On 28 June 2025, the G7 issued a “statement on global minimum taxes” sharing a common understanding on the co-existence of Pillar 2 and US minimum tax rules. In practice, US parented groups would be excluded from the Income Inclusion Rule and the Undertaxed Profits Rules. This comes with the members’ commitment to tackle any risk posed by this coexistence to the level playing field and base erosion/profit shifting. The G7 also commits to work towards simplification on the Pillar Two administration and alignment towards a more favourable treatment of tax credits.
Background
On 20 December 2021, the OECD and G20 Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) issued Model Rules for the implementation of Pillar Two designed to guarantee a minimum level of taxation of a multinational enterprise (“MNE”) group. The OECD/G20 Inclusive Framework on BEPS represents 140 countries and jurisdictions. At EU level, Council Directive (EU) 2022/2523, based on the OECD Model Rules, was released on 14 December 2022 and had to be transposed by EU Member States by 31 December 2023.
Under Pillar Two, MNEs taxed below a 15% effective tax rate in a jurisdiction, are subject to a top-up tax. The latter is levied at the level of the ultimate parent entity (“UPE”) or intermediate parent entity through the Income Inclusion Rule (“IIR”) and where the parent entities do not apply the IIR, entities within the scope of Pillar Two are liable to the top-up tax through the Undertaxed Profits Rules (“UTPR”). Participating jurisdictions are given priority to levy top-up tax arising in their jurisdictions through a qualified domestic top-up tax (“QDMTT”). The OECD maintains a list of qualifying top-up taxes and a peer-review process shall be implemented. Non qualifying status of taxes levied by a country allows other countries to levy the top-up tax.
At US level, a global minimum tax was implemented in 2017 under the so-called Global Intangible Low Taxed Income (“GILTI”). Although it inspired Pillar Two, due to technical differences GILTI was not considered as equivalent to Pillar Two, thus leading to continuous discussions between the US and the OECD/G20 Inclusive Framework. Notable differences include a jurisdictional approach for Pillar Two while GILTI applies a worldwide approach and a minimum effective tax rate of 15% for Pillar Two while GILTI applies a lower effective tax rate.
In the July 2023 Administrative Guidance, the OECD introduced a transitional UTPR safe harbour for the first years of UTPR’s application (financial years beginning on or before 31 December 2025 and ending before 31 December 2026). This effectively excludes from the UTPR UPE’s subject to corporate tax at a rate of at least 20% and gives more time to reach an agreement with the US. However, in January 2025 the US stated that they are not bound by preexisting positions with respect to the Global tax agreement. In addition, the US proposed domestic legislation, specifically the so called “Section 899” foreseeing an increase in domestic withholding tax rates, with treaty override provision, for payments to residents of countries applying “unfair foreign taxes”. The latter included the UTPR, digital services taxes and taxes deemed discriminatory or extraterritorial by the US Treasury.
The G7 statement and OECD response
The statement recalls the history that led to the shared understanding. First, the US concerns about Pillar 2 and their proposal to recognize the US global minimum tax rules with corresponding exclusion of US parented groups from the IIR and the UTPR. Second, the recent legislative developments at US level which notably include an increase in GILTI’s effective tax rate and the removal of Section 899. Finally, the G7 took note of the broad implementation of the QDMTT.
The key point of the statement is the understanding that a coexistence of Pillar Two and the US global minimum tax rules would preserve the progress made by the Inclusive Framework as well as stabilise the international tax system. This G7 consensus relies on the following principles:
- A coexistence of Pillar Two and US rules implies excluding US parented groups from the IIR and UTPR for their US and non-US profits. This comes with the commitment to address any potential risks to the level playing field or BEPS risks resulting from this coexistence.
- A commitment to work towards (i) material simplification of the overall Pillar Two administration and compliance framework and (ii) an alignment of the Pillar Two treatment of substance-based non-refundable tax credits with the treatment of refundable tax credits.
In its statement, the G7 acknowledges that further discussions need to take place within the Inclusive Framework. On the same day, the OECD issued a statement welcoming the G7 declarations and the coming engagement with the OECD Inclusive Framework. The OECD considers that both the US and the OECD global minimum taxes are vital for the international tax system and that the G7 statement falls within the initial objective to set mutually agreed limitations on corporate tax competition and safeguard national tax bases. The statement also recalls that from the taxpayers’ perspective, the cooperation among sovereign nations is essential to enhance tax policy certainty and reduce risks of double taxation.
Way forward
The G7 statement moves forward the discussion on the compatibility of the US global minimum tax and Pillar Two through coexistence and commitment to fill in any gaps in the level playing field. This is a first step, which needs to be further discussed and agreed within the Inclusive Framework then translated in the Pillar Two rules. The proposal includes benefits for a large audience of MNEs within the scope Pillar Two. First, it outlines the need for simplification in Pillar Two administration and compliance obligations. In addition, it proposes changes in the Pillar Two treatment of non-refundable tax credits through an alignment with the treatment of refundable tax credits. Under current rules, non-refundable tax credits are treated as a reduction in income tax while qualified refundable tax credits are treated as an income therefore having less impact on potential top tax liability than the former. Such evolution is of particular importance in a context where tax credits are a favoured policy tool to tackle high priority matters such as environmental issues and enhance R&D expenses. This is especially relevant for Luxembourg MNEs subject to Pillar Two as Luxembourg investment tax credits are non-refundable.
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