Pillar 2 of the Organisation for Economic Co-operation and Development’s (OECD) Global Tax Deal would limit tax competition and the so-called “race to the bottom” on corporate income tax rates. It would establish a minimum effective tax rate applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world, in the form of a global minimum tax. The proposed global minimum tax rate is 15 percent.
What is the OECD Global Tax Deal?
The Global Tax Deal is a significant shift in international tax rules. The Base Erosion and Profit Shifting (BEPS) project in 2015 and later Digital Services Tax (DST) proposals were attempts to change tax rules for multinational corporations. BEPS harmonized some tax rules and DSTs were meant as temporary policies targeted at large, digitalized business models.
The OECD’s current plan aims to reduce incentives for tax planning and avoidance by U.S. and foreign multinational companies by limiting tax competition and changing where companies pay taxes.This was decided as part of the OECD/G20 Inclusive Framework.
To achieve this, the proposal is divided into two independent plans: Pillar One and Pillar Two.
What is the Aim of OECD Pillar Two?
In the last few years, the OECD has discussed a more permanent and effective plan to change tax rules for large companies and continue to limit tax planning by multinationals. This plan was broken into two pillars: Pillar Oneis focused on changing where companies pay taxes, and Pillar Two would establish a global minimum tax.
Specifically, Pillar Two would establish a minimum effective tax at a proposed rate of 15 percent applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world. Pillar Two would also include dispute resolution processes meant to improve tax certainty for companies.
Pillar Two includes three rules that apply to companies with more than €750 million ($991.9 million) in revenues.
- Income inclusion rule: determines when a company’s foreign income should be included in the parent (main) company’s taxable income.
- Under-taxed profits rule: allows a country to increase taxes on a business if that business is part of a larger company that pays less than 15 percent in another jurisdiction.
- Subject to tax rule: makes it possible for countries to tax inter-company payments that would be under-taxed.
According to initial analysis of the original proposals, Pillar One and Pillar Two would increase the effective average tax rate by around 0.7 percent across all jurisdictions. Pillar Two, the global minimum tax, is responsible for the majority of this increase, accounting for a 0.6 percent increase.
How Could This Impact U.S. and Foreign Multinationals?
Pilar II and the broader global tax deal would impact U.S. and foreign multinationals by:
- Limiting tax planning
- Increasing effective tax rates on cross-border investment
- Increasing taxes on earnings in low-tax jurisdictions
- Discouraging foreign direct investment (FDI)
- Impacting where companies hire and invest globally and domestically
- Slowing global economic growth
- Introducing additional tax complexity
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FAQs
the taxation of multinational enterprises (MNEs).
What is the pillar 2 of the global minimum tax? ›
Specifically, Pillar Two would establish a minimum effective tax at a proposed rate of 15 percent applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world.
What is OECD Pillar 2 minimum tax proposal? ›
Pillar 2 establishes a new minimum tax of 15 percent on the global income of MNCs. The OECD also developed Pillar 1 to set new rules on the allocation of taxable profits of large MNCs in countries where they sell their goods and services.
What is the OECD global minimum tax? ›
The deal, which was proposed by the Organisation for Economic Co-operation and Development (OECD), imposes a minimum effective rate of 15% on corporate profits. The policy is aimed at ending the benefit of shielding multi-billion-dollar profits in tax havens.
What is the OECD 2 pillar approach? ›
Pillar Two sets out global minimum tax rules designed to ensure that large multinational businesses pay a minimum effective rate of tax of 15% on profits in all countries.
What is pillar 2 risk? ›
Under Pillar 2, banks are obligated to assess the internal capital adequacy for covering all risks they can potentially face in the course of their operations. The supervisor is responsible for ascertaining whether the bank uses appropriate assessment approaches and covers all risks associated.
What is the meaning of Pillar 2 top up tax? ›
The intention of Pillar Two is to ensure that the income of enterprises arising in the countries in which they operate is taxed at an effective rate of at least 15 % through the levying of a "top-up tax".
How does the global minimum tax work? ›
In its simplest form, the OECD's global minimum tax proposal involves paying a 'top-up tax' at the level of the parent company if income made further down the ownership chain has been taxed below the global minimum rate.
What is OECD tax? ›
The OECD Tax Database provides comparative information on a range of tax statistics - tax revenues, personal income taxes, non-tax compulsory payments, corporate and capital income taxes and taxes on consumption - that are levied in OECD member countries.
How many countries have implemented Pillar 2? ›
PwC's Pillar Two Country Tracker provides the status of Pillar Two implementation in different countries and regions. Under an OECD Inclusive Framework, more than 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalization of the economy.
The U.S. created a minimum tax on companies' foreign income in 2017, but it applies to their global profits, not country-by-country as required by the international deal. The U.S. created a second minimum tax in 2022, but that, too, doesn't align with other countries' levies.
Who has the highest tax rates in the OECD? ›
The highest tax wedge is observed in Belgium (52.7%) and the lowest in Colombia (0.0%). The OECD average tax wedge was 34.8% of labour costs in 2023.
What is the minimum tax rate in 2024? ›
The Alternative Minimum Tax exemption amount for tax year 2024 is $85,700 and begins to phase out at $609,350 ($133,300 for married couples filing jointly for whom the exemption begins to phase out at $1,218,700).
How to prepare for pillar 2? ›
Pillar Two Checklist
- Monitor country reactions and participate in local policy/guidance and development.
- Determine which entities in the group structure are in-scope of the rules.
- Perform impact assessment to determine whether a top-up tax obligation will arise and what elections to make.
While the implementation of Pillar 2 legislation in the U.S. remains uncertain, the pressure to act may intensify as other countries implement crucial components of Pillar 2 in 2024 and 2025. Despite U.S. inaction, the implementation abroad will affect U.S. MNEs in various ways.
What does OECD stand for? ›
The Organization for Economic Co-operation and Development (OECD) - United States Department of State.
What is Pillar 1 and Pillar 2 tax? ›
In the last few years, the OECD has discussed a more permanent and effective plan to change tax rules for large companies and continue to limit tax planning by multinationals. Pillar One is focused on changing where companies pay taxes. (Pillar Two would establish a global minimum tax.)
What is pillar 2 minimum tax in Switzerland? ›
The Federal Council decided at its meeting today that Switzerland will introduce the global minimum tax (“Pillar 2”) in a gradual approach. Specifically, from 1 January 2024, Switzerland will levy a national top-up tax (QDMTT) on profits of Swiss corporations and permanent establishments of international groups.
Does Gilti satisfy Pillar 2? ›
For the calculation of the tax liability, under pillar 2, GILTI is a blended tax, but the corporate AMT (regarding foreign income) may not be (which does not matter here because the corporate AMT is 0). As a result, we allocate GILTI tax of 0.35 down to Ireland under the administrative guidance.
