What Is Pillar Two? How Does It Work?

Understanding what is Pillar Two Tax is essential for developing corporate financial strategy. It’s a global tax framework that the Organization for Economic Co-operation and Development (OECD) developed as part of its Base Erosion and Profit Shifting (BEPS) 2.0 initiative, intended to introduce a minimum corporate tax rate worldwide. The goal is to address the challenges of base erosion and profit shifting caused by large multinational entities.

This article provides a clear overview of the structure, purpose, implementation mechanisms, and potential impact on international business. Importantly, it takes a global perspective, rather than focusing on local jurisdictions, making it relevant for companies, entrepreneurs, and legal professionals worldwide.

Overview of the OECD Pillar Two Framework

Pillar Two is part of the OECD’s broader BEPS project, intended to reduce the impact of large companies using tax strategies that exploit gaps or mismatches in international tax rules.

BEPS 2.0 is built around two key phases. The first—Pillar One—tackles the reallocation of taxing rights among different jurisdictions, particularly focusing on large digital and consumer-facing businesses. The second—Pillar Two—is about establishing global minimum tax rates. As a result, it is built around Global Anti-Base Erosion (GloBE) rules; an internationally-accepted framework for ensuring large Multinational Enterprises’ (MNEs’) income is taxed at least to the minimum effective rate in each jurisdiction in which they have operations. 

Objectives of Pillar Two

This regulation has a few key objectives. Firstly, to reduce the incentive for MNEs to move their profits to low-tax jurisdictions, reducing tax base erosion of higher tax countries and limiting harmful tax competition. Additionally, it establishes a floor for corporate tax rates across the globe, maintaining consistency and stability. Finally, it aims to ensure overall fairer taxation of MNEs no matter where in the world they operate.

Key Components of Pillar Two

There are some distinct defining elements to understand. Firstly, this regulation imposes a strict 15% minimum tax rate on multinational corporations with more than €750M in annual revenue, applicable anywhere in the world.

Additionally, it outlines broad definitions of what is considered covered taxes. It goes beyond simple income and includes retained earnings and corporate equity, among other elements. The framework also seeks to align financial reporting standards, such as International Financial Reporting Standards (IFRS) and local Generally Accepted Accounting Principles (GAAP).

Furthermore, the framework utilizes three mechanisms to enforce the minimum rate. The Income Inclusion Rule (IIR) requires parent entities of groups to pay a top-up tax on lower-taxed subsidiary entity income. The Undertaxed Profits Rule (UTPR) allows jurisdictions to collect additional taxes in circumstances where IIR isn’t fully applied. The Subject to Tax Rule (STTR) is a treaty-based mechanism, permitting tax withholding on some cross-border payments when they’re taxed below a minimum rate.

Applying these components is complex, with many companies engaging corporate tax consulting services to adjust strategies accordingly.

How Pillar Two Works in Practice

Implementation starts with calculating the effective tax rate (ETR) of a multinational on a jurisdiction-by-jurisdiction basis. The covered taxes are divided by income in each jurisdiction as defined under GloBE rules. Then, if the ETR is found to be lower than 15%, top-up tax measures are triggered.

The IIR ensures that parent companies are obligated to pay the shortfall in taxes between the jurisdictional ETR and the 15% base minimum. In situations where the company is based in a jurisdiction that doesn’t utilize IIR, the UTPR can be triggered by other jurisdictions the group is present in.

Naturally, these steps add more components to corporations’ tax preparation checklist to ensure compliance.

Who Is Affected by Pillar Two?

This framework only impacts specific entities. Mostly, large MNEs whose annual consolidated revenues exceed €750M. This aligns with thresholds used for country-by-country reporting requirements.

That said, there are some exclusions. Investment funds, pension funds, governmental entities, international organizations, and non-profit entities are among those that aren’t affected, which mitigates corporate tax losses on the condition that they meet specific criteria.

It’s vital to understand, too, that corporate group structures are affected. Parent companies, subsidiaries, and joint ventures will usually be evaluated by their entire structure across jurisdictions. Therefore, even if subsidiaries fall below the threshold, when parent companies’ holdings exceed that amount, this regulation kicks in.

Implementation Timeline

Implementation is still ongoing. The OECD’s GloBE rules were released in December 2021, followed by additional guidance throughout 2022 and 2023. Early movers such as the E.U. mandated member states adopt the framework starting in 2024. There have also been announcements on domestic legislation that aligns with Pillar Two by the U.K., South Korea, and Japan.

Additionally, there have been allowances for phased rollouts of Phase Two, particularly for newly included groups or those jurisdictions that are still developing their administrative capacity. This helps to create a fair transition period that reduces pressure on jurisdictions to rush through insufficient legislation, as well as providing time for MNEs to align their internal systems accordingly.

Compliance and Reporting Requirements

To maintain compliance with GloBE regulations, businesses need to maintain data and documents that accurately track covered taxes, qualified income, and ETR for each relevant jurisdiction. In many cases, this is best achieved through collecting granular financial data and building robust audit trails. There are also additional filing obligations, such as GloBE Information Returns, which outline jurisdictional tax and income information. Companies need to align these new reporting requirements with their existing local financial and tax reporting frameworks to avoid potential costly errors and unnecessary administrative burdens.

Challenges and Considerations

A key challenge of compliance is the additional levels of technical complexity, particularly when it comes to calculating covered taxes and ETR, which requires careful attention to reconciliation of localized financial statements that may follow differing standards. Coordination across multiple jurisdictions is also difficult from the perspective of diverging legal interpretations and data practices that don’t always align easily with this new regulation. Additionally, areas of uncertainty remain—for example, in the treatment of deferred assets—and businesses must monitor ongoing OECD communications to fill gaps in guidance.

Impact on Multinational Tax Strategy

In the near future, Pillar Two is likely to reshape tax planning and jurisdiction selection for corporations, as it starts to fill tax reporting and payment gaps that benefitted certain companies. This not only is likely to affect tax incentives offered by low-tax jurisdictions but also effectiveness of intellectual property (IP) migration strategies and holding company structures. Indeed, many MNEs are starting to adopt substance-based structuring, utilizing carve-outs to reduce income and the applicable tax burden.

FAQs

What is Pillar Two?

It is part of an OECD initiative introducing a global minimum corporate tax rate of 15% to reduce profit shifting by multinationals.

What companies are subject to Pillar Two rules?

Enterprises with annual global revenue over €750 million, unless specifically excluded (e.g., government or pension entities).

What is the purpose of Pillar Two tax reform?

To ensure large corporations pay at least a minimum level of tax in each jurisdiction they operate in, limiting tax avoidance.

What are the GloBE rules?

They’re Global Anti-Base Erosion rules, which include the Income Inclusion Rule, the Undertaxed Profits Rule, and reporting requirements.

When does Pillar Two go into effect?

Implementation varies by jurisdiction, with early adoption starting in 2024–2025, depending on national legislation.

How should businesses prepare for Pillar Two compliance?

By evaluating group structures, assessing effective tax rates by jurisdiction, and updating financial and tax reporting systems.

References

OECD. (2025). Base erosion and profit shifting (BEPS). OECD. https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html

OECD Pillars. (2025). ETR Calculation and Top-Up Tax. OECD Pillars. https://oecdpillars.com/pillar-tab/etr-calculation-and-top-up-tax-2/ 

Ross, S. (2025, April 18). GAAP vs. IFRS: What’s the Difference? Investopedia. https://www.investopedia.com/ask/answers/011315/what-difference-between-gaap-and-ifrs.asp