Pillar Two: Are we on the cusp of a global minimum tax?

4 May 2022
The term “Pillar Two” may cause confusion in some corporate boardrooms, but those same board members all know about the push for a global minimum corporate tax rate of 15 percent.

The effort is part of the OECD, G7 and G20’s two-pillar solution to address the tax challenges of our digitalised economy.

Indeed, for more than a decade, treasuries, tax authorities and governments around the world have been struggling to reduce the perceptions of tax avoidance by “jurisdiction shopping” and end the so called race to the bottom on corporate tax rates. The OECD’s effort to address the situation took a major step forward in 2015, with its Base Erosion and Profit Shifting (BEPS) measures, which continue to affect the global tax landscape. The most notable recent step was the December 2021 OECD release of the Pillar Two model rules for domestic implementation of a 15 percent global minimum tax, which has a proposed implementation date of 2023.

These rules have caused a stir far beyond international tax circles, with the popular press repeating a mantra that the world will soon be adopting a 15 percent corporate tax floor.

We’re now in the phase of unilateral country-specific consultation, legislative drafting, review and implementation. Given the many elements of this process, and the 141 countries now in the OECD’s Inclusive Framework, the 1 January 2023 early adoption proposal for elements of Pillar Two looks ambitious to say the least.  It may be that some countries only partially adopt Pillar Two rules, while others delay implementation — all of which could hamper consensus or result in an agreement for a later adoption date. And the proposals themselves are complex, with the unilateral implementation by countries adding further difficulties.

Even with these uncertainties and complexities, multinational enterprises (MNEs) should understand the basics of the OECD pillars, and what and when certain elements may be adopted. This will provide you with the best chance to determine how the new rules may affect your organisation’s cash-tax outlay and enable you to make tax-informed decisions.

Pillar One: Brief recap

The OECD’s Pillar One aims to allocate certain taxing rights to end-market jurisdictions where goods or services are used or consumed, regardless of whether there is a physical presence in those jurisdictions. Essentially, Pillar One addresses where tax will be paid by a multinational enterprise and what portion of the MNE’s profits will be taxable.

It’s important to note that Pillar One applies to MNEs with a global consolidated revenue of more than €20 billion and profitability above 10 percent. The relevant allocation of taxing rights is still being finalised; we do know, however, that the allocation will be a formulaic calculation, rather than one based on the arm’s length principle.

Given the high revenue threshold, Pillar One should only apply to around the world’s top 100 organisations, at least initially. MNEs should also note that when Pillar One is implemented, many countries will repeal their own digital services taxes. For example, the UK government indicated that it is “committed to dis-applying the [UK’s] Digital Services Tax once an appropriate international solution is in place.”

Pillar Two: Summary and implementation considerations


In December 2021, the OECD published its Global Anti-Base Erosion, or GloBE, model rules, or Pillar Two. In March 2022, the OECD published commentary and examples “to promote a consistent and common interpretation of the GloBE Rules that will facilitate co-ordinated outcomes for both tax administrations and MNE groups.” Consultation on the details of the implementation is now starting globally.

In principle, Pillar Two compares country-specific tax rates to a global minimum effective tax rate of 15 percent, though the framework is detailed and complex. In short, even with the March 2022 commentary, implementing Pillar Two on a global scale (though on a country-by-country basis) may have significant unintended outcomes. For now, however, we’ll concentrate on Pillar Two’s scope and planned implementation.

Pillar Two applies to MNE groups with global consolidated revenue above €750 million in two or more of the preceding four years. 
There are limited exclusions for various sectors and organisations, including those MNEs involved in pensions, investment funds and real-estate.


The OECD framework provides for a phased implementation of: the Income Inclusion Rule (IIR), starting in 2023; the Undertaxed Payments Rule (UTPR), starting in 2024; and, finally, the Subject to Tax Rule (STTR). The detailed rules around the implementation and calculations of the IIR, UTPR and STTR are complex, including incorporating adjustments, elections and exclusions. Below are high-level summaries of each rule.

Income Inclusion Rule

The IIR is similar to current controlled foreign company (CFC) rules. It applies and is collected at the head-office jurisdiction, with application to group subsidiaries and branches.

Under the IIR, the effective tax rate of all entities within a country will be calculated on the basis of global minimum tax rules. The head office will then be liable to a top-up tax in any countries with a tax rate below the 15 percent minimum effective tax rate.

If the country where the head office is located has not implemented the IIR, then an intermediate parent country may apply the IIR.
It’s worth emphasising that this is a very short summary of the IIR. The rule’s potential technical and application difficulties become apparent almost immediately on moving beyond first-level principles.

Undertaxed Payments Rule

Operating as a backstop to the IIR, the UTPR applies when a country’s effective tax rate is below 15 percent, but the IIR has not been applied.

Under the UTPR, taxes are adjusted (for example, by denying deductions) so as to increase tax at the subsidiary level. The adjustment will be “an amount sufficient to result in the group entities paying their share of the top-up tax remaining after the IIR.” The top-up tax amount is based on a formula that includes the share of total employees and tangible assets.

Subject to Tax Rule

The STTR is a treaty-based rule that allows developing countries to override existing treaty benefits in connection to certain related-party payments when those payments won’t be subject to a nominal tax rate of at least 9 percent in the recipient country.

The OECD is still finalising details of the proposed STTR. Under the current proposal, the rule would apply on a payment-by-payment basis, and relevant payments are expected to include interest and royalties.

Global implementation

As of 2021, the 141 Inclusive Framework countries have agreed in principle on Pillars One and Two. But agreeing to a tax framework in principle is very different from implementing tax laws on a country level; and the reality of how those implementations unfold remains to be seen. Here are a few country-specific examples of Pillar Two implementation considerations.

  • The US has an existing minimum tax regime — global intangible low-taxed income, or GILTI — but it’s not aligned with Pillar Two. In the US, Pillar Two implementation is subject to the enactment of President Biden’s Build Back Better bill. It’s proposed that the bill would align the GILTI regime with Pillar Two.
  • Poland has objected to a proposed EU-wide implementation of Pillar Two. Sweden, Estonia and Malta also initially opposed Pillar Two, though they have dropped their objections following amendments to the EU proposals. Poland may yet drop its opposition, but this example does illustrate the difficulty of obtaining widespread agreement on the actual implementation of the proposed provisions.
  • Other countries are considering implementing only the STTR and adopting a “wait and see” approach to the IIR and the UTPR.
Compliance and administration

Country-specific implementation of Pillar Two will give rise to significant tax compliance burdens for MNE groups. Tax authorities will also face burdens, including determining how to facilitate and ensure compliance. Multinationals and tax authorities faced similar challenges during the implementation of the OECD’s country-by-country reporting (CbCR) rules, though these requirements were perhaps not as technically opaque.

For its part, the OECD continues to develop a GloBE Implementation Framework that includes administrative rules, guidance and procedures. They’ve proposed that in-scope MNEs prepare a GloBE Information Return that sets out:

  • Group member and tax identification details
  • Corporate structure
  • Relevant details of entities, country-specific effective tax rate and any top-up tax

The OECD also proposes that the ultimate parent entity files a standard template return, for potential exchange with other tax authorities. Again, these proposals are similar to existing CbCR filing and lodgement requirements.

Next steps

Given the proposed Pillar Two implementation date of 1 January 2023, multinational enterprises are increasingly, and rightly, concerned. Most pressingly, they must understand the potential implications of Pillar Two on their cash-tax and business operations. They must also undertake impact assessments and consider future compliance resourcing, along with taking other steps.

These other steps could be significant. They could include mapping each material third party and intra-group income stream, along with monitoring the potential country- and treaty-specific implications of Pillar Two as laws are passed and implemented on a unilateral basis. Other steps could include understanding the effects of Pillar Two on existing tax treaties and on a group’s tax positions.

In the immediate term, even in the absence of any Pillar Two considerations, we recommend taking the following steps, which can help protect your organisation:

  • Consider opportunities to streamline your global corporate group structure. (Of course, streamlining must be understood within the context of operational and fiscal-efficiencies.) 
  • Map your material third-party income streams and your intra-group transactions and financing across each entity globally. Mapping will be a necessary step to ensuring potential compliance with Pillar Two. Fortunately, mapping is a worthwhile exercise in virtually any situation, as it enables MNEs to make better, tax -informed decisions.

Depending on whether your organisation meets the pillars’ thresholds, the anticipated speed of country-by-country implementation and other factors, you may be tempted to take significant early steps to ensure compliance. It is indeed critical to prepare, and we’ve of course mentioned some of the steps you’ll want to consider. Given the resources involved in some of these steps, however, it’s equally critical not to overreact and make unnecessary organisational changes. Proper due diligence will include keeping abreast of OECD developments and country-specific implementations, while remaining nimble to meet changing tax regulatory demands.