Navigating OECD Pillar 2: Implications for U.S. Multinational Corporations

Understanding OECD Pillar 2

Pillar 2 establishes a global minimum tax of 15%, ensuring that multinational enterprises (“MNEs”) meeting specific thresholds pay at least this rate across all jurisdictions in which they operate. Unlike NCTI, which is a U.S.-specific regime, Pillar 2 is an OECD initiative adopted by many jurisdictions, including the EU and the UK, but not yet by the United States, China or India.

Companies that meet the following criteria fall within the scope of Pillar 2:

• Multinational operations, including foreign subsidiaries or branches;
• Annual consolidated gross revenue of at least 750 million euros (equal to approximately $800 million USD), based on financial reporting standards rather than tax filings, in at least two of the four fiscal years preceding the relevant fiscal year.

Determining whether a company meets these thresholds involves analyzing group structure and identifying the ultimate parent entity. For example, a private equity-owned U.S. investment partnership with multiple portfolio companies—some filing separate consolidated returns, some with controlled foreign corporations (“CFCs”), and others with only domestic activity—may still be considered the ultimate parent entity. In this case, all portfolio companies’ gross revenues count toward the revenue threshold, and CFC ownership could trigger foreign presence.

“Multinational operations” can be triggered by even a very inconsequential presence in a foreign jurisdiction. For example, a company with a small permanent establishment due to one or two people in a jurisdiction that would require a branch filing would constitute multinational operations even though no legal entity exists in that jurisdiction. The compliance costs would skyrocket if Pillar 2 applies, so the company may decide to discontinue the permanent establishment as not worth the additional costs.  Such tax-driven decisions that aim to avoid Pillar 2 are in contravention of ordinary business care and prudence, and global expansion. U.S. multinationals may thus face challenges aligning their tax and business strategies with Pillar 2 requirements.

Theoretically, fewer than expected U.S. multinational companies should be subject to the Pillar 2 minimum tax since the US enacted the CAMT in 2022, which imposes a 15 percent minimum tax rate on the book income of U.S. multinationals on a global basis. However, the Pillar 2 operating rules function differently from the CAMT rules and therefore, at least, impose complex additional calculations and compliance burdens on large multinationals.

U.S. Response and Legislative Uncertainty

Unlike many OECD members, the U.S. has not adopted Pillar 2. Instead, it continues to rely on the NCTI regime, which calculates tax liability differently from the GloBE rules. The current administration has made its opposition to Pillar 2 clear, declaring that the global minimum tax has “no force or effect” in the U.S. and directing the Treasury to explore countermeasures against jurisdictions implementing it. Despite the U.S. pulling out of Pillar 2, the initiative is expected to have a significant impact on many large U.S. multinationals.

European tax executives and practitioners have expressed concerns that Pillar 2 will “encourage disputes as the potential for misunderstandings over different taxing rights grows,” directly impacting investment. Tax certainty has become an increasingly important investment criterion among investors and executives and now outweighs tax incentives in the hierarchy of multinationals’ investment considerations.

This investment impact could geographically bias MNEs in the EU, which is arguably the only major economy to have implemented the Pillar 2 rules. Since investment decisions are generally made on margin, increased Pillar 2 compliance costs and uncertainty could deter future investment in EU MNEs, according to a policy brief published by the economic research institute ZEW in Mannheim, Germany.

Even without U.S. cooperation, GLoBE could also negatively affect foreign investment in the U.S. to the extent U.S. effective tax rates are below 15%, thereby increasing taxes on multinational operations in the U.S. Further, GLoBE could undermine the benefit of domestic tax incentives such as R&D tax credits by increasing taxes for companies that would otherwise qualify for a lower effective tax rate through such credits.

Alongside these concerns, a U.S. MNE, joined by various U.S. business groups, brought a constitutional challenge before the Belgian Constitutional Court in American Free Enterprise Chamber of Commerce v. Ministerraad to overrule Belgian laws that implement Pillar 2. The case moved promptly to the EU’s Court of Justice, where it is currently pending and expected to be ruled upon during 2026, potentially ending Pillar 2.

Compliance Challenges and Transitional Safe Harbors

For companies subject to Pillar 2, compliance involves calculating effective tax rates on a jurisdictional basis, considering only “covered taxes.” This excludes certain levies, such as payroll and excise taxes, complicating the assessment of top-up tax liabilities. However, a Simplified Effective Tax Rate (ETR) Safe Harbor is now available.

A key relief mechanism is the transitional safe harbor, which applies to companies that file country-by-country (“CbC”) reports. If an MNE can demonstrate that its entities meet any of the three CbC-based tests—effective tax rate (“ETR”) test, routine profits test, or the simplified income test—then no top-up tax applies for that jurisdiction. Satisfying any one test is sufficient to eliminate Pillar 2 top-up tax for that jurisdiction under the safe harbor. There is also a Substance-based Tax Incentive Safe Harbor now available.

Dise by Side Rules

After months of negotiations, the OECD agreed to the U.S.’s request for a side-by-side agreement that effectively exempts U.S. multinationals from most Pillar 2 global minimum tax rules, in recognition of U.S. minimum tax rules. Under this “side by side” arrangement, U.S.-parented groups are exempt from the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) if they elect into the Side-by-Side (SbS) Safe Harbor, but remain subject to Qualified Domestic Minimum Top-up Taxes (QDMTTs). The U.S. exemption applies to fiscal years beginning on or after January 1, 2026. While these concessions are a welcome relief for U.S. MNEs, many questions remain. For example, it is unclear whether a foreign-owned U.S. joint venture is eligible to make an SbS election and how the election works across multiple jurisdictions.

Recommendations for U.S. Multinationals

Given the evolving global tax environment and pending AmFree case, companies that meet the gross revenue and foreign activity thresholds would benefit from taking proactive steps now to navigate Pillar 2’s impact:

• Monitor Key Jurisdictions: Understand how major countries are implementing Pillar 2 and its potential impact on operations. In addition, the impact of tax treaties on the permissibility of the GLoBE 15% tax is currently unsettled and being discussed, so staying in tune with the latest treaty developments in this context is important as it may have a large impact on the ultimate cost of GLoBE among companies in treaty jurisdictions. Follow the side-by-side election guidance and stay tuned for the ramifications of the AmFree decision, expected this year.
• Assess Exposure: Evaluate the effective tax rates of all foreign subsidiaries to determine potential top-up tax liabilities. For example, if U.S. parent owns a vertical tier of foreign subsidiaries, the lowest of which does not meet the 15% GLoBE effective tax rate as a result of a local tax incentive, the direct owner of such subsidiary will be subject to a top-up tax on the lowest tier subsidiary’s undertaxed profits. Alternatively, if the U.S. parent does not meet the 15% GLoBE effective tax rate, the first-tier foreign subsidiary’s jurisdiction could impose tax on the U.S. parent’s undertaxed income.
• Leverage Safe Harbors: Familiarize yourself with the SbS Safe Harbor election. Consider transitional measures available through CbC reporting and safe harbors to mitigate compliance burdens.
• Prepare for Legislative Changes: While the U.S. has not adopted Pillar 2, future administrations or legislative actions could bring changes requiring strategic adjustments.

Pillar 2 represents an attempt to globally unify international tax policy, which will require careful attention and resources from U.S. multinationals. While current U.S. policy suggests a resistance to adoption and the side-by-side concessions from the OECD, global compliance pressures may still necessitate strategic planning. WilliamsMarston provides guidance to help companies assess their exposure and navigate these complex tax developments, offering clarity amidst the uncertainty surrounding Pillar 2 implementation.

This article is for general information only and does not constitute tax advice