Key global developments in Pillar 2 model rules

Vikas Vasal,
Michiko Shinohara,
Peter Vale,
Christina Busch,
Dustin Stamper,
Yvonne Chappell,
Cory Perry
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In a ground-breaking international accord, more than 130 countries have agreed to impose a minimum 15% corporate tax on multinational enterprises (MNEs) with over €750 million global turnover (OECD Pillar 2). In a 90-minute webcast, Grant Thornton experts outlined key developments in the U.S., U.K., Ireland, Germany, and Japan; and the resulting implications for MNEs. Here’s a quick summary.

Pillar 2 seeks to end the ‘race to the bottom’ on tax rates worldwide. In a further clampdown on aggressive tax planning, Pillar 2 would also make it much harder to minimise tax by recording profits in low tax jurisdictions and costs in high tax counterparts. But agreement in principle is one thing. Enacting Pillar 2 in national legislation and applying it in practice is another.

Even with the latest OECD Pillar 2 guidelines (Model Rules), there is considerable room for divergence in interpretation and implementation in different jurisdictions. The complexities of imposing a globally binding minimum tax rate and sharing tax rights across multiple jurisdictions, subsidiaries and affiliates are heightened by conflicting priorities both between and within signatory states.

The result is continuing uncertainty and legislative delays, with few countries on track to enact and implement Pillar 2— and its sister Pillar 1, which aims to reallocate taxing rights to reflect an increasingly digitized global economy — by the 2023 target. In turn, the differences in interpretation, application, and legislative timetables may open up a serious risk of tax disputes and double-taxation.

The OECD’s model rules on Pillar 2 bring together two interlocking measures:

  1. The income inclusion rule (IIR): A top-up tax on the ultimate parent entity of a low-taxed foreign subsidiary.
  2. Undertaxed payment rule (UTPR): The UTPR requires a UTPR taxpayer that is a member of an MNE Group to make an adjustment in respect of any top-up tax that is allocated to that taxpayer from a low-tax Constituent Entity of the same group.

The big questions are how and when different countries will build these measures into their tax frameworks.

The U.S.

President Joe Biden’s administration is one of the key drivers of the Pillar 2 agreement. While the existing global intangible low-taxed income (GILTI) framework is conceptually similar to Pillar 2, it appears it would not fully comply in practice. The administration and congressional Democrats have therefore drafted legislation to largely align GILTI with Pillar 2.

At a headline level, this includes increasing the GILTI tax rate to align with the Pillar 2 minimum requirement of a 15% rate. At an operational level, this includes a range of convergence measures such as aligning GILTI with the IIR by moving to apply it on a country-by-country basis. However, the proposed legislation stops far short of complete convergence.

The problem is that the legislative changes needed to enact Pillar 1 are wrapped up in a larger Democratic economic package dubbed Build Back Better (BBB). With some Democrats still opposed, the bill is currently stalled within the Senate. Negotiations with hold-out senators on a smaller package that would include international reform continue, so enactment in the next few months is still conceivable. But with mid-term elections coming up later in the year, time for enactment is running out. It will only become harder next year if Republicans take control of at least one chamber of Congress, as many expect.

Failure to move Pillar 2 into law in the U.S.—in an economy with such scale and global reach—would be a serious blow to the OECD. It could also expose U.S. MNEs to the risk of double taxation when operating in countries that do adopt Pillar 2. A possible example of the collateral effects would be a U.S. headquartered business with a holding company in the U.K. The U.S. tax authorities would apply GILTI for the whole group, but the U.K. could insist on an IIR for the subsidiaries of the U.K. holding company.

In practice, many U.S. companies are likely to balk at the anomalies and resulting competitive disadvantages of operating on either side of the Pillar 2 divide. These businesses could therefore put added pressure on Congress to bring the U.S. tax framework into line with other major economies.


Given Ireland’s current corporate tax rate of 12.5%, Pillar 2’s proposed 15% minimum rate could erode some of Ireland’s tax advantages. Nonetheless, Irish policymakers have broadly welcomed the Pillar 2 agreement as it removes the once muted possibility of even higher rate increases. At 15%, Ireland’s tax rate would still be competitive when compared to rising rates in the U.K. and other major economies. Moreover, the existing 12.5% rate will be retained for groups with global turnover of less than €750 million.

Like other E.U. members, Ireland’s legislation will be based on a common E.U. directive. With several technical and political issues still to be resolved, E.U.-wide agreement and enactment of national legislation by 2023 appear increasingly unlikely. While there has been no formal announcement, 2024 is a more realistic expectation.

With a significant number of U.S. corporations basing their European operations in Ireland, developments in the U.S. are also being closely monitored.


The U.K. is a supporter of Pillar 2 and could be one of the first countries to implement the measures. Current plans include introducing a domestic minimum tax to complement the Pillar 2 rules.

Following consultations earlier in the year, legislation is due to go before Parliament in the Autumn, followed by the publication of the implementation framework at the end of 2022.

However, the consultations have highlighted corporate concerns over both the complexities of Pillar 2 and the need for clarification of a number of grey areas. An example would be the potential for top up tax for loss making companies and the apparent discrepancy between treatment of tax incentives, the benefits of tax credits for research and development looking to be largely preserved, whilst patent box may not.

In addition to the tight timetable for implementation, many U.K. businesses are worried that early implementation in the U.K. would mean that it’s out of step with other major economies. A delay until 2024 would allow more time to prepare and alleviate some of the anomalies.


As a high tax economy, there is strong political backing in Germany for a measure that would reduce rate differential—and potential disadvantages—when competing against low-tax jurisdictions.

Still, many corporations are concerned about moving to Pillar 2 in 2023. In part, this is because the E.U. directive is still being drafted, leaving little time to prepare. In addition, based on past experiences, many businesses are also worried that German implementation of the directive may be stricter than other E.U. states and the punishments for non-compliance harsher.

The concerns are heightened by some of the complexities and potential for conflict when building Pillar 2 into German tax codes. A clear case in point is how the Pillar 2 top-up tax would work alongside current controlled foreign corporation (CFC) regulations. At present, the CFC is triggered when tax falls below 25%—much higher than the 15% threshold in Pillar 2. Even if the thresholds are aligned, differences in computation between Pillar 2 and German CFC rules could lead to double top-up taxation.

Many corporations would welcome a delay in 2024 or later as it would give more time to iron out such issues and prepare for the new compliance demands.


Like the U.K. and Germany, Japan is a keen advocate of Pillar 2, believing it could improve the competitiveness of Japanese companies.

But like these other states, the complexities and conflicts have raised concerns. A particular focus is the risk of double taxation when applying the Pillar 2 rules alongside Japan’s own CFC regulations.

Further concerns centre on whether the accounting rules in the consolidated financial statements used in Pillar 2 can be reconciled with local generally accepted accounting principles without incurring considerable extra cost and risk.

The other big uncertainty is whether the necessary legislation and implementation measures will be ready in time to introduce Pillar 2 in 2023. Therefore there are concerns as to whether introduction next year is really feasible.

The way forward

With so much still to be agreed upon and so many grey areas to be resolved, the key take-away from the webcast is the need to watch developments closely. While there may be a temptation to leave preparations until everything is set in stone, this would leave your business with dangerously little time to get ready for what is a major overhaul ahead.