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Federal Tax

Treasury Officials Tease Upcoming OECD Pillar Two Guidance

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

The Organization for Economic Co-operation Development (OECD) is working with the U.S. to release guidance on its global minimum tax regime that will address the treatment of global intangible low-taxed income (GILTI) and certain credits, according to Treasury Department officials.

As the OECD’s second “pillar” of its global anti-base erosion rules (GloBE)—which imposes a 15% global minimum top-up tax—progresses further toward fruition, concerns have been raised about how current U.S. law may conflict despite the Biden administration’s hopes of conforming with the international tax framework.

President Biden and Treasury Secretary Janet Yellen have long supported implementing the global tax plan stateside and have coordinated with the OECD to do so. Meanwhile, the European Union in December directed its members to adopt the global minimum tax by the end of 2023.

Isaac Wood, attorney advisor at Treasury’s Office of Tax Policy, said in introductory remarks at a D.C. Bar tax conference panel January 26 that from a U.S. perspective, the goal is to “level the playing field” for domestic businesses, while also protecting workers and middle class families. According to Wood, two current areas of focus are refining Pillar Two rules and their administration. “The idea here is how we can create a coherent system that works for U.S. taxpayers, and works for all the tax administrations which are going to interact with the rules in one way or another,” he said.

Pillar Two’s global minimum tax calculation and application is comprised of several key parts. The income inclusion rule (IIR) is the primary component, requiring parent companies of multinational enterprises (referred to as ultimate parent entities) to top-up tax rates on profits in jurisdictions where they operate to 15%. Next, the undertaxed payment rule (UTPR) functions as a backstop to apply to low-tax profits of foreign subsidiaries that may not be encompassed by the IIR. Countries may also adopt a qualified domestic minimum top-up tax (QDMTT) that is factored before the IIR or UTPR.

“The QDMTT is prioritized with the result that a jurisdiction with a QDMTT becomes the first in line to receive any top-up revenue from entities located in its jurisdiction,” observed tax policy experts at London-based Macfarlanes, LLP. “Without a QDMTT, that revenue would go to another country as determined by the Pillar Two rule order.”

At issue is how these aspects of the global minimum tax interact with GILTI, established in 2017 by the Tax Cuts and Jobs Act. The tax applies to such intangibles such as patents, trademarks, or copyrights. Wood said additional Pillar Two guidance is needed quickly that would, among other things, provide clarity on GILTI, because “there’s going to be difficulties tracing your GILTI liability to a specific [controlled foreign corporation]” since “GILTI is done so much on a blended basis.” Wood alluded to work that has been done “towards a mechanical allocation key that would reduce the compliance burdens, reduce the opportunity for disputes.”

Other items forthcoming guidance may address include treatment of investments involving U.S. tax credits like those relating to low-income housing and renewable energy projects, according to Wood. Also, guidance could shed light on treatment of internal asset transfers under U.S. generally accepted accounting principles.

At a separate panel at Thursday’s annual D.C. Bar conference, Treasury Office of Tax Policy Deputy Assistant Secretary for International Tax Affairs Michael Plowgian said that a package of 25-30 issues is currently being discussed and that guidance is expected to be issued “very soon.” He hinted that this package will focus on safe harbor issues in addition to GILTI and credit matters forecasted by Wood earlier that day, as well as QDMTTs.

“This is a set of issues that … is very political,” said Plowgian. “It’s a set of issues that lots of countries care about, including countries that didn’t really care about the IIR or the UTPR. That is going to drive … some of the guidance that we see in the QDMTT space” in the near future.

Chip Harter, senior policy advisor at PricewaterhouseCoopers, LLP, said at the same panel that in the coming years, QDMTTs “are likely to be nearly universal.” He said that U.S. multinationals will face a 15% tax rate “any place they do business,” and will thus not have “significant tools of low-tax income.”

“The benefit under current global blending disappears if you don’t have low-tax earnings in significant amounts to blend,” said Harter. “Simultaneously, U.S. multinationals will be faced with the enormous complexity of applying two very complex systems with respect to their income earned through CFCs,” he added, noting that GILTI does not currently fall under the OECD IIR purview.


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