Pillar Two Global Minimum Tax

The Pillar Two global minimum tax is a framework of co-ordinated national rules designed to ensure that large multinational groups pay a minimum effective rate of corporate tax of 15 per cent on their profits in each jurisdiction in which they operate. If a group's profits in a country are taxed below that rate, a top-up tax is charged to bring the total to 15 per cent. The rules are formally known as the Global Anti-Base Erosion rules, abbreviated GloBE.

The framework was agreed in October 2021 by more than 130 members of the Inclusive Framework on base erosion and profit shifting, a body convened by the OECD and the G20. It is the second part of a two-pillar plan; Pillar One is separate and has not been implemented. Pillar Two is not a treaty: each country chooses whether to enact the model rules in its own law.

For decades, countries competed for investment by lowering corporate tax rates and offering preferential regimes, and multinational groups arranged their affairs so that profits arose in low-tax locations, often through transfer pricing and the placement of intangible assets. Pillar Two took a different approach: rather than policing how profits reach a tax haven, it reduces the benefit of having them taxed there, and so sets a floor under tax competition.

The rules apply to a multinational group whose consolidated annual revenue was at least 750 million euros in two or more of the four preceding fiscal years. This is the same threshold used for country-by-country reporting. Government bodies, non-profit organisations, pension funds and certain investment funds are excluded.

The calculation is made jurisdiction by jurisdiction. For each country, the group adds up the income of its entities there, starting from the financial accounts used for consolidation and making prescribed adjustments, and adds up the taxes attributable to that income, including adjusted deferred tax. Dividing taxes by income gives the effective tax rate for the jurisdiction.

Where the rate is below 15 per cent, the shortfall is the top-up percentage. It is applied to the jurisdiction's income after deducting a substance-based income exclusion, an allowance calculated as a percentage of payroll costs and of the carrying value of tangible assets in the country. The exclusion means that the minimum tax falls on profits in excess of a routine return on real activity. For example, if a group earns 100 million in a country, pays 9 million of covered tax and qualifies for an exclusion of 20 million, its effective rate is 9 per cent, the top-up percentage is 6 per cent, and the top-up tax is 6 per cent of 80 million, or 4.8 million.

Three charging mechanisms determine who receives the top-up tax, in a set order of priority:

• Qualified domestic minimum top-up tax. A country may impose its own top-up tax on low-taxed profits arising within its borders, calculated in line with the model rules. This is credited against any liability under the other two rules, so the revenue stays in the country where the profits arise.
• Income inclusion rule. If the profits are not topped up locally, the country of the ultimate parent entity charges the tax on the parent in respect of its low-taxed subsidiaries.
• Undertaxed profits rule. As a backstop, any remaining top-up tax is collected by other countries in which the group operates, allocated by a formula based on employees and tangible assets.

The European Union adopted a directive in December 2022 requiring member states to apply the income inclusion rule for fiscal years beginning on or after 31 December 2023 and the undertaxed profits rule a year later. The United Kingdom, Switzerland, Japan, South Korea, Canada, Australia and many others have enacted some or all of the rules, and a number of low-tax jurisdictions have introduced domestic top-up taxes or new corporate taxes in response.

The United States has not adopted the model rules and maintains its own minimum taxes on foreign income and on large companies' book profits. In 2025 the United States government stated that the 2021 agreement had no force in the country, and the G7 announced an understanding on a side-by-side arrangement under which groups with a United States parent would be treated separately. The Inclusive Framework agreed that arrangement in January 2026 as a safe harbour that switches off the income inclusion and undertaxed profits rules for such groups, while domestic top-up taxes continue to apply.

Groups in scope must file a standardised information return. Accounting standard-setters amended IAS 12 in 2023 to provide a mandatory temporary exception from recognising deferred taxes arising from Pillar Two, together with new disclosures. The current top-up tax forms part of the tax provision. The rules interact with existing regimes for double taxation relief and controlled foreign companies.

Critics point to the complexity of the calculations, the compliance cost, and the scope for countries to replace low tax rates with subsidies and refundable credits that the rules treat favourably. Developing countries have argued that the ordering of the rules favours the home countries of multinationals, and some have pursued a broader tax convention through the United Nations.

• Organisation for Economic Co-operation and Development (OECD)