It was envisaged that Pillar 2 would help address issues of tax competition though the setting of minimum tax at 15%. However the recent amendments, particularly the side by side system, risk reintroducing fragmentation and planning opportunities.
Why the amendment to Pillar 2 was necessary
BEPS 1.0 while instrumental in shutting down the use of harmful tax practices, left scope for improvement. Corporate tax statistics by the OECD suggest that the median profit per employee, the closest proxy for substance based activity was, but for 2020, the highest for investment hubs[1]. The US has tried to onshore activities through the tax cuts and jobs act. As per Arnon et al. (2021)[2] the tax cuts and job acts helped onshore activities such as R&D by US MNEs and their affiliates[3], particularly due to the shift in the tax treatment. There is also an observed convergence in the effective tax rates (ETR) paid by US based parent MNE and the foreign affiliates[4], particularly on account of the lower domestic tax rates in the US. The ETRs are above 15% for most foreign affiliates and there were few countries where the rate is below the GMT average, noticeably Singapore and Switzerland. It is expected that with these countries introducing a minimum tax the improvement in effective tax rates continues. Although a lot has changed since 2021, for which the latest data is available, the aforementioned trends and the application of the UTPR explain the US’ withdrawal from Pillar. The US is keen to use domestic tax policies to compete while ensuring that it is seen as compliant with the principles of GloBE. However, a key departure is that global blending is permissible under the US Non CFC Tested Income[5] unlike GloBE ETR calculations.
Challenges from recent amendments
The recent amendments to the Pillar 2 agreement include simplified effective tax rate, a new category of qualified tax incentives and the safe harbor for MNEs operating in jurisdictions with eligible tax systems. Even though the qualified tax incentives still operate within the strict confines of substance based caps, the other two amendments exacerbate coordination issues and leave scope for tax planning.
Need for enhanced coordination
Simplified effective tax rate is when the ETR calculated based on consolidated financial statements with minimal adjustments of the ‘tested jurisdiction’ is 15% or more, then the UPE can elect just the ETR safe harbor to apply to such jurisdiction. The eligibility of an entity is to be tested annually and where the entity does not qualify in a year, it cannot avail of the safe harbor until two years after. A key concern is that entities will move in and out of the SH and this creates complications for the tax authorities to keep track of such elections over the years. Although certainty is maintained where an advance pricing agreement is signed, through adjustments to Jurisdictional Profit Before Tax and Jurisdictional Income Tax Expense, the election of the system can make coordination difficult when an entity is covered under the simple ETR and then under GloBE. Further, the complexity of the interaction of rules is exacerbated by unilateral advance pricing agreements and where an expense is disallowed under the domestic statute, not including those which have been listed for adjustments, by tax authorities. Therefore, though the suggested change is an exercise in simplification, it adds the need for coordination.
Limited Tax Incentives
The amendment to include the qualified tax incentives, retains the substance based cap where an entity can continue to offer tax incentives that may not be a qualified refundable tax credits and marketable transferable tax credits. The treatment of these tax incentives is that they are not added to GloBE income nor to covered taxes, benefitting companies that are in receipt of production or expenditure linked incentives. Although the 5.5% cap based on employee costs or depreciation, or 1% on the carrying value of tangible assets elected by the MNE provides more room for tax incentives, this can be beneficial to developing countries like India where fiscal support through production linked incentives[6] are made available.
Tax planning continues
The most controversial among these is the side by side system whereby a UPE located in a country with an eligible SbS system will be exempt from the application of IIR and UTPR, though not QDMTT. The OECD defines systems that can qualify as compatible with SbS system-
The domestic tax system should have the following features- Statutory corporate tax rate of at least 20%, a QDMTT or minimum tax of 15% and no material risk that in scope MNEs will face an ETR of less than 15%. The worldwide tax system should include- Comprehensive foreign income inclusion regime covering both active and passive CFC incomes, substantial unilateral mechanisms to address BEPS risks, no material risk that MNEs in scope, foreign tax credit for QDMTTs and enacted the system prior to Jan 2026. At the moment, the US is the only system that qualifies under the SbS. However, as more countries apply for the exemption, the impact of the Pillar 2 may be muted as compared with initial assessments. It is observed that different countries are choosing different design for legislations.
Two countries that are of significance to India are Singapore and Mauritius that make up for nearly 50 per cent of total FDI inflows, followed by 10% from USA[7]. Singapore has applied for SBS SH, Mauritius has applied only a QDMTT and the US selected the SbS system. Therefore for investments that are structured through these countries India will have to align with different systems. Where a partner country does not introduce a SbS system and or elects one which is compliant but with lower tax incidence, it is possible that a MNE may elect be relocate to a ‘suitable’ SbS system. This is a problem specifically for India where tax residence in Mauritius is oft contested issue before Courts[8], raising concerns of how would such a system tabilize. A further concern is if the SbS system is taken as applicable, does it rule out any application of GAAR or PPT to a treaty, as the regime would qualify as GloBE compliant and minimum taxes are paid. Therefore the risk of tax planning is not substantially mitigated.
Concluding remarks
The amendments to Pillar 2 are expected to bring more complexity especially where countries begin to elect their systems as qualified for SbS. For developing countries like India the benefits of Pillar 2 are limited in so far as the application of IIR or UTPR is concerned. Among the companies listed in Forbes 2000[9], MNEs headquartered in India account for only 1.74% of sales and 2.5% of the number of companies. Moreover, India applies a domestic minimum alternate corporate tax of 15% to book profits in India. The only issue that is a concern for India that Pillar 2 could remedy is the tax planning carried out through the structures in low tax jurisdictions. It is possible that tax planning will continue to thrive given that the option of global blending and differences in SbS systems.
Pillar 2 was in spirit a good proposal, as it set a floor on minimum taxes. Countries however have expressed their need to preserve sovereignty and therefore modifications to the proposal were necessary. The recent amendments retain the option to apply domestic systems but with added features of the GLoBE proposal, creating a system that will in time require more coordination efforts and clarity on how these systems interact.
Author would like to thank Prof Irma Mosquera and Prof Peter Hongler for the opportunity to participate in the roundtable of 10 June 2026. She would also like to thank Mr. Marteen De Wilde for reviewing the article.
[1] Page 96, Corporate Tax Statistics 2025 (EN)
[2] Profit Shifting and the Global Minimum Tax | Penn Wharton Budget Model
[3] Activities of U.S. Multinational Enterprises (MNEs) | U.S. Bureau of Economic Analysis (BEA)
[4] Recent Trends in US Multinational Activity | Penn Wharton Budget Model
[5] Side-by-side? The future of Pillar Two minimum corporate tax rules
[7] 41192ca92c1de34eb064800fbffa0379.pdf
[8] https://www.bdo.global/en-gb/insights/tax/world-wide-tax/india-supreme-court-reverses-course-on-tax-residency-certificates-in-landmark-decision
[9] Based on reference of data from 2021