The global tax landscape is undergoing its most significant transformation in a generation. The OECD's Inclusive Framework on Base Erosion and Profit Shifting, agreed by over 140 jurisdictions, has produced a set of model rules — commonly referred to as Pillar Two or the Global Anti-Base Erosion (GloBE) rules — that establish a minimum effective tax rate of 15% on the profits of large multinational enterprises.

The implications for international structuring, jurisdictional competition, and the broader architecture of cross-border business are profound and far-reaching.

The mechanics of Pillar Two

The GloBE rules are designed to ensure that large multinational groups pay a minimum level of tax on their profits in every jurisdiction where they operate. The mechanism works through two interlocking rules. The Income Inclusion Rule (IIR) is the primary rule. It requires the parent entity of a multinational group to calculate the effective tax rate (ETR) of each constituent entity in the group, jurisdiction by jurisdiction.

If the ETR in any jurisdiction falls below 15%, the parent entity must include additional income — a "top-up tax" — to bring the effective rate to the minimum. This top-up tax is payable in the parent entity's jurisdiction, regardless of where the low-taxed income was earned. The Undertaxed Profits Rule (UTPR) serves as a backstop. If the parent entity's jurisdiction has not implemented the IIR, or if the IIR does not fully capture the low-taxed income, the UTPR allows other jurisdictions in the group to impose an additional tax on their own constituent entities, allocated proportionally based on the number of employees and tangible assets in each jurisdiction.

The calculation of the ETR under GloBE is not simply the statutory tax rate of the jurisdiction. It is based on the ratio of "covered taxes" (a defined category of income taxes actually paid or accrued) to "GloBE income" (a measure of profit derived from financial accounting, with specified adjustments). This means that jurisdictions with low statutory rates but significant tax incentives — such as patent boxes, R&D credits, or investment allowances — may still fall below the 15% threshold, triggering top-up tax liability.

Who is in scope

Pillar Two applies to multinational enterprise (MNE) groups with consolidated annual revenues of at least €750 million in at least two of the four preceding fiscal years. This threshold places the rules squarely in the territory of large multinationals — the Googles, the Apples, the Amazons, the Shells. Smaller businesses are, for now, outside the scope. But the €750 million threshold should not be taken as a permanent boundary.

When the OECD first introduced country-by-country reporting under BEPS Action 13, the threshold was also set at €750 million. Several jurisdictions subsequently adopted lower thresholds for their domestic implementations. It is entirely plausible — and indeed expected by many tax policy analysts — that the Pillar Two threshold will be lowered over time, bringing mid-sized multinationals within scope.

Moreover, the indirect effects of Pillar Two extend well beyond the MNEs that are directly subject to the rules. Jurisdictions that have historically attracted businesses with zero or near-zero tax rates are adjusting their regimes in response to the global minimum tax. The UAE introduced a 9% corporate tax in June 2023. Bermuda enacted a 15% corporate income tax for the first time in its history, effective for fiscal years beginning on or after January 1, 2025.

Barbados, Jersey, Guernsey, and the Isle of Man have all announced or implemented similar measures.

Implementation status

The European Union adopted its Pillar Two implementation directive in December 2022, requiring member states to transpose the IIR into national law by December 31, 2023, and the UTPR by December 31, 2024. As of October 2024, all 27 EU member states have either enacted or are in the final stages of enacting their implementing legislation. The United Kingdom enacted its Pillar Two legislation in Finance Act 2024, effective for accounting periods beginning on or after December 31, 2023.

Japan, South Korea, Canada, Australia, and Switzerland have all adopted or announced their implementation timelines. In total, more than 30 jurisdictions are expected to have operational Pillar Two regimes by the end of 2025. The United States, characteristically, has taken a different path. While the US was instrumental in negotiating the Pillar Two framework, domestic implementation has stalled in Congress.

The Biden administration's proposed SHIELD rule (Stopping Harmful Inversions and Ending Low-Tax Developments) was not enacted. As a result, the US does not currently apply the GloBE rules domestically — although US-headquartered MNEs may still face top-up taxes in jurisdictions that have implemented the UTPR.

What this means for international structuring

For large multinationals, Pillar Two fundamentally changes the calculus of jurisdictional selection. Routing profits through zero-tax or low-tax entities — a strategy that has underpinned international tax planning for decades — will no longer deliver a tax benefit if the effective rate in those entities falls below 15%. The top-up tax mechanism ensures that the benefit is recaptured by the parent entity's jurisdiction.

This does not mean that tax planning is dead. It means that the focus of planning must shift from rate reduction to substance, efficiency, and defensibility. Jurisdictions will continue to compete — but increasingly on the basis of regulatory quality, legal infrastructure, banking access, and operational convenience rather than on tax rate alone. For small and medium enterprises below the €750 million threshold, the direct impact is limited.

But the indirect effects — jurisdictions raising their tax rates, tightening substance requirements, and increasing enforcement — are already being felt. The tide is rising, and it will eventually reach every shore.

Conclusion

At Fidelys Partners, we have long advocated for structures built on substance rather than rate arbitrage. The global minimum tax accelerates a trend that was already underway. Our approach — designing architectures that are defensible, coherent, and operationally real — is more relevant now than ever. The question is no longer "how low can we go?" but "how strong can we build?"

— Fidelys Partners —