Negotiators Make Progress on Pillar Two Negotiations

The Trump administration is racing to finalize an agreement before the end of the year that would exempt U.S. multinationals from key aspects of Pillar Two under a “side-by-side” system. 

Negotiations with the Organisation for Economic Co-operation and Development (OECD) have been complex and contentious since the U.S. agreed to drop the proposed “reciprocal tax” under Section 899 from the One Big Beautiful Bill Act (OBBBA) in exchange for a commitment from G-7 countries to seek an agreement on exempting the U.S. from some Pillar Two taxes. Reports suggest the U.S. and the OECD may finally be nearing an agreement on a robust package of administrative guidance that would: 

• Create a side-by-side safe harbor that would exempt U.S.-parented multinationals from the income inclusion rule (IIR) and the undertaxed profits rule (UTPR). 
• Simplify compliance and reporting for all countries with a new new permanent safe harbor to replace the current temporary safe harbors.
• Provide parity for substance-based nonrefundable credits like the U.S. R&D credit, so that like certain refundable credits, they would not reduce effective tax rates for Pillar Two tax purposes.
  
  

The U.S. has reportedly conceded that there will be no “pushdown” of the tax on net CFC tested income (NCTI) (formerly global intangible low-taxed income, or GILTI), so that income will first be subject to a qualified domestic minimum top-up tax (QDMTT) before NCTI or GILTI applies.  

The deal could be subject to ongoing evaluation to provide a level playing field. In addition, the side-by-side safe harbor would be structured to fit the parameters of the U.S. tax system, but would presumably be available to other countries that meet the standards. 

Many other open questions remain, including the relief’s effective date and when countries would implement the new rules. Although the U.S. has been pushing for retroactive implementation, it appears that the most likely effective date is January 1, 2026. The U.K. has already warned that they may not be able to implement any changes in their law until 2027, and there is some controversy over whether the EU has the authority to make the changes without opening up the current Pillar Two directive directive or violating anti-discrimination rules.