Understanding the OECD Pillar Two Framework: The Global Minimum Tax

On By Maria Paula

 

The OECD’s Pillar Two framework is a landmark in international taxation. By setting a floor for corporate taxation worldwide, it seeks to balance fairness, efficiency, and competitiveness in the global economy. For businesses, the message is clear: the era of aggressive profit shifting is ending, and proactive compliance will be essential.

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The Core of Pillar Two

At its heart, Pillar Two establishes a minimum effective corporate tax rate of 15% on the profits of large multinational groups. It applies to groups with consolidated revenues above €750 million, aligning with the Country-by-Country Reporting threshold.

The framework is implemented through a set of model rules, often referred to as the Global Anti-Base Erosion (GloBE) Rules. These rules include:

  • Income Inclusion Rule (IIR): Requires a parent entity to pay top-up tax on low-taxed income of subsidiaries.

  • Undertaxed Payments Rule (UTPR): Acts as a backstop, allowing jurisdictions to deny deductions or impose top-up tax where income is undertaxed and not captured by the IIR.

  • Subject to Tax Rule (STTR): A treaty-based rule allowing source jurisdictions to impose withholding tax on certain related-party payments taxed below 9%.

Objectives and Rationale

Pillar Two seeks to:

  • Limit profit shifting by removing the incentive to shift income to low-tax jurisdictions.

  • Level the playing field by reducing harmful tax competition between countries.

  • Protect tax bases of both developed and developing economies.

  • Promote fairness by ensuring large multinationals contribute a minimum share of tax regardless of where they operate.

Global Implementation

Since its adoption in October 2021, progress has been uneven but significant:

  • European Union: Member States agreed to implement Pillar Two starting 1 January 2024.

  • UK, Canada, Japan, South Korea, and others have introduced legislation aligned with the OECD rules.

  • United States: Although supportive at the OECD level, U.S. implementation remains uncertain due to political divisions, with debate focusing on interactions with existing rules like GILTI (Global Intangible Low-Taxed Income).

As of 2025, more than 50 jurisdictions have introduced or proposed Pillar Two legislation, signaling a broad international shift.

Challenges and Criticisms

Despite broad consensus, Pillar Two faces several hurdles:

  • Complexity: The GloBE rules are intricate, requiring detailed financial and tax data across jurisdictions.

  • Compliance Burden: Multinationals must overhaul reporting systems and processes to calculate effective tax rates accurately.

  • Sovereignty Concerns: Some countries view the rules as limiting their ability to set competitive tax policies.

  • Political Uncertainty: In particular, the U.S. stance on the UTPR and global coordination remains a key risk.

Looking Ahead

Pillar Two represents the most significant change to the international tax framework in decades. While implementation challenges remain, the shift toward a global minimum tax signals a new era of cooperation and standard-setting in taxation. For multinational enterprises, the focus must be on readiness: adapting systems, enhancing transparency, and engaging with evolving guidance to ensure compliance.