The Latest on the Global Tax Agreement

In recent years, countries have debated significant changes to international tax rules affecting multinational companies. In October 2021, after negotiations at the Organisation for Economic Co-Operation and Development (OECD), more than 130 member jurisdictions agreed to an outline for new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rules. However, in the years since that initial agreement much has changed.

The proposal would require large companies to pay more taxes in countries where they have customers and less in countries where they have headquarters, employees, and operations. Additionally, the agreement set out a global minimum tax of 15 percent, which would increase taxes on companies with earnings in low-tax jurisdictions.

Several dozen governments are currently implementing the minimum tax rules.

The OECD proposal follows an outline that has been discussed since 2019. There are two “pillars” of the reform: Pillar One changes where large companies pay taxes (impacting roughly $200 billion in profits); Pillar Two introduces the global minimum tax (increasing tax revenues by an estimated $220 billion, globally).

A draft of the multilateral treaty for Pillar One was published in October 2023, and a deadline of June 2024 for a final agreement has come and gone. The agreement between the US and several nations with discriminatory digital services taxes has also lapsed. Canada, which was not part of that agreement, has implemented its own digital services tax.

The implementation of Pillar Two happened in 2024 for the earliest adopters.

Pillar One contains “Amount A” which would apply to companies with more than €20 billion in revenues and a profit margin above 10 percent. For those companies, a portion of their profits would be taxed in jurisdictions where they have sales; 25 percent of profits above a 10 percent margin may be taxed. After a review period of seven years, the €20 billion threshold may fall to €10 billion.

Amount A is a limited redistribution of tax revenue from countries where large multinationals operate to countries where they have customers. US companies constitute a large share of these companies.

The Joint Committee on Taxation in the US Congress has estimated that the US would likely lose some tax revenue (an estimated $1.4 billion in a single year) due to Amount A. They also estimate that approximately 70 percent of the potential profits to be reallocated under Amount A is generated by US domestic multinationals.

Pillar One also contains “Amount B” which provides a simpler method for companies to calculate the taxes on foreign operations such as marketing and distribution. In December 2024, the OECD released guidance on using the Amount B framework starting in January 2025.

Pillar Two is the global minimum tax. It includes three main rules and a fourth for tax treaties. These rules are meant to apply to companies with more than €750 million in revenues. Model rules were released in December 2021.

The first is a domestic minimum tax which countries could use to claim the first right to tax profits currently being taxed below the minimum effective rate of 15 percent.

The second is an income inclusion rule, which determines when the foreign income of a company should be included in the taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. of the parent company. The agreement places the minimum effective tax rate at 15 percent, otherwise additional taxes would be owed in a company’s home jurisdiction.

The income inclusion rule would apply to foreign profits after a deduction of 8 percent of the value of tangible assets (like equipment and facilities) and 10 percent of payroll costs. Those deductions would be reduced to 5 percent each over a 10-year transition period.

Importantly, Pillar Two rules rely primarily on financial (i.e., “book”) accounting data rather than tax accounting data. These book/tax differences mean that the Pillar Two rules account for timing differences by focusing on deferred tax assets which can include net operating losses and capital allowances. However, those deferred tax assets must be valued at the 15 percent minimum tax rate.

Like other rules that tax foreign earnings, the income inclusion rule will increase the tax costs of cross-border investment and impact business decisions on where to hire and invest around the world—including in domestic operations.

The third rule in Pillar Two is the undertaxed profits rule, which would allow a country to increase taxes on a company if another related entity in a different jurisdiction is being taxed below the 15 percent effective rate. If multiple countries are applying a similar top-up tax, the taxable profit is divided based on the location of tangible assets and employees.

Together, the domestic minimum tax, income inclusion rule, and undertaxed profits rule create a minimum tax both on companies investing abroad and foreign companies investing domestically. They are all tied to the minimum effective rate of at least 15 percent and would apply to each jurisdiction in which a company operates.

The fourth Pillar Two rule is the “subject to tax rule,” meant to be used in a tax treaty framework to give countries the ability to tax payments that might otherwise only face a low rate of tax. The tax rate for this rule would be set at 9 percent.

The outlined version of Pillar Two is like a template that countries can use to design their rules. If enough countries adopt the rules, then a significant share of corporate profits across the globe would face a 15 percent effective tax rate.

The 27 European Union member states are in the process of implementing the Pillar Two rules in line with a unanimously agreed directive. Companies with an annual turnover of at least €750 million will begin to pay the 15 percent minimum rate starting in 2024. This includes wholly domestic groups that meet the revenue threshold.

Member states with more than 12 in-scope multinational groups must implement the income inclusion rule from 31 December 2023, and the undertaxed profits rule from 31 December 2024. Those member states with fewer than 12 can elect to defer implementing both rules for six years. According to reports, these include Estonia, Latvia, Lithuania, Malta, and the Slovak Republic.

As of 27 February 2025, 65 countries have either introduced draft legislation or adopted final legislation transposing Pillar Two’s model rules into their national laws.

So far, the US Congress has chosen not to implement changes in line with the global tax deal. Though the Biden administration supported the agreement, Congress left those changes out of the 2022 InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. Reduction Act (IRA). Furthermore, Chairman of the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. , Representative Jason Smith (R-MO), recently introduced retaliatory legislation that would counter laws adopted by foreign countries applying minimum tax rules to American multinationals.

President Trump has threatened to retaliate against other countries that impose the global minimum tax on US companies and has revived trade threats against foreign digital services taxes. In a memorandum published on 20 January 2025, the President directed the US Treasury Secretary to publish findings and recommendations within 60 days. The President also included digital services taxes in his “Fair and Reciprocal Plan” for US trade relations.

Other governments are also reviewing Pillar Two. Germany and the Netherlands released a joint informal statement in December 2024 saying that minimum tax should be the starting point of an effort to “declutter” international tax rules. While the statement does not endorse repeal of the rules, it notes there is “broad potential for simplification.”

Additionally, the finance minister for the German state of Hesse has called for the suspension of the global minimum tax in response to President Trump’s threat of retaliation.

If US policy does not shift or there is no substantive change to the minimum tax rules, US companies will be caught in a confusing web of minimum taxes including Global Intangible Low-Tax Income (GILTI), the Base Erosion and Anti-Abuse Tax, the new Corporate Alternative Minimum Tax from the IRA, and likely some portion of the global minimum tax rules. Recent guidance on Pillar Two means that US GILTI would apply after foreign minimum taxes, reducing US tax revenues from the tax on GILTI. A prior version of the Pillar Two proposal would have given GILTI and US companies much better treatment than current rules.

The structure of the rules means adoption in the 27 EU countries, Japan, Korea, the United Kingdom, and a number of other significant jurisdictions will dramatically impact multinationals across the globe.

The rules clearly incentivize government subsidies to businesses to offset some of the increased costs from the minimum tax. This is because standard tax credits are at a disadvantage relative to government grants and refundable credits.

Undoubtedly, this is a step change in the level of complexity for corporate tax both for governments in their legislating and enforcement roles and taxpayers and their compliance burdens.

The agreement represents a major change for tax competition, and many countries will be rethinking their tax policies for multinationals. If there is no agreement on changes to Pillar Two or digital services taxes, retaliatory American tariffs could be on the horizon.

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