Pillar Two and global uncertainty

International tax rules are changing rapidly and the Organisation for Economic Co-operation and Development (OECD)’s Pillar Two global minimum tax rules have created new challenges, especially for companies in the US.

What are the Pillar Two rules and why do they matter?

Pillar Two is part of the OECDs Base Erosion and Profit Shifting (BEPS) project. It aims to make sure large multinational businesses pay a minimum level of tax no matter where they operate. Many OECD members, including the UK, have made significant progress in implementing a 15% top-up tax. However, the US has taken a different route, causing a lot of uncertainty for US headed businesses. A recent agreement with G7 nations introduces a new side-by-side approach. It aims to help the Pillar Two system and the US’s domestic tax rules work together.

Latest update on Pillar Two tax rules

The OECD has shared more details on the side-by-side package and other steps to simplify Pillar Two rules. This update gives businesses much needed clarity on how the rules will work in practice. While this package does not answer every question, it represents a significant step forward. It will help businesses prepare for compliance with Pillar Two rules and will exclude many groups from being charged under the regime.

Below, we summarise the key elements of the announcement and what they mean for multinational groups.

A side-by-side safe (SbS) harbour has been introduced to minimise compliance and administration requirements. It applies when a group is headquartered in a jurisdiction with a tax system that incorporates minimum taxation requirements on domestic and foreign income. For periods beginning on or after 1 January 2026, groups may elect to use the safe harbour where the ultimate parent is resident in a jurisdiction with a qualified SbS regime.
At present, the only country with a qualified SbS regime is the US. However, this is likely to grow in the coming years. The safe harbour exempts the parent and its subsidiaries from operating Pillar Two in its jurisdiction, including the top-up tax and the under-taxed profit regime (UTPR). This means US-headed groups are carved out of Pillar Two.
The announcement gives US businesses more certainty, but the safe harbour only applies from 2026. This leaves questions about how to apply Pillar Two in 2024 and 2025
A permanent simplified effective tax rate (ETR) safe harbour has been introduced to replace the transitional simplified ETR safe harbour. Under this rule, the top-up tax is treated as zero if the filing entity chooses the safe harbour and the simplified ETR is above the minimum rate or if a loss occurs. The new safe harbour no longer relies on country-by-country reporting (CbCR) data. Instead, calculations use the same data that prepares the group’s consolidated financial statements
A qualifying incentive safe harbour has been introduced so that qualifying substance-based tax incentives are added to covered taxes in the effective tax rate calculation. This reduces the top-up tax from tax incentives that require activities in a jurisdiction. These incentives are less likely to result in tax base erosion or profit shifting
The transitional CbCR safe harbours have been extended for one year to include fiscal years that begin on or before 31 December 2027. Transitional safe harbours allow groups to elect to use their country-by-country report data to show that a jurisdiction meets the simplified ETR test, the routine profits test or the de minimis test. If a jurisdiction passes, its top up tax is zero. These rules are not new, but before this change, they only applied to fiscal years beginning before 31 December 2026.

The extension gives the OECD more time to agree on permanent safe harbours for the de minimis and routine profits tests, similar to what has now been done for the simplified ETR test.

How Pillar Two rules impact multinational businesses

Groups with ultimate parent entities in the US will be carved out of the Pillar Two regime from 1 January 2026
Compliance planning can now proceed with greater confidence, especially for US headed businesses
Groups with large R&D tax credits will have a more uniform approach to substance-based tax incentives
Groups with high effective tax rates have more certainty over the future of their Pillar Two compliance obligations and the ability to rely on simplified effective tax rate safe harbour.

The announcement does not eliminate the complexity of Pillar Two and we expect further details on the above announcements over the coming weeks. However it does provide a significant change to the implementation of Pillar Two regime for US headed groups and a much clearer path forward for many other groups.

Where does the US stand on Pillar Two?

The US has raised concerns about how Pillar Two fits with its current tax system, especially the Global Intangible Low-Taxed Income (GILTI) rules. Last month, the US Treasury proposed a side-by-side system. This would allow US headed groups to be exempt from Pillar Two rules in other countries by recognising the US’s own minimum tax mechanism as the OECDs mechanism. The G7 nations recently reached an initial agreement to support this approach. In exchange, the US agreed to remove a controversial provision—Section 899—from its proposed tax legislation. This would have imposed retaliatory taxes on foreign entities applying the rules to US companies.

What is the Pillar Two side-by-side approach?

The side-by side system that is being proposed is based on the following key principles:

US headed groups would be excluded from Pillar Two rules, including the minimum top-up tax
The US would maintain its own minimum tax rules (e.g. GILTI and the qualified domestic minimum top-up tax (QDMTT)).
A commitment to monitor and address any risks to the level playing field or base erosion
Consideration of simplifications to Pillar Two compliance and alignment on the treatment of tax credits are also being considered.

What this means for businesses

While the agreement signals progress, uncertainty remains. The side-by-side system has only been provisionally agreed and is not yet fully implemented or universally accepted within the OECD. It has only been agreed by the G7 nations. It’s unclear how other countries will respond especially those already enforcing the rules. US companies operating abroad may still face compliance challenges in places that do not sign up to the side-by-side approach.

There is also a commitment to consider simplification of Pillar Two compliance. This could affect all businesses subject to the Pillar Two rules. Whilst simplification is always welcome, it could create further confusion. The system is still new and yet to be embedded and understood by tax professionals and global companies.

Our advice for US headquartered groups

For US headed groups and groups with US operations, it is essential to:

Monitor legislative developments in both the US and other countries
Assess exposure to Pillar Two rules, especially in countries that may not adopt the side-by-side approach
Review internal tax structures and consider the implications of potential double taxation or compliance burdens
Engage with advisors to model different scenarios and prepare for a range of outcomes

We are closely tracking these developments and are ready to help you navigate this evolving landscape. You can find out more about Pillar Two and common FAQs in our blog.