Explaining UTPR and the Pillar Two Framework

Pillar Two is a global initiative developed by the Organisation for Economic Co-operation and Development (OECD) to address profit shifting and base erosion by large multinational enterprises. It establishes a global minimum tax of 15 percent on corporate profits, regardless of where those profits are booked. The goal is to ensure that multinational companies pay a minimum level of tax in each jurisdiction where they operate, thereby limiting the incentive to shift profits to low-tax countries. Pillar Two is intended to operate through a series of coordinated rules that allocate taxing rights among countries when income is taxed below the minimum rate.

Elements of Pillar Two

Three critical components of Pillar Two are the Qualified Domestic Minimum Top-Up Tax (QDMTT), the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR):

A QDMTT is a minimum tax imposed by a country in accordance with the Pillar Two rules. If the Effective Tax Rate (ETR) of a company subject to Pillar Two falls below the 15 percent global minimum rate, the QDMTT would kick in to tax the shortfall under 15 percent (the “top-up tax”) in such country.
The secondary rule is the IIR. If the collective income of a company’s subsidiaries in another country is not taxed at least 15 percent, the ultimate parent’s country would collect the difference.
The UTPR is intended to serve as a backstop to ensure the top-up tax is paid where a company’s tax below the 15 percent ETR is not collected under an IIR. Generally, this rule works by allocating the top-up tax to subsidiaries in different countries by requiring an adjustment (such as a denial of a deduction) that increases the tax liability for such subsidiaries.

Presently, U.S. companies enjoy a Pillar Two safe harbor, shielding them from the UTPR through December 31, 2025. It is unclear, following commitments from the G-7 to exempt U.S. companies from the UTPR and IIR, how Pillar Two will impact the U.S. in 2026 and beyond.

A Timeline of Pillar Two Implementation

Pillar Two and TCJA

The Tax Cuts and Jobs Act (TCJA), enacted by the United States in December 2017, made several significant changes to the U.S. international tax system that interact with the principles underlying the OECD’s Pillar Two proposal.

One of the most notable provisions of the TCJA is the introduction of a Global Intangible Low-Taxed Income (GILTI) regime. GILTI has subsequently been modified and renamed to Net CFC-Tested Income (NCTI), but the general purpose of the provision remains the same. This effectively imposes a minimum tax on the income of foreign subsidiaries of U.S. companies, which mirrors the principle of a global minimum tax proposed in Pillar Two. The NCTI regime is designed to reduce the incentive for U.S. companies to shift their profits to low-tax jurisdictions.

Because there are differences in the design and operation of NCTI and the IIR rules under Pillar Two, NCTI is not currently considered a qualified IIR for Pillar Two purposes. For instance, NCTI is calculated on a global basis, taking into account the income of all foreign subsidiaries, while the IIR is proposed to apply on a country-by-country basis.

Section 899 and the OBBBA

In July of 2025, House Republicans introduced, and Congress subsequently passed the One Big, Beautiful Bill Act (H.R. 1). The bill, which has been signed into law, implements many of the Trump administration’s priorities, including permanent extension of several business provisions like bonus depreciation, immediate expensing for domestic R&E, and restoring the EBITDA standard under Section 163j.

As part of this exercise, Congressional Republicans proposed but ultimately withdrew a new Section 899—a provision that would have implemented retaliatory measures in response to unfair and discriminatory taxes, including the UTPR under Pillar Two and digital services taxes.

Sec. 899 would have increased withholding rates for foreign-parented companies and would have imposed upon them a super BEAT. This effort, if included in the final bill, would have exponentially increased tax rates for U.S. subsidiaries of foreign-parented companies and would have resulted in a loss of American jobs, economic growth, and investment in the U.S.

Congressional Republicans ultimately removed Sec. 899 from the OBBBA after negotiations resulted in a commitment from G-7 countries to permit a side-by-side system that exempts U.S.-parented companies from the IIR and UTPR, and works toward a solution regarding Pillar Two treatment of non-refundable tax credits.

Pillar Two Post-OBBBA

This January, the OECD released an agreement on the long-awaited “side-by-side package” with respect to exempting U.S. companies from aspects of Pillar Two, following the objectives set forth under the framework agreed to by the G7 in June of 2025.

The agreement effectively lays out four key elements:

A side-by-side system carving U.S. MNEs out of Pillar Two through the use of two new safe harbors
A permanent Simplified Effective Tax Rate (ETR) Safe Harbor
A new Substance-Based Tax Incentive (SBTI) Safe Harbor
Extension of the transitional Country-by-Country Reporting (CbCR) Safe Harbor

The side-by-side system would effectively carve U.S. multinational companies out from the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) through a side-by-side system with two safe harbors—the Side-by-Side Safe Harbor and the Ultimate Parent Entity (UPE) Safe Harbor. The former is available to MNE groups with a UPE in a jurisdiction with both an eligible domestic tax regime and an eligible worldwide tax regime. These regimes must effectively meet a minimum level of taxation on the group’s domestic and foreign operations. The latter is for jurisdictions that only have an eligible domestic regime and provides for a safe harbor with respect to the UTPR for profits in the UPE jurisdiction.

All MNE groups, including U.S. HQ groups, are subject to QDMTTs in jurisdictions where they exist and in which the MNE operates, calculated without pushdown of taxes on CFCs or foreign branches.

The permanent Simplified ETR Safe Harbor is designed to reduce compliance burdens for multinational enterprises (MNEs) across the globe with respect to Pillar Two’s global minimum tax. An MNE group’s ETR will be calculated based on data from the MNE group’s “existing accounting systems” with small adjustments. It will be live for all MNE groups in 2027 (or beginning of 2026 in certain cases).

The Substance-based Tax Incentive (SBTI) Safe Harbor will permit the treatment of certain Qualified Tax Incentives (QTI) as Covered Taxes of the Constituent Entities. A QTI should be generally available to taxpayers and calculated either as an expenditure-based incentive or a production-based incentive. The Safe Harbor has a substance cap “equal to the greater of 5.5% of payroll costs or depreciation of tangible assets in the jurisdiction.” MNEs can elect to use an alternative cap “equal to 1% of the carrying value of tangible assets in the jurisdiction.”

Finally, the CbCR Safe Harbor is extended by one year to ensure the success of the implementation of the Simplified ETR Safe Harbor. Taxpayers can opt for either the Simplified ETR Safe Harbor or the CbCR Safe Harbor during the one-year transition period.

The OECD will undertake a stocktake measure regarding the implementation of the side-by-side package, concluding by 2029.