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Borys Ulanenko
CEO of ArmsLength AI
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Pillar Two (the OECD GloBE rules) imposes a 15% minimum effective tax rate (ETR) tested jurisdiction-by-jurisdiction for large multinational groups. If a jurisdiction’s Pillar Two ETR is below 15%, the rules compute a top-up tax on that jurisdiction’s “excess profit” (after the substance-based income exclusion), collected through a rule design that (in general) prioritizes domestic collection and then parent-level collection: QDMTT → IIR → UTPR, subject to qualified status, local implementation choices, and safe harbours. Transitional safe harbours can significantly reduce compliance where Country-by-Country Reporting (CbCR) and financial statement data indicate low risk (OECD Safe Harbours and Penalty Relief, 2022). (oecd.org)
Pillar Two is often described as a “15% global minimum tax,” but operationally it is a standardized minimum tax calculation that can produce incremental tax even when local statutory rates exceed 15%, and can produce no incremental tax in a low-tax jurisdiction if the group meets safe harbours or has sufficient substance carve-outs.
At a high level, Pillar Two works like this (GloBE Model Rules, Arts. 5.1–5.3):
Pillar Two is not a single “global tax.” It is a coordinated set of domestic rules (often via an EU directive or national legislation) based on an OECD model, with outcomes heavily dependent on whether a jurisdiction’s rules are treated as qualified by other countries.
| Term | Practical meaning | Where defined |
|---|---|---|
| Minimum Rate | Fixed at 15% | GloBE Model Rules, Art. 5.1 |
| Jurisdictional blending | Taxes and income are blended within a jurisdiction, not globally | GloBE Model Rules, Arts. 5.1–5.2 |
| GloBE Income | Financial accounting net income (consolidation standard) plus Pillar Two adjustments | GloBE Model Rules, Chapter 3 |
| Adjusted Covered Taxes | Current + eligible deferred taxes, adjusted under detailed rules | GloBE Model Rules, Chapter 4 |
| SBIE | Carve-out for a fixed return on payroll and tangible assets | GloBE Model Rules, Art. 5.3 |
| Top-up tax | Incremental tax to bring jurisdictional ETR up to 15% (applied to excess profit) | GloBE Model Rules, Art. 5.2 |
As a starting point, a group is generally in scope if the UPE’s consolidated financial statements show €750m or more of revenue in at least two of the four fiscal years immediately preceding the tested year (GloBE Model Rules, Arts. 1.1–1.2). This structure is familiar to CbCR teams because it aligns conceptually with the CbCR threshold, but Pillar Two scoping must still be validated against Pillar Two definitions and local implementation.
The Model Rules exclude certain categories such as governmental entities, international organizations, non-profits, pension funds, and certain investment and real estate vehicles—often with additional conditions around ownership chains and activities (GloBE Model Rules, Art. 1.5).
Treat “excluded entities” as a mapping exercise, not a label. Many groups have excluded entities and non-excluded entities in the same jurisdiction; Pillar Two still applies to the in-scope constituent entities.
Rule order is where Pillar Two becomes operationally “real.” Two groups with identical numbers can end up paying the same top-up tax amount, but to different governments, depending on:
A Qualified Domestic Minimum Top-up Tax (QDMTT) is a domestic regime designed so the source jurisdiction collects the top-up tax on its low-taxed profits before other countries do.
Conceptually:
Internal deep dive: see /blog/qdmtt-guide and glossary /glossary/qdmtt.
The Income Inclusion Rule (IIR) is the parent-level rule that picks up residual top-up tax on low-taxed income of controlled entities (GloBE Model Rules, Chapter 2). When a qualified IIR applies, it typically collects top-up tax up the ownership chain.
Internal deep dive: /blog/income-inclusion-rule-guide.
The Undertaxed Profits Rule (UTPR) is intended as a backstop if top-up tax is not collected under an IIR. UTPR generally allocates residual top-up tax to jurisdictions where the group has entities, commonly using a formula based on employees and tangible assets (high level).
Internal deep dive: /blog/utpr-guide and glossary /glossary/utpr.
Planning point that teams miss: the Model Rules include an “initial phase of international activity” UTPR exclusion (Art. 9.3) for certain groups—broadly, where the group has entities in no more than six jurisdictions and has ≤ €50m of tangible assets outside its “reference jurisdiction,” for a limited period (and with timing linked to when UTPR comes into effect). (oecd.org)
Most operational models implement a priority logic rather than assuming every statute follows an identical mechanical sequence:
The OECD maintains a “Central Record” of legislation with transitional qualified status. Two practical cautions:
| Mechanism | Who typically pays? | Who collects? | What problem it addresses |
|---|---|---|---|
| QDMTT | Local constituent entities (or per local design) | The low-tax jurisdiction | Seeks to ensure domestic collection before foreign collection (subject to qualified status / recognition) |
| IIR | Parent entity(ies) | Parent jurisdiction(s) | Collects top-up tax on low-taxed subsidiaries when a qualified parent rule applies |
| UTPR | Constituent entities in implementing jurisdictions | Those jurisdictions | Backstops cases where IIR doesn’t apply or doesn’t fully collect |
Rule-order errors are a common cause of “phantom top-up” forecasts (e.g., forecasting UTPR exposure while ignoring an effective/recognized QDMTT). Build your model so QDMTT recognition, IIR priority, and UTPR backstop logic are enforced jurisdiction-by-jurisdiction.
The Pillar Two computation is accounting-based, but it is not the same as the consolidated tax note and not the same as local current tax. The key is to treat Pillar Two as its own calculation framework, anchored in financial reporting data but governed by detailed definitions (GloBE Model Rules, Chapters 3–5).
GloBE Model Rules Art. 5.1 defines the jurisdictional ETR as:
If the jurisdictional ETR is below 15%, the top-up percentage is:
Top-up tax is then computed under the Model Rules’ structure in Art. 5.2, based on:
A practitioner-friendly simplification (still incomplete, but structurally aligned) is:
Important: even where the Model Rules reference “Domestic Top-up Tax,” whether a domestic regime is treated as a qualified QDMTT (and therefore recognized cleanly by other countries for rule-order purposes) depends on implementation and the relevant qualification mechanism. (oecd.org)
Even before getting into complex deferred tax mechanics, Pillar Two differs because it:
Do not use the consolidated financial statement ETR (or local GAAP tax rate) as a proxy for Pillar Two ETR. The differences in tax base, covered tax definition, and blending can swing outcomes materially (GloBE Model Rules, Chapters 3–5).
Most Pillar Two implementations fail (or run late) for data reasons, not technical reasons. At minimum, expect to map:
Align Pillar Two to your financial close calendar: treat it like a “tax close” with reconciliations, controls, and an audit trail. This reduces rework when auditors or tax authorities challenge variances between filings and statutory accounts.
The Substance-Based Income Exclusion (SBIE) reduces the profit subject to top-up tax by carving out a fixed return on substantive activity—measured using eligible payroll costs and eligible tangible assets (GloBE Model Rules, Art. 5.3; OECD Commentary 2025 explains the policy intent).
SBIE is the sum of:
The Model Rules set steady-state rates at 5% of eligible payroll and 5% of eligible tangible assets (GloBE Model Rules, Art. 5.3). Transitional rules provide higher percentages that step down over time (GloBE Model Rules, Art. 9.2). For example:
| Fiscal year (illustrative) | Payroll carve-out rate | Tangible asset carve-out rate | Source |
|---|---|---|---|
| 2024 | 9.8% | 7.8% | GloBE Model Rules, Art. 9.2 |
| 2025 | 9.6% | 7.6% | GloBE Model Rules, Art. 9.2 |
| Later years | Step-down schedule toward 5% | Step-down schedule toward 5% | GloBE Model Rules, Art. 9.2 |
SBIE reduces the top-up tax base (excess profit), not the ETR itself. In low-margin jurisdictions, SBIE can eliminate excess profit even when the jurisdictional ETR is below 15%.
Transitional safe harbours are the fastest path to a workable first-year compliance approach—especially for groups operating in many jurisdictions with modest profits and limited Pillar Two exposure.
This is also where Pillar Two connects directly to CbCR governance and data quality.
For a deeper CbCR-to-Pillar Two workflow, start with /blog/pillar-two-cbcr-guide and your operational baseline /blog/cbcr-preparation-guide.
The OECD transitional safe harbour uses CbCR data plus financial statement information to determine when a jurisdiction can be treated as having top-up tax = 0 for the year—meaning you can avoid a full GloBE calculation for that jurisdiction (OECD Safe Harbours and Penalty Relief, 2022).
The OECD defines a Transition Period for the Transitional CbCR Safe Harbour: it applies to fiscal years beginning on or before 31 December 2026, but not including a fiscal year that ends after 30 June 2028. (oecd.org)
In practical terms, for many calendar-year groups, that generally means the transitional safe harbour can apply to fiscal years 2024, 2025, and 2026, subject to local adoption and year-by-year eligibility.
| Test | What it’s trying to prove | Typical threshold / concept | Source |
|---|---|---|---|
| De minimis | The jurisdiction is too small to be material | Revenue < €10m and PBT < €1m | OECD Safe Harbours and Penalty Relief (2022) |
| Simplified ETR | CbCR-based ETR is at/above a transition rate | Uses simplified covered taxes and income | OECD Safe Harbours and Penalty Relief (2022) |
| Routine profits | Profit doesn’t exceed routine return | CbCR profit ≤ SBIE-like routine return | OECD Safe Harbours and Penalty Relief (2022) |
For triage work, teams usually need the Transition Rate schedule used in the Simplified ETR test:
Safe harbours are not “set and forget.” Eligibility is year-by-year, and OECD guidance includes anti-arbitrage guardrails (e.g., targeted arrangements that would undermine safe harbour outcomes). Your documentation should show data lineage from source systems through CbCR to Pillar Two conclusions.
Avoid a common naming trap: this “de minimis” test is the Transitional CbCR Safe Harbour de minimis test. It is different from the Model Rules Art. 5.5 de minimis exclusion, which is a separate election and uses GloBE-based revenue/income concepts (not CbCR simplifications). (oecd.org)
If your CbCR is prepared late or with heavy manual adjustments, Pillar Two safe harbours will magnify those weaknesses. Treat CbCR process improvements as Pillar Two risk reduction—not just reporting hygiene.
Pillar Two is a “common approach” at OECD level, but compliance is driven by domestic implementation. As of late 2025, many jurisdictions have enacted or are applying IIR/QDMTT, while UTPR is phasing in.
| Jurisdiction / framework | IIR effective (typical) | QDMTT / domestic top-up | UTPR effective (typical) | Primary reference |
|---|---|---|---|---|
| EU | Fiscal years beginning from 31 Dec 2023 | Permitted under directive / implemented nationally | Generally fiscal years beginning from 31 Dec 2024 | Directive (EU) 2022/2523 |
| UK | Periods beginning on/after 31 Dec 2023 (MTT) | Periods beginning on/after 31 Dec 2023 (DTT) | Periods beginning on/after 31 Dec 2024 | UK government technical notes; HMRC guidance |
| Japan | Consolidated accounting years beginning on/after 1 Apr 2024 | Fiscal years beginning on/after 1 Apr 2026 | Fiscal years beginning on/after 1 Apr 2026 | PwC Tax Summaries (Japan) |
| United States | No OECD Pillar Two adoption as of Dec 2025 | N/A | N/A | Reuters (Jan 2025); U.S. Treasury (June 2025) |
EU nuance (important): the Directive includes an election allowing certain Member States (those with no more than 12 in-scope UPEs located there) to delay application of IIR and UTPR for six consecutive fiscal years beginning from 31 Dec 2023 (Art. 50), with a related cross-border arrangement in Art. 50(2). (eur-lex.europa.eu)
EU baseline application dates: Member States apply the Directive measures for fiscal years beginning from 31 Dec 2023, and (with limited exceptions) apply UTPR-related measures for fiscal years beginning from 31 Dec 2024. (eur-lex.europa.eu)
For US-headed groups: non-adoption does not eliminate exposure. If you have entities in countries applying QDMTT/UTPR, you may still face foreign top-up taxes on low-taxed jurisdictions within the group.
The OECD has published a standardized GloBE Information Return (GIR) package (OECD GIR, January 2025). Local implementation determines:
The OECD has indicated that the first GIRs and notifications are expected to be due on 30 June 2026 in many first-wave scenarios (subject to domestic law). (oecd.org)
For example, UK guidance indicates reporting is due 18 months after the end of the first accounting period, and 15 months after subsequent periods. The same UK guidance also frames the process as needing a UK return plus an Information Return or an Overseas Return Notification. (gov.uk)
Filing mechanics (what to distinguish in your operating model):
UK example: HMRC expects (i) registration, then (ii) submission using compatible software, and (iii) a UK submission package that includes a UK return and either an Information Return or an Overseas Return Notification. (gov.uk)
As of December 2025, the US has not adopted Pillar Two domestically. In January 2025, a presidential memorandum stated the OECD deal had “no force or effect” in the United States and directed Treasury to prepare “protective measures” in response to foreign regimes viewed as discriminatory/retaliatory. (reuters.com)
Separately, in June 2025, the U.S. Treasury published a G7 statement describing discussions of a proposed “side-by-side” approach under which U.S.-parented groups would be excluded from the IIR and UTPR in recognition of existing U.S. minimum tax rules (described as a proposed solution, not enacted Pillar Two adoption). (home.treasury.gov)
These examples are intentionally simplified to illustrate the mechanics (full compliance requires detailed Chapter 3/4 adjustments, deferred tax rules, and local law specifics).
Facts (Jurisdiction L):
Step 1 — Jurisdictional ETR (GloBE Model Rules, Art. 5.1)
Step 2 — Top-up percentage (Art. 5.2)
Step 3 — SBIE (FY 2024 transitional rates) (Art. 9.2)
Step 4 — Excess profit (Art. 5.3)
Step 5 — Top-up tax (simplified, ignoring Art. 5.4 items)
Result: €3.975m of top-up tax is generally collected under a qualified IIR in the parent chain (subject to ownership allocation rules) (GloBE Model Rules, Chapter 2).
Same facts as Example 1, except Jurisdiction L imposes a QDMTT that is treated as qualified, and the resulting Domestic Top-up Tax amount for FY 2024 is €4.0m.
Result: No residual top-up tax for IIR/UTPR to collect for that jurisdiction in that year (subject to detailed rules and local implementation/qualification). Internal deep dive: /blog/qdmtt-guide.
Facts (Jurisdiction H, FY beginning in 2025):
Under the Transitional CbCR Safe Harbour de minimis test, if revenue < €10m and profit before tax < €1m, top-up tax is deemed zero for the year (OECD Safe Harbours and Penalty Relief, 2022).
Result: Jurisdiction H can be treated as top-up tax = 0 under the transitional safe harbour for that year, avoiding a full GloBE computation for that jurisdiction.
Scenario: A US-headed group (no domestic IIR as of Dec 2025) has low-tax profits in Jurisdiction L. Jurisdiction L has no QDMTT. Several countries where the group operates apply UTPR.
Facts:
Because there is no QDMTT and no collecting IIR at the parent level, the residual €8.5m may be allocated under UTPR to jurisdictions that have implemented UTPR.
Simplified allocation illustration (not the full rule):
Assume only two UTPR jurisdictions participate in the allocation key:
Why this matters: even without parent adoption, Pillar Two can create foreign cash tax exposure that is operationally complex (multi-country assessments, local adjustments, and potential disputes). This is why many US-headed groups prioritize (i) QDMTT mapping and (ii) safe harbour optimization early.
Internal deep dive: /blog/utpr-guide.
A workable Pillar Two program is less about “getting the math right once” and more about building a repeatable process that survives audits, local filings, and year-to-year change.
Pillar Two is not “transfer pricing,” but it will amplify weaknesses in your existing documentation ecosystem:
Relevant primers:
/blog/transfer-pricing-documentation-guide/blog/cbcr-preparation-guide/blog/benchmarking-study-guideTeams that integrate Pillar Two into their close cycle (rather than treating it as an annual “tax project”) typically reduce first-year rework and are better positioned to defend safe harbour positions and QDMTT/IIR ordering decisions.
/blog/pillar-two-cbcr-guide/blog/qdmtt-guide/blog/utpr-guide/blog/global-minimum-tax-guide/blog/income-inclusion-rule-guide/glossary/pillar-two/glossary/qdmtt/glossary/utprPillar Two is the OECD/G20 Inclusive Framework’s global minimum tax (GloBE rules) that targets a 15% minimum ETR per jurisdiction for large multinational groups, charging a top-up tax when the jurisdictional ETR is below 15% (GloBE Model Rules, Arts. 5.1–5.2).
Pillar Two generally applies to groups with €750m or more consolidated revenue in the UPE’s financial statements in at least two of the four prior fiscal years (GloBE Model Rules, Arts. 1.1–1.2).
Pillar Two ETR is calculated by jurisdiction as Adjusted Covered Taxes ÷ Net GloBE Income (GloBE Model Rules, Art. 5.1). It is not the same as the financial statement ETR.
In general, Pillar Two is designed so that domestic top-up taxes (QDMTTs)—where treated as qualified/recognized—reduce the residual top-up exposure first, then IIR applies as the primary parent-level rule, and UTPR applies as a backstop where IIR does not apply or does not fully collect (GloBE Model Rules; OECD Commentary 2025). (oecd.org)
A QDMTT is a domestic minimum top-up tax intended to allow the low-tax jurisdiction to collect top-up tax first. When treated as qualified, it generally reduces or eliminates residual top-up tax otherwise collected under IIR/UTPR (OECD Commentary 2025; Model Rules Art. 5.2 framework). (oecd.org)
See /blog/qdmtt-guide.
The Substance-Based Income Exclusion (SBIE) is a carve-out that reduces the profit subject to top-up tax using a fixed return on eligible payroll costs and eligible tangible assets (GloBE Model Rules, Art. 5.3).
The Model Rules provide transitional rates that step down over time (GloBE Model Rules, Art. 9.2). For example, 2024 uses 9.8% of payroll and 7.8% of tangible assets; 2025 uses 9.6% and 7.6%, respectively.
CbCR is central to Pillar Two because the Transitional CbCR Safe Harbour uses CbCR data and financial statement information to deem top-up tax = 0 in certain jurisdictions, reducing the need for full GloBE computations (OECD Safe Harbours and Penalty Relief, 2022).
The transitional CbCR safe harbour includes three common pathways: a de minimis test, a simplified ETR test, and a routine profits test (OECD Safe Harbours and Penalty Relief, 2022). The transitional safe harbour is only available during the OECD-defined Transition Period (fiscal years beginning on/before 31 Dec 2026, but not including a fiscal year ending after 30 Jun 2028), and the Simplified ETR test uses Transition Rates of 15% (FY beginning 2023/2024), 16% (2025), and 17% (2026). (oecd.org)
Deadlines are set by domestic law and vary by jurisdiction. For example, UK guidance indicates filing/reporting is due 18 months after the end of the first accounting period and 15 months after subsequent periods. (gov.uk)