Definition
Pillar Two refers to the OECD/G20 Inclusive Framework's Global Anti-Base Erosion (GloBE) Rules, which establish a 15% global minimum effective tax rate for large multinational enterprises (MNEs). The rules are designed to ensure MNEs pay a minimum level of tax on income arising in each jurisdiction where they operate—calculated on a jurisdictional basis using GloBE-adjusted financial accounting data.
Pillar Two is one of two pillars of the OECD/G20 international tax reform package. Pillar One addresses profit allocation and nexus rules; Pillar Two addresses minimum taxation.
OECD/Regulatory Reference
The GloBE Model Rules were published by the OECD/G20 Inclusive Framework on BEPS on 20 December 2021. The rules are set out in the document titled "Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two)".
Key supplementary guidance includes:
- Commentary to the GloBE Model Rules (March 2022)
- Administrative Guidance on the GloBE Rules (multiple releases, 2023–2025)
- Safe Harbours and Penalty Relief (December 2022)
- GloBE Information Return (July 2023, updated January 2025)
The rules apply to MNEs with consolidated group revenue of €750 million or more in at least two of the four fiscal years immediately preceding the tested fiscal year.
In Practice
Core Mechanics:
| Component | Description |
|---|
| Minimum Rate | 15% effective tax rate |
| Scope | MNEs with ≥€750M consolidated revenue |
| Calculation Basis | Jurisdictional (not entity-by-entity) |
| Top-Up Tax | Difference between 15% and actual jurisdictional ETR |
Charging Mechanisms (Rule Order):
- QDMTT — Qualified Domestic Minimum Top-up Tax (domestic rule applied first)
- IIR — Income Inclusion Rule (parent jurisdiction collects residual top-up)
- UTPR — Undertaxed Profits Rule (backstop if IIR doesn't apply)
Key Calculations:
Jurisdictional ETR = Adjusted Covered Taxes ÷ Net GloBE Income
Top-Up Tax % = 15% − Jurisdictional ETR (if ETR < 15%)
Top-Up Tax = Top-Up Tax % × Excess Profit
Excess Profit = Net GloBE Income − SBIE
SBIE (Substance-Based Income Exclusion): A carve-out that reduces the income subject to top-up tax based on payroll costs and tangible asset carrying values in the jurisdiction. This protects profits attributable to genuine economic substance.
Example
Facts:
- MNE Group has a subsidiary in Jurisdiction L
- Net GloBE Income in Jurisdiction L: €100 million
- Adjusted Covered Taxes: €8 million
- Eligible payroll: €40 million
- Eligible tangible assets: €60 million
- SBIE transitional rates (FY beginning 2025, per Article 9.2): 9.6% payroll + 7.6% tangible assets
Calculation:
ETR = 8 / 100 = 8%
Top-Up Tax % = 15% − 8% = 7%
SBIE = (9.6% × 40) + (7.6% × 60) = 3.84 + 4.56 = 8.4
Excess Profit = 100 − 8.4 = 91.6
Top-Up Tax = 7% × 91.6 = €6.41 million
Result: €6.41 million of top-up tax is due. If Jurisdiction L has a qualified QDMTT, that jurisdiction collects the tax. Otherwise, the IIR or UTPR applies.
Transitional Safe Harbours
For fiscal years beginning on or before 31 December 2026 (but not including fiscal years that end after 30 June 2028), the OECD provides Transitional CbCR Safe Harbours that allow MNEs to treat a jurisdiction as having zero top-up tax if any of these tests are met using CbCR data:
| Safe Harbour Test | Condition |
|---|
| De Minimis | Average Revenue < €10M AND Average Profit < €1M (or loss) |
| Simplified ETR | Simplified ETR ≥ Transition Rate (see below) |
| Routine Profits | Profit ≤ SBIE amount |
Simplified ETR Transition Rates:
- FY beginning 2023 or 2024: 15%
- FY beginning 2025: 16%
- FY beginning 2026: 17%
Related Terms
- QDMTT — Qualified Domestic Minimum Top-up Tax
- UTPR — Undertaxed Profits Rule
- Income Inclusion Rule — Primary charging mechanism
- Top-Up Tax — The additional tax due under GloBE
- Country-by-Country Report — Data source for safe harbours
Further Reading
- Pillar Two Guide — Comprehensive overview of GloBE Rules
- Global Minimum Tax Guide — ETR calculations and mechanics
- Pillar Two & CbCR Hub — All Pillar Two resources
Frequently Asked Questions
What is the Pillar Two minimum tax rate?
The GloBE Rules establish a 15% minimum effective tax rate. If an MNE's effective tax rate in a jurisdiction falls below 15%, top-up tax is due to bring the effective rate to 15%.
Who is in scope for Pillar Two?
MNEs with consolidated group revenue of €750 million or more in at least two of the four fiscal years immediately preceding the tested fiscal year. Certain entities are excluded, including governmental entities, international organizations, non-profit organizations, pension funds, investment funds that are ultimate parent entities, and real estate investment vehicles that are ultimate parent entities. Entities owned ~95%/~85% by excluded entities may also be excluded subject to conditions.
When did Pillar Two come into effect?
The GloBE Model Rules were published on 20 December 2021. In the EU, Member States apply IIR/QDMTT generally for fiscal years beginning from 31 December 2023 and UTPR for fiscal years beginning from 31 December 2024, subject to limited deferral elections.
How is the effective tax rate calculated?
The jurisdictional ETR equals Adjusted Covered Taxes divided by Net GloBE Income for jurisdictions with positive Net GloBE Income. Both the numerator (taxes) and denominator (income) are subject to adjustments from the financial accounting starting point. The calculation is performed on a jurisdictional basis, aggregating all constituent entities in each jurisdiction.
What is the relationship between Pillar Two and transfer pricing?
Pillar Two uses financial accounting income as its starting point but shares data infrastructure with transfer pricing (particularly CbCR for safe harbours). Transfer pricing determines how profits are allocated between jurisdictions; Pillar Two then applies minimum taxation to those allocated profits.
Can a jurisdiction avoid Pillar Two by having a QDMTT?
A Qualified Domestic Minimum Top-up Tax (QDMTT) allows a jurisdiction to collect the top-up tax domestically before the IIR or UTPR applies. This gives the source jurisdiction first right to the revenue but does not avoid the tax—it redirects where it's collected.
What happens if no jurisdiction applies Pillar Two rules?
If the parent jurisdiction doesn't have an IIR and no UTPR jurisdictions exist, the MNE may currently escape the minimum tax. However, as more jurisdictions adopt GloBE rules, these gaps are expected to close. The UTPR acts as a backstop mechanism.