Pillar two and uncertainty in the US

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.

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.

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:

1. Monitor legislative developments in both the US and other countries
2. Assess exposure to Pillar Two rules, especially in countries that may not adopt the side-by-side approach
3. Review internal tax structures and consider the implications of potential double taxation or compliance burdens
4. 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.