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
- While details and timeline for the framework with the G-7 have yet to be released, the UTPR safe harbor is still set to expire at the end of 2025. It is unclear how Pillar Two will be implemented after the framework unfolds.