNE and allocable to the jurisdiction by the GloBE income or loss attributable to the jurisdiction. These calculations are first done for each CE in a jurisdiction and then essentially aggregated to arrive at jurisdictional amounts.

The GloBE rules set forth their own calculations by which GloBE income or loss and covered taxes are determined, which are fundamentally based on the MNE’s books and records used for financial statement purposes (e.g., U.S. GAAP, IFRS). Broadly speaking, GloBE income or loss is determined by making certain adjustments to the profit before tax (PBT) attributable to a CE. The model rules require adjustments for net tax expense, excluded dividends, excluded equity gain or loss, included revaluation method gain or loss, gain or loss from disposition of assets and liabilities excluded by other elements of GloBE rules, asymmetric foreign currency gains or losses, policy disallowed expenses, prior period errors and changes in accounting principles, and accrued pension expense.

In addition, special rules relate to adjustments required for, among other things, the treatment of stock-based compensation, transactions that are not at arm’s length, and qualified refundable tax credits. Further, there are specific rules with respect to when adjustments are required related to intragroup financing arrangements that cause significant complexity. As a result, GloBE income or loss can vary significantly from PBT.

Similarly, covered taxes are determined by making various adjustments to the provision for income taxes related to each CE. In general, covered taxes are taxes imposed on the income or profits of a CE itself, on distributed profits, imposed in lieu of a generally applicable corporate income tax, and levied by reference to retained earnings. Notable required reductions to covered taxes include any amounts of current tax expense that relate to uncertain tax positions and any tax that is not expected to be paid within three years. The GloBE rules have detailed rules regarding the treatment of deferred items, the effect of which are combined to arrive at the total deferred tax adjustment amount. Assessing the applicability and appropriate treatment of various items of deferred taxes under the GloBE rules is often a qualitative exercise. GloBE rules also include a number of rules regarding the allocation of covered taxes to various CEs. For example, taxes imposed by a parent company’s jurisdiction’s controlled foreign corporation (CFC) regime on the income of a subsidiary are allocated to the country of the subsidiary.

Under the GloBE rules, the GloBE income or loss and covered taxes for a jurisdiction are determined by combining the GloBE income or loss and covered taxes for each CE located in the jurisdiction. For example, if a U.S. parented company (USP) has two subsidiaries located in a country, Sub X-1 and Sub X-2 both based in Country X, then the GloBE income or loss and covered taxes of Sub X-1 and Sub X-2 are separately determined and then aggregated to determine the jurisdictional GloBE income or loss and covered taxes for Country X. If USP also had a branch in Country X (USP X-PE), the GloBE income or loss and covered taxes of USP X-PE would be independently calculated, and then combined with the results of Sub X-1 and Sub X-2 to arrive at the jurisdictional GloBE income or loss and covered taxes for Country X. In this situation, the results of USP X-PE would not be included in the calculations of USP’s jurisdictional GloBE income or loss and covered taxes for determining the U.S. GloBE ETR.

As noted above, the income or loss and covered taxes of a CE are generally attributed to that CE (including CEs that are PEs), and thereafter the results of the CEs located within a jurisdiction are aggregated to determine that jurisdiction’s GloBE ETR and any potential Top-Up Tax liability.

Special rules apply, however, to CEs that are flow-through entities. In general, these rules can result in the GloBE income or loss or covered taxes of a CE located in one jurisdiction being attributed or allocated to one or more CEs located in other jurisdictions.

Charging Provisions

As noted previously, where a jurisdiction does not reach the minimum 15% GloBE ETR, the GloBE rules impose a Top-Up Tax equal to the amount of tax necessary to bring that jurisdiction’s GloBE ETR up to 15%. The GloBE rules include a series of “charging provisions” that set forth the order in which a jurisdictional Top-Up Tax can be assessed by the various countries in which the MNE operates.

Under these rules, the general OECD guidance states:

• The jurisdiction that generated the Top-Up Tax is given priority to collect the Top-Up Tax via a Qualified Domestic Minimum Top-Up Tax (QDMTT).
• To the extent the jurisdictional Top-Up Tax is not collected by a QDMTT (because, for example, they have not enacted a QDMTT), the jurisdiction of the ultimate parent entity (UPE) or that of an intermediate parent entity (IPE) is permitted to collect the Top-Up Tax under an income inclusion rule (IIR). It is important to note that the IIR applies to those countries that have enacted an IIR in a top-down fashion, such that the UPE’s IIR applies first and then down the relevant chain of holding companies.
• Any amount of Top-Up Tax not otherwise collected by a QDMTT or IIR can be collected by other countries in which the MNE group has a presence and that have enacted an undertaxed profits rule (UTPR).

The QDMTT essentially operates as an alternative minimum tax applied by a jurisdiction on all the CEs of a MNE group located in that jurisdiction, and as such can be viewed as a jurisdiction preserving its own tax base. To those ends, QDMTTs have not met with much resistance, and the U.S. Treasury in 2024 indicated that QDMTTs would be treated as creditable taxes for U.S. foreign tax credit purposes.

IIRs, which were originally conceived as the backbone of Pillar 2 rules, are more complicated. First, unlike QDMTTs, multiple jurisdictions’ IIRs are potentially applicable in any situation. Second, once IIRs below the UPE jurisdiction come into play, both the corporate holding structure and the individual CEs that generated the jurisdictional Top-Up Tax are relevant to the analysis as different holding company jurisdictions may have rights to different portions of a single jurisdictional Top-Up Tax. Third, and perhaps most importantly, an IIR applies to a holding company jurisdiction that has enacted Pillar 2 legislation and applies those rules to income generated in another jurisdiction. Put simply, IIRs require a recalculation of another jurisdiction’s GloBE ETR for purposes of applying the IIR. This is one of the areas where a jurisdiction’s actual enacted legislation may deviate from the OECD’s guidance and can have particular significance.

Within this framework, UTPRs are the most contentious. UTPRs were conceived as a backstop to the IIR. In general, the UTPR accumulates all of the jurisdictional Top-Up Taxes not previously collected through QDMTTs or IIRs and allocates the right to collect that remaining overall Top-Up Tax liability among jurisdictions that have enacted a UTPR (UTPR jurisdictions). The UTPR is allocated by means of a formulary apportionment. Broadly speaking, the amount of a UTPR allocated to a UTPR jurisdiction for collection is the sum of 50% of the ratio of that jurisdiction’s relative payroll expense as compared to the aggregate payroll expense of all the UTPR jurisdictions and 50% of the ratio of that jurisdiction’s relative tangible asset base as compared to the aggregate tangible asset base of all the UTPR jurisdictions. A key element of this is that these fractions are based only on the metrics of the UTPR jurisdictions. This was done to ensure that if there is a remaining UTPR liability that it would be collected. In the broadest terms, what a UTPR represents is the low-taxed income of a jurisdiction being taxed by the UTPR jurisdiction without any connection to the income.

The means by which a jurisdiction may collect the UTPR illustrates the importance of checking with local foreign tax advisers to review the details of legislation adopted in a jurisdiction. In its guidance, the OECD outlined a process whereby a UTPR jurisdiction would collect the UTPR allocated to that jurisdiction by denying deductions to the MNE group’s CE(s) located in its jurisdiction up to the point where the UTPR jurisdiction would collect additional cash taxes equal to its allocated UTPR. In general, where a UTPR jurisdiction could not collect its allocated UTPR from one year through a denial of deductions, the UTPR jurisdiction would not be allocated a share of the MNE group’s subsequent year’s UTPR until it had collected its first allocation. While the OECD’s guidance outlined a denial of deduction mechanism, it left the door open for other approaches. Several countries have opted out of the denial of deduction approach and instead instituted a direct charge.

The UTPR is particularly contentious because its rule applies with equal force to a UPE jurisdiction. This means that unless the UPE jurisdiction has a QDMTT, it could find itself directly liable under the UTPR. This is in contrast to a subsidiary where the Top-Up Tax could be collected via either a local QDMTT or an IIR before a UTPR could apply. This extraterritoriality applied to UPE jurisdictions was a key driver for the introduction of the proposed Section 899, so if negotiations fail to exempt the United States from Pillar 2, it would not be a surprise to see it reappear in future legislation.

Conclusion

Pillar 2 is a significant departure from historical international taxing norms. Through its 750 million euros revenue threshold, Pillar 2 is geared to apply to larger MNEs that presumably have the sophistication and resources to address its requirements and complexities. MNEs that find themselves subject to Pillar 2 face a significant level of data collection, analysis, and monitoring. The relevance of Pillar 2 to U.S.-based MNEs may dramatically decrease if the United States’ tentative agreement with the G7 is enacted.

However, foreign-based multinational companies with U.S. subsidiaries still must contend with Pillar 2. Consider, for example, undertaking a U.S. R&D or energy tax credit study for a U.S. subsidiary of a foreign-based multinational that is subject to Pillar 2. If the U.S. ETR of the subsidiary group falls below a 15% ETR because of these credits, what may end up happening under Pillar 2 is that some or all of the benefits generated by the credits may be absorbed by one or more of the Pillar 2 Top-Up Tax countries in the group, resulting in just a shifting of the tax savings from the United States to an additional tax in another jurisdiction that has enacted a Top-Up Tax within the foreign MNE’s group. Therefore, U.S. tax advisers and tax professionals need to be familiar with Pillar 2 rules because they may apply to U.S. subsidiaries of foreign MNEs when engaging in any tax planning studies and strategies, not just credit-type engagements. This will require close communication and integration with foreign tax advisers of

U.S. tax planning strategies and engagements for U.S. subsidiaries of foreign-based multinationals to avoid situations where tax planning results in no, or limited, net positive tax results to the group as a whole. In other words, the U.S. MNE group should make every effort to avoid unpleasant surprises after the fact by ensuring that they are aware of how the Pillar 2 Model Rules in some cases essentially undo the effect of tax credits or other tax planning strategies when determining each jurisdiction’s GloBE ETR. 

Adam Packer, JD, LLM, is managing director with Andersen in Seattle where he is the head of quantitative modeling for international tax. He can be reached at adam.packer@andersen.com.

Mark Klitgaard, JD, LLM, is a director with Andersen in Silicon Valley, Calif., where he works with clients on international tax and transfer pricing matters. He can be reached at mark.klitgaard@andersen.com.