A Look at the Global Tax Agreement 126   Recently updated !

 in Tax Guide  tagged A Look at the Global Tax Agreement by (updated 9 days ago)

In recent years, the international community has been working to change global tax rules for multinational corporations. In October 2021, over 130 countries agreed on a framework for new rules through the Organisation for Economic Co-Operation and Development (OECD). This plan has two main components, known as “pillars.”

The Two Pillars: What They Are and Where They Stand

Pillar One: Redistributing Taxing Rights

Pillar One aims to give countries the right to tax a portion of the profits of large multinational companies, even if those companies don’t have a physical presence there. This is especially relevant for digital companies and would affect firms with more than €20 billion in revenue and a profit margin above 10%. Under this plan, 25% of a company’s profit above the 10% margin could be taxed in countries where it has sales. The goal is to move about $200 billion in profits to these countries.

A draft treaty for Pillar One was released in October 2023, but a final agreement has yet to be reached. This has created uncertainty, especially as a previous agreement between the U.S. and several countries on digital services taxes has expired.

Pillar Two: The Global Minimum Tax

Pillar Two is focused on creating a global minimum tax of 15% for multinational companies with revenues over €750 million. The goal is to prevent companies from avoiding taxes by shifting profits to countries with very low tax rates. This could raise an estimated $220 billion in global tax revenue.

Unlike Pillar One, many countries have already started implementing Pillar Two. As of August 2025, 65 countries have either drafted or passed legislation to adopt these rules. This new system relies on financial accounting data rather than tax data, which adds a layer of complexity for both governments and businesses.

The Pillar Two framework includes:

  • A domestic minimum tax to allow countries to tax profits below the 15% rate.
  • An income inclusion rule that ensures a parent company’s foreign income is taxed at the 15% minimum rate.
  • An undertaxed profits rule that allows a country to collect additional tax on a company if an affiliate in another country is taxed below the 15% rate.
  • A subject to tax rule, which is designed to ensure certain payments between related companies are not taxed at a very low rate.

The U.S. and the Global Tax Deal

While many countries are moving forward with Pillar Two, the United States has not yet adopted it. The U.S. Congress has not implemented the necessary changes, and the current administration under President Trump has threatened to retaliate against countries that impose the global minimum tax on U.S. companies.

Recently, an agreement at the G7 meeting suggested a “side-by-side” approach where other countries would respect U.S. tax laws and not apply their new rules to U.S.-based companies. However, this agreement needs to be translated into official guidance and national laws to be enforceable.

Broader Implications

The new rules, particularly Pillar Two, will significantly increase the complexity of international taxation for both governments and businesses. While the minimum tax aims to stop a “race to the bottom” on corporate tax rates, it also changes the incentives for countries that want to use tax breaks to attract investment. Moving forward, governments may favor direct subsidies and grants over traditional tax credits to encourage business investment.

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