What is Pillar Two?
Pillar Two is a series of rules designed and agreed by OECD Inclusive Framework jurisdictions with a view to ensuring an effective global minimum corporation tax rate of 15% for certain multinational groups of companies. The backbone of the rules is constituted by the OECD’s Model Rules, published in December 2021, which, broadly, contemplate an Income Inclusion Rule (IIR) and, as a backstop, the Undertaxed Profits Rule (UTPR). Plus, for completeness, we should mention the treaty-based subject-to-tax rule, which addresses under-taxed intra-group payments from developing countries and was the subject of a Multilateral Convention in September 2024.
The Model Rules in relation to the IIR and UTPR are supplemented by OECD Commentary and Administrative Guidance. In addition, the rules provide for jurisdictions to implement their own domestic versions of the top-up tax (DTTs). (For further background on Pillar Two, read our 20 questions on Pillar Two and the GloBE rules, and view our dedicated OECD Pillars webpage.)
There are many elements of Pillar Two that create challenges and complexity, not least of which is the need for the rules to be implemented locally in each jurisdiction that wishes to apply the rules. This is exacerbated by the fact that further rules are being produced on a rolling basis by the OECD in the form of administrative guidance, which leads to domestic legislation potentially having to be amended multiple times to remain consistent with the latest agreed OECD position. Only today, two new pieces of administrative guidance have been published (on deferred taxes and completing the necessary returns), together with further changes to the form of the Globe Information Return (GIR) that must be filed to comply with Pillar Two.
Some jurisdictions are implementing all aspects of the rules (i.e. the IIR, the UTPR and a DTT, as in the EU under the Pillar Two Directive (2022/2523) and in the U.K.), with others only implementing a DTT or only an IIR, and all at varying stages of implementation of the administrative guidance. Others are not implementing Pillar Two itself but are introducing their own corporate taxes for the first time or raising the rate of such taxes in response to the introduction of Pillar Two.
Even for those technically introducing the same rules, there can still be inconsistencies as a result of the way the rules are implemented into domestic law, the timing of such implementation, or the way Pillar Two rules interact with other existing domestic rules.
All of the above makes applying the Pillar Two rules (or even working out which rules are to be applied) at any given time incredibly challenging.
Global implementation
Despite these odds, 2024 saw many jurisdictions implementing or committing to introduce Pillar Two rules. In December 2024 alone Australia, Brazil, Kuwait, the UAE, Oman, Qatar, Hong Kong, Japan and Guernsey joined the list of countries that have introduced Pillar Two rules or that have committed to do so.
To illustrate the complexities of global implementation, we have taken a closer look at two of the last EU jurisdictions to implement Pillar Two (Spain and Poland). Notwithstanding the fact that these jurisdictions have a directive to follow and have had the opportunity to observe how other jurisdictions have implemented and to align with what has been done elsewhere, there are still a number of points of difference.
Spain
On December 22, 2024, Spain enacted Law 7/2024, which establishes the Global Minimum Corporation Tax (also referred to as the Complementary Tax or Impuesto Complementario) (hereinafter, the Spanish Complementary Tax) in alignment with the Pillar Two Directive (the Spanish Complementary Tax Law). Despite the law’s approval late in 2024, the Spanish Complementary Tax will apply retroactively to the 2024 fiscal year, although the relevant official tax forms will only be due in 2026.
The Spanish Complementary Tax Law largely aligns with the international framework established by the Pillar Two Directive and OECD guidelines. Nonetheless, it introduces specific adjustments tailored to the nuances of the Spanish tax system (such as definitions of taxpayer, taxable base, and tax rate). Consequently, the Spanish Complementary Tax Law is not merely a straightforward implementation of global standards, but rather an adapted approach that will require some time and effort to fully understand and implement.
The Spanish legislator has introduced three types of Complementary Taxes:
- National Complementary Tax, which ensures that the profits generated in Spain meet the global minimum threshold, impacting both Spanish and foreign multinational groups.
- Primary Complementary Tax, which requires Spanish parent companies to collect the tax difference from their foreign subsidiaries to meet the 15% minimum tax rate.
- Secondary Complementary Tax, which applies only under specific conditions, mainly when there is no Ultimate Parent Entity (UPE) responsible for ensuring the group’s minimum tax rate.
A notable feature of the Spanish Complementary Tax Law is the establishment of the “substitute taxpayer” role, which designates a company responsible for fulfilling the tax obligations and overseeing compliance with the Spanish Complementary Tax. For groups with a Spanish UPE, this entity will take on the role of substitute taxpayer. In other cases, the intermediate parent company will generally be responsible. This centralization of compliance obligations is complemented by a joint and several liability regime.
Regarding the timeline, as previously mentioned, for the National and Primary Complementary Taxes, the first affected fiscal year is 2024, meaning that groups will have to begin preparing now, even though the first Official Tax Forms are not due till 2026. The Secondary Complementary Tax, however, follows a different schedule: its first fiscal year is 2025, unless the UPE is located in a jurisdiction that has delayed Pillar Two implementation (in which case it will apply in 2024) or in jurisdictions with a nominal tax rate of at least 20% (where it will be effective from 2026).
According to information provided by the Spanish Government, implementation of Pillar Two in Spain could affect a total of 126 domestic groups. Furthermore, 707 out of 2,526 multinational groups with foreign parents and Spanish subsidiaries will likely be subject to the Spanish Complementary Tax.
In addition to having to collect and report the necessary information, groups will have to assess its effects. The integration of Pillar Two into the Spanish tax system may have a significant impact on specific tax credits, such as R&D and IT tax credits. In addition, thought will need to be given to how the Complementary Tax will interact with special tax regimes, such as those for venture capital companies (entidades de capital riesgo) and REITs (SOCIMIs), which foresee, under certain requirements, low Corporate Income Tax rates.
Poland
With a one-year delay, the Pillar Two Directive was implemented in Poland on January 1, 2025. The wording of the legislation, the Act of November 6, 2024 on compensatory taxation of constituent entities of international and domestic groups (ustawa z dnia 6 listopada 2024r. o opodatkowaniu wyrównawczym jednostek składowych grup międzynarodowych I krajowych; hereinafter the Polish Compensatory Taxation Act or PCTA), was published on November 19, 2024.
In principle, the rules do not apply to 2024, unless so requested by a particular group covered by the PCTA (by way of a statement in the form of a notary deed that can be made between March 1 and May 30, 2026).
The Polish Compensatory Taxation Act, like the Spanish rules, introduces three completely new taxes:
- Global Compensatory Tax (GCT, globalny podatek wyrównawczy, corresponding to IRR under the Directive),
- National Compensatory Tax (NCT, krajowy podatek wyrównawczy), and
- Undertaxed Profits Tax (UPT, podatek wyrównawczy od niedostatecznie opodatkowanych zystków, corresponding to the UTPR under the Directive).
Poland anticipates that a few thousand Polish entities (constituent entities of MNE groups) will be obliged to test their effective tax rate for the purposes of the National Compensatory Tax (a qualified domestic minimum top-up tax due from Polish entities) making the NCT the main element of the Pillar Two implementation in Poland. According to the same estimates, the Global Compensatory Tax should, by way of contrast, impact only a few dozen MNE groups where a Polish entity is considered to be the UPE.
The implemented legislation generally follows the Pillar Two Directive, while at the same time introducing Polish specific features. Recognising that the rules are complex (the new legislation is separate from existing tax laws and introduces a completely new set of rules and definitions that often overlap with existing definitions used in other pieces of legislation), Poland has introduced tax rulings in relation to the PCTA. The statutory deadline for the authorities to issue a ruling is eleven months and the administrative fee ranges between PLN15,000 and PLN50,000 (approximately EUR3,500 – 11,500). Also, a Compensatory Taxation Council (Rada do spraw Opodatkowania Wyrównawczego, a GLOBE Council) has been introduced to opine on interpretations of the new law.
The first reporting deadlines are on June 30, 2026. Although there is no tax guidance on the PCTA, the extensive Reasoning (Uzasadnienie) to the PCTA, published for the purposes of passing the Act through the parliament, together with the possibility of obtaining a tax ruling on a matter, should allow for the proper application of the regulations despite their complexity.
Broader issues
The positions taken in these two jurisdictions illustrate the nuances that governments and multinationals are having to get to grips with and the different approaches being taken. A further complication for EU Member States is in the interaction between the Pillar Two Directive and OECD administrative guidance. For instance, in October 2024, the European Commission put forward its “DAC 9” proposal to streamline Pillar Two filing obligations across the EU. Whilst a desire to ease compliance might seem uncontroversial, some aspects are posing issues, as some of the principles that DAC 9 seeks to build on, such as the simplified jurisdictional reporting framework, are contained in OECD administrative guidance which was not issued until after the Pillar Two Directive was agreed.
The EU has also been considering how it can fast-track changes to DAC 9 (without having to introduce a new amending directive each time) as and when changes are made to the OECD’s Globe Information Return. With a new version of the GIR issued today, there is renewed pressure to find a way to deal with such issues.
This serves as a reminder of the downsides of relying on non-binding administrative guidance to supplement and amend the Model Rules, and the issues that this creates under EU law.
One potential ray of hope for 2025 in the midst of all these complications comes in the form of speculation that this year might bring new guidance on a permanent safe harbour to provide greater certainty and lessen the compliance obligations for those in scope beyond the transitional period. With the form of any such safe harbour dependent on the outcome of highly political international negotiations, one can but hope.
The UTPR starts to come into effect
A big crunch point for Pillar Two in 2025 comes in the shape of the UTPR. This is the first year that the UTPR comes into effect in certain jurisdictions, including EU Member States and the U.K.. Multinationals and governments are still coming to terms with what this will mean for groups and transactions. The biggest challenge will be working out which rules apply. Currently, the IIR generally only requires consideration of the rules in the UPE jurisdiction. Whereas, the application of the UTPR is similar to DTTs, in that it requires consideration of the rules in all the jurisdictions of other members of the group to check if there is any residual UTPR to be collected.
There is flexibility in how the UTPR is to be implemented, which although helpful to governments, is a compliance nightmare for multinationals who will have to work out whether a UTPR applies by denial of deduction or some other mechanism such as a further top-up tax. What happens where the rules in different jurisdictions are not consistent? Will the mechanisms for preventing double taxation be effective in resolving any disputes? How can the impact of these rules be assessed when not all jurisdictions have finished legislating even though they already have effect (for instance the U.K.’s draft UTPR legislation is still being amended as it passes through Parliament)?
One thing is certain, the UTPR will add yet another level of complexity for those trying to apply Pillar Two. And that is before we factor in the U.S. position and its opposition to Pillar Two, and in particular, the UTPR.
The impact of the U.S. elections on Pillar Two
Although it is still too early to determine the exact course a second Trump administration and Republican-majority House of Representatives and Senate might take with respect to Pillar Two, it is unlikely that the United States modifies its global intangible low-taxed income (GILTI), base erosion and anti-abuse tax (BEAT) or corporate alternative minimum tax (CAMT) rules to conform with the OECD Model Rules, and it is unlikely that provisions implementing an IIR, UTPR or DTT that is compliant with the OECD Model Rules would be enacted. However, it is possible that the Trump administration and Republican-majority House of Representatives and Senate could attempt to pressure countries that have enacted Pillar Two rules to make changes to certain aspects of their Pillar Two rules.
In particular, it is plausible that the United States could exert pressure on the OECD and other countries to: (i) revise their Pillar Two rules so non-refundable and non-transferable U.S. tax credits that were not addressed in the July 2023 OECD administrative guidance, particularly the research and development tax credit, do not result in a reduction to the effective tax rate of a recipient under the Pillar Two rules and (ii) either modify the UTPR in their Pillar Two rules to align it more closely with its earlier iteration (based on an undertaxed “payment” rule rather than an undertaxed “profits” rule), making it more akin to the US BEAT rules, or eliminate the UTPR from their Pillar Two rules entirely.
If countries do not modify their Pillar Two rules to implement changes requested by the United States, it is possible that the United States applies pressure on such countries through the imposition of tariffs, as the Trump administration did in 2020 in response to the French digital services tax, or through retaliatory legislative proposals targeting such countries. This would most likely be the case with respect to countries that do not modify or eliminate the UTPR in their Pillar Two rules.
Recent proposals presented in 2023 by House Republicans may provide insight into what such legislative proposals would look like. For example, one proposal sought to target the UTPR by imposing higher rates on foreign investors from countries with “extraterritorial taxes” or “discriminatory taxes,” and another proposal would make the BEAT more punitive with respect to a payment made by certain U.S. taxpayers to a foreign affiliate that is a tax resident of a country that has enacted an extraterritorial tax regime.
Accordingly, while we do not expect the U.S. to modify its GILTI, BEAT or CAMT legislation to conform to the Pillar Two rules, or otherwise enact new Pillar Two compliant rules, it is possible that it will exerts significant pressure on other countries to change certain aspects of their Pillar Two rules, which could ultimately lead to significant changes to, or the elimination of, the UTPR in the Pillar Two rules of such countries.
The UN challenge to Pillar Two
To add to the uncertainty, the UN has stepped into the debate on how to reform international tax policy, driven by concerns from several developing countries that the OECD's approach failed to take account of their needs. Their aim is to provide an alternative, more inclusive framework that allows all countries to effectively participate in developing the rules that affect them. This means taking into account the different needs, priorities, and capacities of all countries.
Whilst a laudable aim, achieving this will be no mean feat. Many OECD countries have voiced objections to the UN project on the grounds that the OECD approach (which took years to achieve) has the support of over 130 jurisdictions and substantial progress has already been made in terms of implementation. They fear a new framework could disrupt this progress and lead to further delays. Nonetheless, in November 2024, the UN General Assembly adopted a resolution approving the terms of reference for a framework convention on international tax cooperation (with many OECD countries rejecting the resolution or abstaining). And so the project moves on.
For multinationals, the introduction of a competing framework could undoubtedly increase complexity and uncertainty, potentially providing even more obstacles to tax rules being applied consistently across the world.
However, progress on the UN framework will not be rapid. The resolution provides for the new intergovernmental negotiating committee to present the final text of the framework convention and of the two early protocols to the General Assembly for its consideration in the first quarter of its eighty-second session, which starts in September 2027. Perhaps the most multinationals (and governments) can do for now is work with the OECD rules for the time being and wait and see what 2027 brings.
Conclusion
As we navigate the complexities of Pillar Two in 2025, the diverse approaches taken by different countries, political shifts and evolving OECD guidance are contributing to a constantly evolving environment. Multinationals, as well as governments, trying to grapple with such an unstable set of rules, not to mention the threat of a potential competing UN framework, face an uphill battle to stay on top of developments. Hold on to your hats, as 2025 looks set to be anything but plain sailing.
For more on Pillar Two, please see our dedicated OECD Pillars webpage.