OECD Reaches Agreement on New “Side-By-Side” Pillar Two Framework for U.S. Multinationals

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The Organization for Economic Co-operation and Development (OECD) Inclusive Framework recently announced a significant development for U.S.-headed multinational companies. The OECD agreed to a new Pillar Two “side-by-side” framework that substantially limits the application of the OECD Pillar Two global minimum tax to U.S. groups. The U.S. and other G7 countries reached an agreement expected to treat the U.S. tax system as compliant with Pillar Two and exempt U.S.-headed multinational enterprise (MNE) groups from certain global minimum top-up taxes.

The OECD Pillar Two global minimum tax represents one of the most significant changes to international corporate taxation in decades, aiming to ensure that large multinational enterprises pay a minimum effective tax rate of 15% on a country-by-country basis. While many jurisdictions have moved forward with implementation, Pillar Two’s interaction with the U.S. international tax regime, particularly net tested income (previously known as GILTI), has remained a central point of tension.

The Pillar Two side-by-side framework is a critical development for multinational businesses, allowing OECD Pillar Two and U.S. tax rules to coexist without triggering punitive outcomes for U.S.-headed multinational groups. It shapes how the global minimum tax will apply in practice and provides greater certainty amid an otherwise complex and evolving tax landscape. 

Below we outline the Pillar Two rules in more detail and explain the side-by-side agreement and its potential effects.

Pillar Two and the Side-by-Side Framework for U.S.-Headed Multinationals

Pillar Two is part of a global tax reform initiative led by the OECD and adopted by many countries worldwide. Its purpose is to ensure that very large multinational companies pay a minimum level of tax on their profits, regardless of where those profits are reported.

In simple terms, Pillar Two introduces a global minimum tax rate of 15% for large multinational groups. If a company pays tax below this level in any country, Pillar Two rules allow another country — typically where the parent company is located — to impose an additional “top-up” tax to bring the total tax paid up to the minimum rate. The goal of Pillar Two is to disincentivize large multinational groups from shifting profits to low-tax jurisdictions.

Pillar Two currently applies only to large multinational enterprise (MNE) groups — those with consolidated revenue of 750 million euros or more, again to ensure they pay a minimum level of tax in every jurisdiction where they operate, regardless of how their operations are structured.

The computation begins with accounting profit (subject to certain adjustments) determined on a country-by-country basis. An effective tax rate is then calculated by dividing the taxes paid in the jurisdiction by the adjusted accounting profit. Before any top-up tax is assessed, Pillar Two excludes a portion of profit attributable to substantive activities, including employees (payroll) and tangible assets such as buildings, equipment and factories. If the resulting effective tax rate is 15% or higher, no Pillar Two tax applies; if it is below 15%, a top-up tax is imposed.

Example
A multinational earns $100 of profit in Country A and pays $10 of tax, resulting in a 10% effective tax rate. After excluding $10 of profit attributable to payroll and tangible assets, $90 remains subject to Pillar Two. Because the minimum required rate is 15%, an additional 5% top-up tax applies.
Top-up tax = 5% × $90 = $4.50.

Under the new side-by-side approach, the United States is recognized as having an eligible tax regime, allowing U.S. tax rules to operate alongside Pillar Two without triggering its most punitive provisions. As a result, qualifying U.S. multinational groups are effectively exempt from top-up taxes under the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), which have been the primary areas of concern for U.S. companies operating globally.

Safe Harbors

The agreement introduces two important Pillar Two safe harbors. The side-by-side safe harbor for U.S.-headed MNEs protects eligible groups from IIR and UTPR exposure, while preserving the application of foreign Qualified Domestic Minimum Top-Up Taxes (QDMTTs). In addition, an Ultimate Parent Entity (UPE) safe harbor effectively removes U.S. domestic income from the OECD Pillar Two global minimum tax, provided certain minimum tax and effective tax rate conditions are met.

Other Provisions

The OECD package also includes expanded relief for substance-based tax incentives, a permanent simplified effective tax rate calculation beginning in 2027, and an extension of transitional Country-by-Country Reporting (CbCR) relief through 2027. CbCR requires large multinational groups to report key financial and tax information for each jurisdiction in which they operate, enabling tax authorities to assess transfer-pricing and profit-shifting risks.

Takeaway

Although implementation will depend on local legislation in each jurisdiction, this announcement represents a meaningful reduction in both compliance complexity and potential tax exposure for U.S.-headed multinational groups subject to OECD Pillar Two, particularly with respect to global minimum top-up taxes under the IIR and UTPR.

Contact Us

If you have any questions about international tax matters, please contact your PKF O’Connor Davies client service team or:

Peter D. Baum, CPA
Partner
pbaum@pkfod.com | 914.341.7088

Leo Parmegiani, CPA, MST
Partner
lparmegiani@pkfod.com | 646.699.2848

Thomas Kinder
Director
tkinder@pkfod.com | 908.520.6346