What Is Pillar 2 Tax? Scope, Top-Up Rules, and Filing

Pillar 2 tax is a global minimum tax agreed by more than 140 countries through the OECD/G20 Inclusive Framework that sets a 15% floor on the effective tax rate paid by large multinational corporations. When a company’s operations in any country pay less than that, another jurisdiction collects the difference as a “top-up tax.” The rules took effect for fiscal years beginning on or after December 31, 2023, in most adopting countries, and they represent the most significant change to international corporate taxation in decades.

Which Companies Fall Within Scope

Pillar 2 is aimed only at the largest multinationals. It applies to multinational enterprise (MNE) groups with annual consolidated revenue of at least €750 million in at least two of the four fiscal years before the year being tested.¹ Small and mid-sized businesses sit outside the framework entirely. An MNE group here means related companies where at least one entity operates in a different country from the rest and all are part of the same consolidated financial statements.

Several categories are carved out. Government bodies, international organizations, non-profits, pension funds, and investment funds that serve as the ultimate parent of a group are all excluded.² If an excluded organization owns a commercial subsidiary that itself heads a qualifying group, that subsidiary can still be pulled in.

How the Top-Up Tax Gets Collected

Pillar 2 uses three layered rules to make sure the minimum tax gets paid somewhere. Each acts as a fallback for the one above it.

Income Inclusion Rule

The Income Inclusion Rule (IIR) is the primary mechanism. If a subsidiary in a foreign country pays an effective tax rate below 15%, the country where the ultimate parent is headquartered charges a top-up tax to close the gap.³ The parent picks up the tab for its low-taxed subsidiaries, removing the core advantage of routing profits through countries with very low or zero corporate tax rates.

Undertaxed Profits Rule

The Undertaxed Profits Rule (UTPR) applies when the IIR doesn’t cover the gap, usually because the parent’s home country hasn’t adopted Pillar 2. In that case, other countries where the group operates can claim a share of the top-up tax by denying deductions or making equivalent adjustments to local tax bills.³ The UTPR amount is split among those countries based on a formula weighting each jurisdiction’s share of the group’s employees at 50% and its share of tangible assets at 50%. Most implementing jurisdictions activated the UTPR for fiscal years beginning on or after December 31, 2024, one year after the IIR went live.⁴

Qualified Domestic Minimum Top-Up Tax

A Qualified Domestic Minimum Top-up Tax (QDMTT) lets a country where the profits are actually earned collect the top-up tax first, before the IIR or UTPR redirects it to a foreign treasury.³ The option has proven popular with historically low-tax jurisdictions. The Bahamas, Bahrain, Bermuda, and Singapore have enacted QDMTTs to keep top-up revenue at home rather than cede it abroad. EU member states, Canada, Australia, and many others have adopted some form of QDMTT alongside their IIR and UTPR legislation.

How the Top-Up Tax Is Calculated

The math is done country by country, not entity by entity. That jurisdictional approach is central to the design: a company cannot offset a high tax bill in one country against a low bill in another.

The first step is calculating the effective tax rate (ETR) for each jurisdiction where the group operates. The ETR equals total “covered taxes” paid in that country divided by “GloBE income” earned there.⁵ Covered taxes begin with the current income tax expense on the entity’s financial statements and are then adjusted for CFC taxes charged by a parent jurisdiction, withholding taxes, and deferred tax adjustments.⁶ GloBE income is the financial accounting profit or loss, adjusted for specific items.

If the ETR in a jurisdiction falls below 15%, the difference is the top-up tax percentage. A group paying an 11% effective rate faces a 4% top-up. That percentage does not apply to all income earned there. First, a substance-based income exclusion (SBIE) is subtracted. The SBIE shields a portion of profit tied to real economic presence, meaning payroll costs and tangible assets like factories and equipment.⁵

The SBIE percentages started high and decline over a 10-year transition period. Initial rates were 10% of eligible payroll costs and 8% of the carrying value of tangible assets, both dropping to a permanent 5% by 2033.² For fiscal year 2026, the applicable rates are 9.4% for payroll and 7.4% for tangible assets. The top-up tax percentage is then applied to GloBE income minus the SBIE, producing the actual top-up liability for that jurisdiction.

What Happens to Tax Credits and Incentives

Pillar 2 can erode the value of domestic tax incentives, and the treatment of tax credits is where this gets tangible. The rules draw a sharp line between two types of credits.

A Qualified Refundable Tax Credit (QRTC) is a credit that the granting government will pay out in cash, or make available as a cash equivalent, within four years of the taxpayer meeting the eligibility requirements.⁶ Under the GloBE rules, QRTCs are treated as income rather than as a reduction in taxes paid. Because they increase the denominator of the ETR fraction (GloBE income) rather than shrinking the numerator (covered taxes), they have a far smaller impact on the effective rate. A company claiming a large QRTC is much less likely to trip the 15% threshold.

Every other income tax credit, meaning the non-refundable kind or credits refundable only after more than four years, is treated as a reduction in covered taxes. That directly lowers the ETR and can push a jurisdiction below 15%, generating a top-up liability that offsets part or all of the credit’s benefit. The distinction matters enormously for clean energy credits, R&D incentives, and housing tax credits. The 2023 Inclusive Framework guidance specifically addressed U.S. green energy credits from the Inflation Reduction Act, and “marketable transferable tax credits” were given treatment similar to QRTCs to preserve their value under Pillar 2.⁷

The Transitional Safe Harbor

Full GloBE calculations are complex, and the rules include a transitional safe harbor that lets many MNE groups skip the heavy math for jurisdictions that clearly aren’t undertaxed. The Transitional Country-by-Country Reporting (CbCR) Safe Harbour deems the top-up tax in a jurisdiction to be zero for the fiscal year if any one of three tests is met:⁸

De minimis test: the group’s total revenue in the jurisdiction is below €10 million and its pre-tax profit is below €1 million, both as reported on its Country-by-Country Report.
Simplified ETR test: the group’s simplified effective tax rate (using CbCR data rather than full GloBE calculations) meets or exceeds a transition rate of 15% for fiscal years beginning in 2023–2024, 16% for 2025, and 17% for 2026.
Routine profit test: the group’s pre-tax profit in the jurisdiction is equal to or less than the substance-based income exclusion amount for the entities located there.

The safe harbor covers fiscal years beginning on or before December 31, 2026, and ending no later than June 30, 2028. If a group skips the safe harbor for a particular jurisdiction in a year when the rules apply to it, it can never use the safe harbor for that jurisdiction again. For groups operating in countries with headline corporate rates well above 15%, the safe harbor can eliminate most of the compliance work during these early years.

Where Pillar 2 Is In Force

The EU adopted a Minimum Tax Directive in late 2022 requiring member states to transpose the IIR and QDMTT into domestic law by December 31, 2023, with the UTPR following one year later.⁴ Most EU members met that deadline, so the IIR has been live across much of Europe since early 2024. Outside the EU, the United Kingdom, Canada, Australia, South Korea, and Japan are among the major economies that have enacted their own Pillar 2 legislation on broadly similar timelines. Traditionally low-tax or zero-tax jurisdictions have responded by enacting QDMTTs rather than let top-up revenue flow to a foreign parent’s treasury.

The United States Position

The United States is the most consequential gap in the global adoption map. While the U.S. participated in negotiating the Inclusive Framework agreement, it has not enacted GloBE legislation. In January 2025, the White House issued a presidential memorandum declaring that any prior administration commitments to the Global Tax Deal “have no force or effect within the United States absent an act by the Congress,” and directed the Treasury Department to investigate whether foreign countries’ Pillar 2 rules amount to discriminatory or extraterritorial tax measures against American companies.⁹

The U.S. already has its own minimum tax on foreign earnings, the Global Intangible Low-Taxed Income (GILTI) regime. GILTI shares the basic concept of the IIR but differs in ways that keep it from qualifying as a “qualified IIR” under GloBE rules. It blends all foreign income globally rather than calculating country by country, uses U.S. tax accounting rules instead of financial accounting standards, and has no payroll-based carve-out.¹⁰ The global blending issue is the most significant. A U.S. company paying 25% in one country and 5% in another might show a blended GILTI rate above 15%, even though the 5% jurisdiction would clearly trigger a top-up under Pillar 2’s jurisdictional approach.

Because the U.S. hasn’t adopted a qualified IIR, the UTPR becomes the relevant backstop. Other countries where a U.S.-parented MNE operates could deny deductions to collect the top-up tax the U.S. declined to impose. A temporary safe harbor shielded U.S. companies from UTPR exposure through the end of 2025, but the status of that protection for 2026 and beyond remains uncertain amid ongoing political tensions between the U.S. and implementing jurisdictions. For U.S.-headquartered multinationals with low-taxed foreign operations, this is the single biggest open question in international tax planning right now.

Filing the GloBE Information Return

Compliance demands a substantial data collection effort. MNE groups must identify every entity in their corporate structure, determine each entity’s tax residency, and gather detailed financial data (profits, losses, and taxes paid) for every jurisdiction where they operate. All of this flows into the GloBE Information Return (GIR), a standardized digital form that covers general group information, the corporate structure, and the full ETR and top-up tax calculations for each country.

The standard filing approach is centralized. The GIR is submitted to the tax authority of the ultimate parent entity’s jurisdiction, which then shares it with other relevant countries through automatic exchange agreements. That spares the group from filing the full return in every country where it has a presence, though some jurisdictions require local notifications as well. The filing deadline is 15 months after the end of the group’s fiscal year, extended to 18 months for the very first return.¹¹ For groups with a calendar fiscal year, the first GIR was due by June 30, 2026.

Penalties for late or inaccurate filings vary by jurisdiction, as each country sets its own enforcement provisions. The EU directive instructs member states to apply “dissuasive penalties” but does not prescribe specific amounts.⁴ The OECD’s guidance on penalty relief encourages a “soft landing” approach during the initial transition years, recognizing that the rules are new and compliance systems are still being built. Groups should still expect detailed scrutiny, and tax authorities will review ETR calculations and may request supporting documentation.

1
Organisation for Economic Co-operation and Development. Tax Challenges Arising From the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two)
2
OECD. FAQs on Model GloBE Rules
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OECD. Pillar Two Model Rules in a Nutshell
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EUR-Lex. Directive 2022/2523
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OECD. Global Minimum Tax
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OECD. Pillar Two GloBE Rules Fact Sheets
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U.S. Department of the Treasury. Treasury Welcomes Clear Guidance on Pillar Two Global Minimum Tax, Tax Credit Protections
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OECD. Safe Harbours and Penalty Relief – Global Anti-Base Erosion Rules (Pillar Two)
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The White House. The Organization for Economic Co-operation and Development (OECD) Global Tax Deal
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U.S. Congress. The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy
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Finnish Tax Administration. Minimum Tax Rate for Large-Scale Groups (OECD Pillar Two) – Filing