The OECD’s Pillar Two rules are crucial for ensuring corporations pay a fair share of tax revenue in jurisdictions where they operate. Global Insight reports on the implementation of the rules so far – and the challenges ahead.

In 2021, over 135 states joined a historic initiative to update the international financial system, which was considered inadequate for the digitalised global economy that has accelerated huge and growing inequality. The OECD’s Global Anti-Base Erosion Rules – agreed under its ‘Pillar Two’ framework – are a key part of this initiative and ensure multinationals with revenue over €750m pay a minimum 15 per cent tax on income from jurisdictions in which they operate.

Pillar Two forms the second plank of the OECD’s overarching Inclusive Framework on Base Erosion and Profit Shifting and was first put forward in 2020. Its aim is to limit tax competition in a globalised economy and to prevent major multinationals shifting profits from high- to low-tax jurisdictions. Over the course of the next few years, after the rules were agreed, numerous jurisdictions began the process of implementation. The Council of the EU, for example, adopted the core Pillar Two directive in late 2022, while the UK enacted legislation to this effect in 2023.

In January 2025, US President Donald Trump took office for the second time. Unlike his predecessor, Joe Biden, President Trump opposed the Pillar Two framework, claiming the rules allowed ‘extraterritorial jurisdiction over American income’ and limited his country’s ability to enact tax policies that served the interests of US businesses and workers. By executive order, the US withdrew from the Pillar Two agreement.

Under the Pillar Two rules, in jurisdictions where the tax rate is lower than 15 per cent the parent entity must pay a ‘top-up’ in order to reach the minimum threshold. Countries can employ a mechanism to ensure these top-ups are retained rather than sent home by the parent company. This drew the ire of the Trump administration, which threatened to impose retaliatory measures if top-ups were applied.

The withdrawal of the US – home to the headquarters of many international companies – as well as the Trump administration’s threats of retaliation led to fears for the survival of the Pillar Two agreement. ‘The success and future of Pillar Two rests on collective effort and cooperation between countries,’ wrote Charlotte Sallabank, a partner at law firm Katten, in February 2025.

Moving forward, side by side

Eighteen months after President Trump began his second term, however, the Pillar Two framework has not met the demise some may have expected. President Trump has dropped his threat to impose retaliatory measures, while numerous other countries have moved forward with implementing the Pillar Two rules. ‘We’re seeing jurisdictions across different regions and at different levels of economic development taking steps to introduce the rules,’ says Manal Corwin, Director of the OECD Centre for Tax Policy and Administration. ‘We are also seeing countries reconsider their domestic tax incentives in the context of the new international minimum tax environment.’

Crucially, the OECD reached agreement with the US and other countries on a ‘side-by-side’ package, which was adopted in January. This retains the minimum tax architecture but introduces a number of changes to the framework, including measures that ‘will reduce compliance burdens for multinational enterprises […] and tax authorities in calculating and reporting under the global minimum tax rules,’ the OECD explains. The side-by-side agreement also seeks to address some of the other criticisms levelled at the Pillar Two framework, such as concerns about the implications for developing countries.

‘This agreement by the Inclusive Framework including 147 countries and jurisdictions is a landmark decision in international tax co-operation,’ said the OECD’s Secretary-General, Mathias Cormann, in January. ‘The Members of the Inclusive Framework are to be commended for their work in finalising this package, which enhances tax certainty, reduces complexity, and protects tax bases.’

The side-by-side agreement creates a new ‘safe harbour’ that exempts US-headquartered multinationals from a pair of ‘backstop’ taxes under Pillar Two – the Income Inclusion Rule and the Undertaxed Profits Rule – that apply when other jurisdictions don’t levy a minimum tax on activity within their borders. Domestic minimum taxes implemented under Pillar Two are unaffected, however.

Amelia O’Beirne, a partner at Irish firm A&L Goodbody, says the side-by-side agreement has cleared the way for the minimum tax regime to progress even without the US on board. The agreement ‘recognises that the US tax system is robust so there’s less risk of companies being subject to tax at a rate below 15 per cent,’ she says. ‘It recognises that the US tax system is not a low-tax system and has existing features similar to the global minimum tax.’ The two systems, then, ‘can sit side by side’.

‘Part of it is about the administrative burden for taxpayers of […] fully complying with the US tax system and Pillar Two at the same time,’ says O’Beirne. ‘The idea is that if the risk of tax mitigation or paying less than 15 per cent is low then the administrative burden of having to comply with both systems outweighs the benefit.’ She describes the side-by-side agreement as a ‘huge administrative relief’ for US-headquartered multinationals.

Others have been more critical of the side-by-side package, while acknowledging its role in preserving the Pillar Two rules overall. In a briefing note published in January, the Financial Accountability and Corporate Transparency (FACT) Coalition says that the side-by-side package ‘simultaneously waters down and preserves the global minimum tax’. The authors of the briefing note – the Coalition’s Co-Director, Zorka Milin, and its Policy Officer, Thomas Georges – write that the package is ‘nonetheless preferable to either the complete abandonment of the global minimum tax or to the punitive tax and trade actions threatened by members of Congress and the Trump administration in response to the prospective application of the minimum tax to US companies.’

The Coalition suggests, however, that a better approach would be for Congress to reform the tax code’s treatment of the foreign profits of US companies, ‘such that it meets the minimum standard established at the OECD’. A reform of this kind, the Coalition argues, would ‘take into account the needs of American workers, level the playing field for smaller domestic businesses, and raise much-needed new revenues to pay for domestic priorities’.

The side-by-side package has strengthened the system by giving certainty as to the application of the minimum tax rate around the world, says Corwin, and by simplifying to reduce compliance burdens. ‘The system still leaves in place strong incentives for jurisdictions to strengthen their domestic tax base,’ she says.

The watchful and the disengaged

In Australia, Canada, the UK and the majority of the EU’s Member States, Pillar Two has already been incorporated into domestic law. Multinational companies with operations in those jurisdictions are now ensuring they’re complying with the legislation, which can have its challenges. O’Beirne says, for example, that ‘there are data points that multinationals may not have been gathering that are required for Pillar Two’.

In some countries, concerns about complexity have led to delays in the implementation of the Pillar Two framework. Charanya Lakshmikumaran, Newsletter Editor of the IBA Taxes Committee, says India, for example, has ‘never been a very active voice on Pillar Two’ because the country already has ‘high tax rates’. It doesn’t see an incentive to ‘write more complexity into domestic tax laws,’ she says.

‘India wasn’t looking at Pillar Two as a way of increasing revenues because it’s not really a jurisdiction that’s attractive for its tax rates,’ says Lakshmikumaran, a partner at Lakshmikumaran & Sridharan in New Delhi. ‘India has been a little watchful when it comes to Pillar Two. We need to put the regulations in place but we’ve not done anything about that.’

Daniela Rey, Membership Officer - South America of the IBA Taxes Committee, highlights that Latin American countries such as Brazil and Uruguay have implemented Pillar Two and taken advantage of the qualified domestic minimum top-up tax mechanism. This ensures that the money generated by top-ups remains in the subsidiary’s jurisdiction rather than being sent to that of the parent company. However, Rey, a partner at Bruchou & Funes de Rioja who’s based in Buenos Aires, says Argentina hasn’t engaged with Pillar Two, in part because it isn’t home to many qualifying companies or their subsidiaries, and because it already has a relatively high tax rate of 35 per cent.

Developing and developed

Since its introduction, a criticism of Pillar Two has been that it pits the developed world against the developing one. Lakshmikumaran says there’s a concern that, while Pillar Two was intended to prevent large multinationals moving profits to lower-tax jurisdictions, some businesses are now apportioning this income in ways that favour operations in low-tax, research-led countries over high-tax, manufacturing-heavy ones. This, Lakshmikumaran says, can lead to developing countries missing out on much-needed tax revenue.

‘Developing countries already have high tax rates – places like Brazil, India and the Southeast Asian countries are not known for having low tax rates,’ she says. ‘They are high consumer markets, with large populations, big spending capacity and a big middle class. There’s a lot of money flowing in those countries right now, but some of the biggest profit earners in India, for example, might not be Indian companies.’

Lakshmikumaran explains that India, a key manufacturing hub for global products, has traditionally taxed foreign companies coming in – be they American, German or Swiss, for example – at a high level. ‘So it’s in the interests of countries like Switzerland, where the R&D is done, to implement Pillar Two,’ she says. ‘Each country will want to try to keep the taxes generated there to itself so the justification that the developed countries try to make is that the tech, know-how and R&D is theirs – they’re the brains behind it so they should be attributed a higher amount of profits.’

The side-by-side package is designed to address this. Billed by the OECD as ‘setting the foundation for stability and certainty in the international tax system,’ the agreement will, the organisation says, make the ‘Inclusive Framework’ truly inclusive. It aims to reinforce the notion that top-up taxes remain in the country where profits were generated, rather than being paid in the parent company’s home jurisdiction. The side-by-side package will ‘preserve the gains achieved so far in the global minimum tax framework and protect the ability for all jurisdictions, particularly developing countries, to have first-taxing rights over income generated in their jurisdictions,’ says the OECD. Preliminary analysis from the OECD has also shown ‘an overall increase in the effective tax rates of large multinational businesses in scope of the global minimum tax, with a greater impact on multinational enterprises more likely to be engaged in profit shifting,’ says Corwin.

The disrupted trajectory

‘In the lead up to the side-by-side guidance being issued there was a question about whether the Pillar Two project would survive’ if the US was no longer part of it, says O’Beirne. ‘There was a sense that it’s very complicated and that the amount of tax being collected wasn’t worth the complexity. Other jurisdictions were questioning how worthwhile it was when they already have robust tax regimes.’

The side-by-side package ‘also allows countries more flexibility to have tax incentives that are still recognised within the Pillar Two model, which is important to maintaining competitiveness,’ she says. Overall, O’Beirne believes that ‘the side-by-side package has brought welcome stability, but it is key that the focus now moves to simplification of the Pillar Two rules with a view to alleviating some of the administrative burden placed on taxpayers’.

Aruna Kalyanam is EY’s Global and Americas Tax Policy Leader, based in Washington, DC. She says that incorporating America’s side-by-side approach into the wider Pillar Two framework represents a ‘major breakthrough’ that’ll bring much-needed stability to the international tax system while also simplifying reporting requirements and reducing the threat of retaliatory tax measures.

However, she says that one of the main planks of the Pillar Two regime – the attempt to bring a degree of commonality to global systems – has been eroded. ‘Multinational tax policy has largely become a story of convergence since the OECD’s Base Erosion and Profit Shifting project began just over a decade ago,’ Kalyanam says. ‘Governments have moved, however unevenly, toward common standards of transparency, substance and minimum effective taxation. The new arrangement disrupts that trajectory.’

She explains that when the US Congress enacted the One Big Beautiful Bill Act in summer 2025, it reinforced the focus of President Trump’s reforms from 2017, which centred on tax policies intended to attract investment and drive America’s economic growth. ‘The law’s provisions, from renewal of bonus depreciation and full expensing of R&D to retention of the corporate tax rate of 21 per cent, are designed to make the US one of the most attractive locations in the world for capital and intellectual property,’ she says. ‘Yet the global implications go beyond the statutory changes. It recalibrates how the US interacts with international tax standards, and how it intends to coexist with the Pillar Two global minimum tax.’

Both the US system and Pillar Two aim to curb profit shifting and ensure a minimum level of taxation on cross-border income, says Kalyanam. ‘Yet a difference in approach lies beneath that shared ambition,’ she says. ‘Pillar Two represents an attempt at a multilateral consensus. It’s an endeavour to create a common standard applied consistently across all adopting jurisdictions.’ The side-by-side approach, by contrast, reflects a return to sovereignty and the belief that the US already has a sufficiently robust international tax system that should be respected, she says.

Margaret Taylor is a freelance journalist and can be contacted at magsntaylor@gmail.com