OECD interim report on the second pillar


The Organization for Economic Co-operation and Development (OECD) released on December 20, 2021 its long-awaited interim report regarding the implementation of a Global Anti-Base Erosion (GloBE) Minimum Tax as part of the second pillar. The rate is currently set at 15% and applies to multinational enterprises (MNEs) whose turnover exceeds 750 million euros. Multinational companies subject to CbC reporting are therefore generally likely to be subject to the GloBE Minimum Tax and will need to maintain a new set of accounting records for this purpose. Additional filing requirements relating to Pillar 2 compliance and notifications will be required and could prove as onerous for multinational enterprises as those related to country-by-country reporting. GloBE’s minimum tax rules will create an “additional tax” to be imposed on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum threshold of 15%. The nearly 70-page document articulates in detail the complex mechanics of the proposed GloBE minimum tax application, including the transition rules. The OECD estimates that the GloBE Minimum Tax generates approximately $150 billion in additional global tax revenue each year.

The context

Although the OECD/G20 Inclusive Framework on BEPS (“the OECD Inclusive Framework”) is a continuation of the OECD’s 2013-2017 work on base erosion and tax transfer (BEPS) aimed at restricting certain tax strategies of MNEs considered harmful, Pillar The second mainly targets tax competition between tax jurisdictions. If reduced corporate tax rates are used as a sovereign tax policy instrument to attract foreign capital, the imposition of a minimum tax of 15% effectively limits the discretionary power of governments to take advantage of this policy instrument to economic development purposes. The likely outcomes of such a policy to reduce tax competition are: (i) low-tax jurisdictions are likely to increase the effective tax rate offered to foreign capital to 15%, and ( (ii) the economic costs caused by less competition are likely to affect indirectly, negatively or positively, depending on the facts and circumstances of economic development, the long-term tax revenues (corporate and otherwise) of all countries. In other words, as is often the case when tax laws change, there will be winners and losers.

Two backstops

The two basic concepts underlying the GloBE Minimum Tax are (i) the income inclusion rule (primary rule) and (ii) the undertaxed payment rule when the income inclusion rule does not is not fully enforced and the effective tax rate in a taxing jurisdiction is less than 15 percent. The income inclusion rule is the primary mechanism that will require a parent company of a multinational enterprise to supplement its actual taxes paid in any tax jurisdiction in which it operates, through a subsidiary or permanent establishment, to obtain a rate of 15%. If the parent company is in a tax jurisdiction that does not apply the income inclusion rule, the next intermediate holding company will perform the calculations and pay the additional taxes to its low-tax counterpart tax jurisdictions. The undertaxed payment rule applies in cases where the income inclusion rule has not been fully applied and the resulting effective tax rate in a taxing jurisdiction is still below 15%. The undertaxed payment rule also applies to a low-tax jurisdiction where the MNE’s ultimate parent company is located. The amount of tax under the undertaxed payment rule is first calculated and then allocated according to a formula to the counterpart tax jurisdictions that have adopted the undertaxed payment rule. A five-year exemption is granted, under certain conditions, to multinationals that expand internationally. The calculation of a multinational enterprise’s second pillar tax liability is determined after transfer pricing adjustments in accordance with Article 9 of the OECD Model Tax Convention; it is not a substitute for transfer pricing rules.

Implications for American multinationals

Since the Tax Cuts and Jobs Act of 2017, U.S. multinationals are already subject to effective minimum tax on foreign income under the Global Low-Tax Intangible Income (“GILTI”) regime. A key difference between the US GILTI regime and the income inclusion rule under the OECD second pillar regime is that the former is applied against the overall effective tax rate of the foreign income of the United States. ‘EMN, while the second is applied on a jurisdiction-by-jurisdiction basis. Unless U.S. law is amended to apply in accordance with the OECD Pillar 2 jurisdiction-by-jurisdiction design, U.S. multinationals will be required to pay the minimum GILTI rate (often 10-15%) on their consolidated foreign income and pay a fiscal” in each tax jurisdiction in which it pays less than the 15% average; the order in which a GILTI tax liability and a second pillar liability are calculated may also affect the ultimate tax liability of a multinational enterprise. The Biden administration’s proposed Build Back Better Act reversed the Trump administration’s position that GILTI, as currently drafted, should be treated as an approved minimum tax regime. It includes changes to the GILTI regime to reflect a minimum tax of around 15% applied to each country where a US multinational makes profits. Given the political climate and the administration’s difficulties in its legislative process, it is unclear whether a consensus can be reached in Congress to better align GILTI with the GloBE Minimum Tax. The OECD pushes back the GILTI issue to 2022, giving U.S. lawmakers a short window of time to reconsider GILTI before the OECD makes a decision on the matter.


A public consultation will be organized by the OECD in February 2022. The income inclusion rule is expected to come into force in 2023 and the undertaxed payment rule in 2024. The Model Treaty Article and Instrument implementation are expected to go out for public comment soon in March 2022. Our Company will continue to closely monitor any developments, including those from the U.S. Congress, (i) in relation to any changes to the GILTI Regime and (ii) in relation to treaty changes necessary to implement the OECD rules discussed here.

Please contact us for more information on how to prepare for the expected upcoming changes in international tax laws.


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