What Pillar Two is and where it comes from
Pillar Two is part of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS). It sets a global minimum effective corporate tax rate of 15%, applied through a set of coordinated rules known as the Global Anti-Base Erosion (GloBE) rules.
The framework was developed to address profit shifting into low-tax jurisdictions, particularly by large MNE groups with the resources and structures to do so at scale. The Inclusive Framework, which includes over 140 countries, agreed the GloBE model rules in December 2021. Since then, individual countries have been legislating the rules into domestic law at different speeds and with varying degrees of deviation from the model.
The practical effect is that a group paying below a 15% effective tax rate in any jurisdiction, whether through low statutory rates, tax incentives, holidays or other arrangements, may now face a top-up tax charge to bring the effective rate to the minimum. That charge does not necessarily arise in the low-tax jurisdiction itself. Depending on which rules a country has enacted, the liability may arise in the parent jurisdiction, in another group member’s jurisdiction or locally under a QDMTT.
Who does Pillar Two apply to?
The revenue threshold is EUR 750 million in consolidated annual revenue, met in at least two of the four fiscal years immediately preceding the current year. Groups below this threshold are not in scope under the GloBE rules, though some jurisdictions have introduced or are considering domestic minimum taxes that apply more broadly.
Within a qualifying group, the rules apply to constituent entities, broadly any entity included in the consolidated group accounts, plus any entity that would be included if the group prepared accounts under an accepted accounting standard. This includes holding companies, intermediate parents, joint ventures (in some cases) and permanent establishments.
Several categories of entity are excluded from the GloBE rules entirely. These include governmental entities, international organisations, non-profit organisations, pension funds and investment funds that are the ultimate parent entity of the group. Certain regulated financial services entities also benefit from specific treatment.
It is worth noting that the threshold applies at the group level, not the entity level. A subsidiary operating in a jurisdiction with modest local revenues may still be a constituent entity subject to the rules if the group as a whole meets the EUR 750 million threshold.
The three charging mechanisms: IIR, UTPR and QDMTT
The GloBE rules operate through three interlocking mechanisms. Understanding how they interact is important for assessing where a top-up tax liability will arise.
Income Inclusion Rule (IIR)
The IIR is the primary charging mechanism. It allows the ultimate parent entity (UPE), or where the UPE is in a non-implementing jurisdiction an intermediate parent entity (IPE), to impose a top-up tax on the low-taxed income of constituent entities. The IIR operates from the top down: the parent jurisdiction collects the top-up tax if the low-taxed entity is not already subject to a qualifying domestic minimum top-up tax.
Undertaxed Profits Rule (UTPR)
The UTPR is a backstop mechanism. It applies where the top-up tax due under the IIR has not been fully collected, for example because the UPE is located in a jurisdiction that has not implemented Pillar Two, or because the IIR has not captured the full amount. In that case, other group jurisdictions that have enacted the UTPR can collect the remaining top-up tax in proportion to certain allocation keys (employees and tangible assets).
Qualified Domestic Minimum Top-up Tax (QDMTT)
A QDMTT allows a jurisdiction to collect its own domestic top-up tax before the IIR or UTPR applies. If the QDMTT is structured in a way that qualifies under OECD criteria, it reduces the IIR and UTPR liability dollar for dollar. This means the tax stays in the source jurisdiction rather than being collected by the parent’s country. Many jurisdictions across Asia-Pacific have introduced or are in the process of legislating QDMTT rules, partly to retain tax revenue that would otherwise flow to implementing parent jurisdictions.
How the ETR calculation works
The ETR is calculated on a jurisdiction-by-jurisdiction basis using the formula: covered taxes divided by GloBE income. Both the numerator and denominator are adjusted from the amounts in the financial statements.
The key adjustments to each component are set out below.
| Component | Starting point | Key adjustments |
|---|---|---|
| GloBE income | Accounting net income or loss of constituent entities in the jurisdiction (aggregated) | Exclude dividends from ownership interests above certain thresholds; exclude equity gains and losses; add back certain excluded equity gains; apply policy elections such as treatment of stock-based compensation |
| Covered taxes | Current and deferred taxes on income per the financial statements | Recalculate deferred tax assets and liabilities using a 15% cap; exclude taxes not levied on income; exclude certain intra-group withholding taxes |
Where the jurisdictional ETR falls below 15%, the top-up percentage is 15% minus the ETR. That top-up percentage is then applied to the excess profit, being GloBE income after the substance-based income exclusion, to determine the top-up tax amount.
Substance-based income exclusions
The substance carve-out is one of the most commercially significant features of the GloBE rules for groups with genuine operational presence in a jurisdiction. It reduces the amount of GloBE income subject to the top-up tax by excluding an amount based on payroll costs and the carrying value of tangible assets.
During a transition period, the carve-out is set at 10% of eligible payroll costs and 8% of eligible tangible assets. These percentages reduce over time: by 2033, they will settle at 5% of payroll and 5% of tangible assets.
Eligible payroll costs are the qualifying compensation costs of employees who perform activities for the group in the jurisdiction. Eligible tangible assets include property, plant and equipment, natural resources, right-of-use assets and certain intangible assets in limited cases. The exclusion does not apply to investment entities or insurance investment entities.
Groups with significant physical operations and local headcount in a jurisdiction will generally have a lower exposure than pure holding structures or IP-holding entities in the same market. For groups relying on investment incentives in manufacturing or infrastructure sectors, the SBIE may partially offset the impact, but is unlikely to eliminate it entirely.
Implementation timeline and where countries stand
The first wave of implementing jurisdictions, including the EU member states, the United Kingdom, Japan, South Korea, Switzerland and Australia, introduced IIR rules effective for fiscal years beginning on or after 31 December 2023. Several of these jurisdictions also introduced QDMTT rules in the same cycle.
A second wave of jurisdictions has introduced or is actively legislating rules, including a number of countries across Southeast Asia and the broader Asia-Pacific region, and that wave is moving quickly. The detail varies by jurisdiction, both in timing and in the specific registration and filing steps that apply locally.
The UTPR is generally following on a delayed schedule. Several jurisdictions have deferred UTPR implementation, in part because of ongoing technical guidance from the OECD and because of concerns about reciprocity. On 5 January 2026, the OECD released a “Side-by-Side” package that introduced new safe harbours allowing US-parented groups to elect zero top-up tax under the IIR and UTPR. As of the time of writing, the US is the only jurisdiction that qualifies. The relief applies only for fiscal years beginning on or after 1 January 2026. For the 2024 and 2025 fiscal years the full rules continue to apply to US-parented groups, including the 2024 GloBE Information Return due by 30 June 2026. Even where the safe harbour is elected for later years, QDMTT liabilities and filing obligations remain in place. For groups with ultimate parent entities outside the US, including most groups with Asian or European parents, the rules apply in full.
For groups with operations across Asia-Pacific, the relevant question is not just whether a jurisdiction has enacted the rules, but whether a QDMTT has been introduced (which affects where the tax is collected), whether the local rules deviate materially from the model (which affects calculation) and whether transitional safe harbours are available (which may simplify the compliance obligation in the short term).
Transitional safe harbours
The OECD introduced a transitional country-by-country reporting (CbCR) safe harbour that allows groups meeting any one of three tests, being a de minimis test, a simplified ETR test or a routine profits test, to treat the top-up tax for a qualifying jurisdiction as zero based on existing CbCR data, without performing the full GloBE calculation. As part of the January 2026 Side-by-Side package, this safe harbour was extended by a year and now covers fiscal years beginning on or before 31 December 2027 and ending on or before 30 June 2029. Eligibility still turns on a jurisdiction-by-jurisdiction assessment rather than a group-wide position.
The same package introduced a permanent Simplified ETR Safe Harbour as the longer-term simplification. It generally applies for fiscal years beginning on or after 1 January 2027, with limited early application from 2026, and is calculated on jurisdictional subgroups using financial reporting data, though it still involves a number of adjustments. It does not carry over the de minimis and routine profits tests of the transitional CbCR safe harbour, so groups that have relied on either of those tests have the benefit of the extra transitional year but a narrower permanent option afterwards.
Practical implications for group tax and finance functions
The rules reach beyond the tax return into how groups are structured and whether finance functions can produce the data the GloBE calculation depends on.
Group structuring
Pillar Two does not render all low-tax structures immediately unviable, but it does change the cost-benefit analysis. The combination of the ETR floor and the SBIE means that structures built around tax incentives, particularly those in jurisdictions offering reduced rates on income from certain activities, need to be reassessed. The key variables are the magnitude of the incentive, the substance in the relevant jurisdiction and whether a QDMTT has been introduced locally.
Restructuring for Pillar Two purposes carries its own risks, including transfer pricing implications, permanent establishment exposure and changes to beneficial ownership conditions that may affect treaty access. Any structuring review needs to account for the interaction between Pillar Two and the broader tax profile of the group.
Finance data readiness
The GloBE calculation requires data that finance teams are not always positioned to produce quickly. The input data, covering jurisdiction-level GloBE income, covered taxes including deferred tax recalculations, payroll costs and tangible asset carrying values by constituent entity, sits across consolidation systems, local statutory accounts and payroll records. For groups with complex legal entity structures, a significant number of constituent entities or operations in jurisdictions with limited reporting infrastructure, the data aggregation challenge is substantial.
Groups should assess whether their existing consolidation and data processes can support the GloBE calculation. That assessment is more useful than waiting for a full impact analysis, because data gaps are often the primary obstacle to completing the calculation at all.
Local vs central tax control
Pillar Two has effectively created a governance question for group tax functions: who owns the calculation, and how is information shared between the centre and local markets? The rules are calculated at the group level for IIR purposes, but local data is essential, and local QDMTT obligations (where they exist) are filed locally.
Groups without a clear governance model, covering a defined owner for the GloBE calculation, agreed data flows between local finance teams and group tax and a process for reviewing local tax positions against GloBE implications, are likely to find the compliance process more difficult and the risk of inconsistent positions higher.
What CFOs should do now
Most of the decisions that matter for Pillar Two exposure sit with the CFO and group tax function, not with individual country teams. The practical steps are relatively straightforward to describe, though each one involves real work. For December year-end groups, the first GloBE Information Return (GIR) fell due 18 months after the fiscal year end, on 30 June 2026.
- Confirm scope. If consolidated revenue is above EUR 750 million in two of the last four years, the group is in scope. If it is close to the threshold, trend analysis is worth doing now.
- Map jurisdiction-level exposure. For each jurisdiction where the group has constituent entities, the key questions are: What is the approximate ETR? Is there a QDMTT in place? Does the jurisdiction qualify for the transitional safe harbour? What is the substantive presence (payroll, tangible assets)? This does not need to be a full GloBE calculation, but it needs to be precise enough to identify where material exposure may exist.
- Review data readiness. Can the finance function produce jurisdiction-level GloBE income, covered taxes and SBIE inputs from existing systems? If not, the gap needs to be understood and a plan developed. Waiting until the first filing year to discover data gaps is a significant risk.
- Align governance. Who is responsible for the GloBE calculation? How are local teams providing data? Is there a process for reviewing material local tax decisions against Pillar Two implications before they are taken? These questions are easier to answer early than under compliance deadline pressure.
