Pillar Two - How it works

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Pillar Two – how it works

Pillar Two – how it works

The OECD (Organisation for Economic Cooperation and Development) Pillar Two framework seeks to address the tax challenges arising from the digitalisation of the economy and a perceived “race to the bottom” on global corporation tax with wide-reaching implications for many international businesses. The main purpose is to reduce incentives for base erosion and profit shifting by limiting tax competition among countries. This is to be achieved through ensuring that large multinational groups pay a minimum level of tax on the profits arising in each jurisdiction in which they operate.

Since publication of the rules, there has been uncertainty around many areas of their operation, including their application to US-headed groups. While areas of uncertainty remain, as of January 2026 we have confirmation that US-headed groups will remain in scope of certain aspects of Pillar Two and the longer term future of the framework appears secure. With returns due from June 2026 and ongoing obligations in the longer term, impacted groups should be ensuring compliance without delay.

The rules apply to businesses with annual consolidated revenues of at least €750 million in at least two out of the prior four accounting periods. They apply for accounting periods commencing on or after 31 December 2023, and therefore the first period in scope of the rules will depend upon the accounting period of the group. Common structures likely to be impacted are those involving:

Tax havens, low-tax jurisdictions and jurisdictions with territorial regimes.
Notional interest deduction regimes.
IP (Intellectual Property) boxes and other similar incentives regimes including tax holidays.
Certain tax credit regimes.
Low-taxed financing, IP and global centralisation arrangements.
Certain partnership structures.
Certain consolidated funds and other similar investment entities such as Real Estate Investment Vehicles.
Groups undertaking M&A activity.

However, every organisation with global revenues of €750m or more will need to act to be compliant with Pillar Two (even if no top-up tax is likely to be due). In addition, organisations that are close to the threshold will need to actively monitor whether they continue to fall outside of scope and, if on a growth trajectory, take action to prepare for Pillar Two compliance when they cross the revenue threshold.

The impact of M&A activity may bring businesses into scope, or take them out of scope, immediately and the impact of this will need to be considered in transactional documentation and processes, such as due diligence.

Internal restructuring events, such as reorganisations and company or debt rationalisation exercises, will need to be reviewed with the Pillar Two rules in mind to ensure that they do not adversely impact the application of safe harbours or even result in top-up tax as the Pillar Two tax base is fundamentally different to that for corporate income tax purposes.

Pillar Two has both short and long-term impacts. In scope businesses should expect a significant increase in their compliance burden as the calculations needed are complex and many of the data points required may not currently be tracked, requiring updates to your systems and changes to existing compliance processes.

Make sure your team is confident in navigating complex Pillar Two legislation with our expert-designed, customisable training modules. Designed to give finance and tax teams a strong foundation in both the legislation and its practical application, our training helps you:

Minimise risk and errors by equipping your team with the knowledge to apply Pillar Two rules correctly.

Spot issues early so global teams can identify and respond to risks in real time.

Demonstrate good governance and a proactive approach to compliance to HMRC and other stakeholders.

Our dedicated global team of International Corporate Tax, Tax Accounting and Tax Technology experts can also support your business with Pillar Two planning, training, compliance and reporting. Through our global network, we provide a consistent, joined-up approach—ensuring your teams are prepared, informed, and aligned.

Find out more here or view an instant demo by filling out a short form.

The OECD’s Pillar Two framework (the ‘Model Rules’) aims to ensure businesses with consolidated revenues above €750 million pay a minimum effective tax rate (ETR) on income in each jurisdiction in which they operate. Commonly referred to as BEPS (Base Erosion and Profit Shifting) 2.0, the framework imposes a ‘Top-Up Tax’ on profits arising in jurisdictions where the ETR (as determined under a detailed set of rules) is below 15%.

In scope businesses must, going forwards, comply with additional tax filing requirements both at the global level – with the new GloBE Information Return (GIR) – and in local implementing jurisdictions.

The core elements of Pillar Two are:

An Income Inclusion Rule (IIR)
An Undertaxed Profits Rule (UTPR)
A framework for a Qualified Domestic Minimum Top-up Tax (QDMTT)

Under the IIR, where a business’ ETR in any jurisdiction is below the minimum 15% rate, the ultimate parent entity (UPE) is primarily liable for a top-up tax to bring the rate up to 15%.

As a backstop the UTPR can apply, through allocation of top up tax in respect of low taxed profits which are not subject to the charge under an IIR to other group entities.

A country may also choose to implement a QDMTT alongside the IIR and UTPR. This would enable the relevant territory to retain taxing rights in respect of low taxed profits arising in its territory (rather than the relevant profits being taxed in the parent entity’s jurisdiction under IIR or sister jurisdictions under UTPR). In this respect, the QDMTT essentially becomes the primary taxing right. Most implementing territories include a QDMTT in their adoption of the Pillar Two rules.

The calculation mechanism for determining the ETR, for comparison with the minimum 15% rate, is broadly the same under all three charging provisions in that it blends elements of current and deferred tax and, therefore, requires an understanding of international tax principles as well as deferred tax accounting in undertaking the calculations. However, there are some differences for QDMTTs, particularly in the treatment of the allocation of foreign taxes.

In addition, while the mechanism is similar, the source data for calculating ETR under QDMTT of some jurisdictions may be based on local GAAP accounts rather than the accounting standard used to prepare consolidated financial statements of the UPE which can result in complexities and an additional administrative burden.

Further, the implementation of the Pillar Two rules is not consistent in every implementing jurisdiction, with significant technical and practical differences. Monitoring differences between QDMTT provisions and OECD Model Rules, and complying with relevant local requirements, will be a key part of the challenge of the practical response to Pillar Two.

Find out more about our Pillar Two training here.

Since the initial publication of the Model Rules, a number of safe harbour provisions have been introduced by the OECD (and implementing jurisdictions) to provide simplification and ease the administrative burden of Pillar Two, by eliminating the need to perform a full ETR and top‑up tax calculation and reducing reporting requirements in relation to jurisdictions that are considered to be at reduced risk of being low-taxed based on a higher level assessment. It is important to note, however, that these safe harbours do not eliminate reporting requirements.

The key safe harbours available to businesses are:

The Transitional Country-by-Country Reporting (CbCR) Safe Harbour (TCSH): The TCSH applies for the first three years of Pillar Two (extended to four in January 2026) and allows jurisdictions meeting the qualifying CbC Report and one of the three simplified tests (De Minimis, Simplified ETR, or Routine Profits) to be treated as having zero top up tax, removing the need for full GloBE calculations and significantly reducing reporting requirements.
Simplified compliance for non-material constituent entities (NMCEs): the NMCE ‘safe harbour’ permits lighter-touch reporting and simplified top up tax calculations for entities below materiality thresholds that are not consolidated line by line, reducing the compliance burden for small or peripheral entities.
The QDMTT Safe Harbour: Where a jurisdiction has implemented a Qualified Domestic Minimum Top-up Tax (QDMTT), the QDMTT safe harbour enables the local QDMTT to be the sole applicable charging mechanism, mitigating the need to consider multiple different charging mechanisms under different territorial rules.
The UTPR Safe Harbour: The UTPR safe harbour temporarily switches off the UTPR in the UPE jurisdiction for groups whose UPE is in a jurisdiction without an IIR but with a statutory corporate income tax rate of at least 20%, preventing UTPR allocations on the UPE jurisdiction’s profits until 2027 or until that jurisdiction introduces a qualifying IIR.

The OECD’s January 2026 Side by Side Package introduced three further safe harbours, applying for fiscal years beginning on or after 1 January 2026 (subject to implementing legislation in jurisdictions that have adopted Pillar Two):

The Simplified ETR Safe Harbour (SESH): The SESH introduces a long-term simplification mechanism by allowing groups to calculate a simplified jurisdictional ETR – based on streamlined profit and tax adjustments – and removing the requirement to undertake full GloBE ETR calculations where this simplified ETR exceeds 15%. Unlike the TCSH, re-entry into the SESH is possible where certain criteria, including that there is no top up tax is the previous two years, are satisfied.
The Side-by-Side Safe Harbour (SbS SH): Under the SbS SH, groups with a UPE in a jurisdiction that the OECD designates as having a Qualified SbS Regime (i.e., both an eligible domestic and eligible worldwide tax system) may elect to be excluded from both the IIR and UTPR for all operations, although QDMTTs still apply. Currently, the only designated jurisdiction is the US.
The UPE Safe Harbour (UPE SH): The UPE SH effectively extends the UTPR safe harbour, allowing groups to exclude profits in the UPE jurisdiction from the UTPR where that country has an eligible domestic tax system, even if it does not meet the more stringent requirements for the SbS regime. Jurisdictions need to apply to the OECD to have their jurisdiction designated.

In addition to the IIR, UTPR and QDMTT charging provisions discussed above, a multilateral instrument on the subject to tax rule (the STTR MLI) has been adopted by the OECD Inclusive Framework to facilitate the implementation of the Pillar Two STTR rule. This is a treaty-based rule which allows the source (or payor) jurisdictions to impose additional tax on several categories of cross-border intragroup payments when such payments are subject to a nominal corporate income tax rate of below 9% in the residence (or payee) state and is expected to be most beneficial to developing countries.

The MLI will allow the STTR rule to be included within existing bilateral tax treaties without the need to make any amendments to those agreements provided that both jurisdictions sign up to the MLI.

The timing of implementation for each charging provision varies by territory. Most territories have opted to implement the IIR and QDMTT first, with the earliest movers having legislated for these rules to be effective from 1 January 2024 (accounting periods beginning on or after 31 December 2023). Implementation of the UTPR has generally followed, being effective from 1 January 2025 at the earliest, however not all implementing territories have chosen to adopt the UTPR.

The UK’s implementation of the Pillar Two rules are included within Finance (No.2) Act 2023 and came into effect for accounting periods beginning on or after 31 December 2023. The UK government has sought to align with the intent of the OECD Model Rules as closely as possible, both from a policy perspective, and to ensure that the UK’s regime is recognised as a ‘qualifying’ regime by other territories introducing the rules. A number of amendments to the original legislation were made in Finance Act 2024 and Finance Act 2025, a number of which eliminated differences between the UK regime and the OECD Model Rules. However, some differences remain apparent.

The enacted legislation includes the IIR, referred to as the ‘multinational top-up tax’ or MTT, and a QDMTT, referred to as ‘domestic top up tax’ or DTT. Both MTT and DTT apply to businesses with global revenues exceeding EUR 750m in two of the previous four years, for accounting periods beginning on or after 31 December 2023. Unlike Pillar Two and MTT, DTT is applicable to wholly domestic UK groups and to a standalone UK entity if it meets the revenue threshold test.

Legislation has also been enacted to implement the UTPR, which came into effect from accounting periods beginning on or after 31 December 2024.

The enacted legislation also includes the safe harbour provisions in line with the OECD rules such as the TCSH provision and UTPR safeharbour, and including a simplified calculation approach for non-material and non-consolidated entities. Additional legislation to implement other OECD safe harbours, namely those under the January 2026 ‘Side by Side’ package, is expected.

BDO’s Pillar Two Implementation Tracker monitors the status of adoption of the OECD's global minimum tax rules in countries across the world, keeps you updated on legislative changes and helps you understand their impact on your business.

The UK’s enacted legislation also sets out the following reporting framework:

A one-time requirement for relevant groups, the UPE or a filing member, to register with HMRC within six months of coming into scope of the rules – for example, groups with a 31 December year end who already met the turnover requirement when the rules came into effect should have registered by 30 June 2025.
An annual domestic information return /overseas return notification, to confirm entities’ UK top-up tax liabilities, to be submitted to HMRC within 15 months after the end of the accounting period (extended to 18 months for a group’s first return).
Payment of the UK top-up tax liability in a single instalment due 15 months after the end of the accounting period (18 months for a group’s first period).

It should be noted that other territories have differing registration, filing and payment requirements and associated timelines, and in scope groups will need to monitor these timelines across their territories of operation.

Typically, the group should be able to benefit from a central filing of the annual Globe Information Return (GIR) such that it does not need to file a local information return in each of the implementing jurisdictions that it operates in, provided that the jurisdiction in which the GIR is filed has a Multilateral Competent Authority Agreement (MCAA) with other jurisdictions and the nominated filing member (if not the UPE) is located in that GIR filing jurisdiction. Where a group benefits from central filing of GIR, such that full local information returns are not required, it may still be required to file a notification in the other implementing jurisdictions in which it operates. A list of countries signed up to MCAA can be found here.

Irrespective of whether any top-up tax becomes payable, the compliance burden for affected organisations will be significant, as there are many data points that will be required to be incorporated into determination of the effective tax rate of a territory under the rules.

Disclosures in financial statements

Now that the Pillar Two rules are in force, in-scope groups have both a disclosure obligation from a reporting perspective and any tax arising under Pillar Two will need to be quantified in the tax provision.

From a current tax perspective, tax arising under Pillar Two should generally be accounted for as an income tax.

The accounting framework requires disclosure of the expected impact of the Pillar Two rules in periods in which the rules are substantively enacted but not yet in force. Once the rules are in force, the requirement switches to disclosure of the top-up tax with potentially a reduced narrative/qualitative disclosure obligation. However, many multinational groups will now experience several periods of flux where some entities are fully in the scope of the rules, while others are in territories which are either yet to legislate or where the rules have been substantively enacted, but no tax can yet fall due. This patchwork brings with it both complexity in terms of where any additional tax will be levied in these ‘in between’ years and the need to still include disclosures for those territories yet to come ‘online’, as well as an estimate of any tax due for those already in force.

In estimating Pillar Two liabilities, groups need to expect a greater level of scrutiny from their auditors as amounts are being recognised in the accounts and not only disclosed. This also applies where groups are stating there is no liability to account for. The following are our observations in this respect:

The importance of data

Auditors will be as interested in the source of the data used in the estimates (and the processes used to gather that data), as the estimates themselves. Groups may find it difficult to obtain sufficiently granular data for the current period and therefore use the previous period’s data to arrive at the estimate. This is potentially acceptable, but auditors will want assurance and may test that no one off events or changes in the underlying business mean that the past position is not indicative of the current period. Technology can have an important role in accelerating the ability of a group to use current period data to derive Pillar Two outcomes (as well as to support from a process perspective) and is therefore likely to be an important feature in ensuring smooth audit processes and facilitating real-time planning.

Many groups are using Country-by-Country Reporting (CbCR) data to underpin their estimates through reliance on the transitional CBCR safe harbour, where such data exists or can be forecast. The TCSH provides for a much-simplified determination of whether top-up tax is due in a territory where the CbC Report is “qualifying” for a territory. It is a generally sensible approach to seek reliance on this safe harbour where possible, but in some cases, it has not been possible for a business to easily evaluate whether they are able to produce a CbC Report that is ‘qualifying’ under the relevant rules. To be ‘qualifying’ means to meet certain requirements on how the CbC Report is compiled and the data sources used. This will need to be tested, and assurance obtained, before reliance can be placed on the TCSH in any jurisdiction. In periods prior to the rules coming into force, many groups were able to state to their auditors an intent to ‘fix’ the process for the first reporting period where the rules apply. However, in periods where the rules are in effect and businesses are in scope, auditors will want to understand the work that groups have undertaken to satisfy themselves that their CbC Report is qualifying for each jurisdiction where they intend to rely upon it, what issues were identified and what remedial work is underway.

For the 2026 and 2027 periods, both the TCSH and the SESH are in principle available to groups. Businesses may wish to run parallel calculations to determine which safe harbour may apply in each jurisdiction, and where there is a choice of which to rely on, should take into account factors such as the different consequences of claiming each (for example, due to interaction with the transitional period).

Moving goalposts

The OECD has issued several sets of guidance to clarify, and in some cases amend or augment, the Pillar Two framework. Countries are then legislating and issuing guidance at different paces to reflect these OECD changes, or to remedy deficiencies and unintended consequences in their own drafting.

It is likely that there will continue to be significant practical divergence from what should be a ‘model’ set of rules due to the approach of different legislatures and competing domestic requirements.

For example, there has been divergence of certain territories from the OECD recommended timeline for registration and reporting for Pillar Two reporting processes, as well as certain countries requiring much more detailed local returns, in some cases including a significant amount of information on the global group, than was envisaged. In other cases, no return is required where no top-up tax is due. We expect to see more such deviations from the OECD suggested approach as time passes.

Find out more about the latest developments in the implementation of Pillar Two around the world

UK only groups are not fully exempt from the rules

One of the perhaps surprising outcomes from a set of rules that is prima facie designed to tax multinational groups is that UK-only groups are not exempt from the entire framework if they breach the turnover threshold. The DTT, which is designed to ensure that the UK retains the taxing rights over UK income, applies to such groups – and hence they also need to demonstrate they are paying an effective rate of more than 15% under the rules to avoid an additional charge, with the same disclosure obligations in the accounts.

Further, even a very small UK subsidiary of a large multinational group will be in scope of the DTT and must take action to comply.

Pillar Two is not just a compliance and reporting matter

While there are undoubtedly compliance and reporting challenges associated with Pillar Two, it must be remembered that it is a live tax. That means that the Pillar Two consequences of any transaction, restructuring or other event should be analysed in parallel to the Corporate Tax, VAT or stamp duty consequences prior to implementation. This will need to be built into group tax governance processes, and appropriate training (see here) provided to workers to be able to identify potential Pillar Two implications and to seek support where needed.

We support “in scope” groups by undertaking impact assessments which broadly involves establishing the application of Pillar Two for the group facts (entity identification and characterisation), a review of the safe harbours/de minimis limits and their application to the group as an initial phase, and determination of ETR and the resulting top up tax on a jurisdictional basis as the next phase, where the safe harbours are not applicable or a group chooses not to rely upon the safe harbours. A key part of this work is review of the CbCR process itself and testing whether it produces a “qualifying” CbC Report in territories where the group intends to rely upon the TSCH. We are supporting many groups with this review, and the ground-up design or re-design of the CbCR process itself.

Alongside this, a thorough data analysis is a key foundation in any Pillar Two response strategy. Pillar Two is a technical challenge, but it is also a data challenge and undertaking a thorough review to map the data the business holds to the data that the Pillar Two rules require, and then addressing identified gaps, is a crucial part of the Pillar Two response strategy.

Adopting a methodical approach to the Pillar Two impact assessment will allow the correct disclosures to be made in financial statements and will also provide a working assessment of future Pillar Two tax exposures. Additionally, it will identify and address data gaps that will be required to complete the full calculations, either where a safe harbour is not applicable (or not elected for) and provide a baseline for the implementation of technology to support future reporting and compliance efforts.

We are also supporting subsidiaries and sub-groups of overseas parented groups by reviewing and leveraging any work that has been undertaken at head-quarter level to assess impact on the subgroup, including any nuance in local implementation of the Pillar Two rules that has not been addressed as part of the group review. In some instances, no work may have been undertaken in the parent jurisdiction to date as some notable countries, such as the US and China, are not currently progressing with local implementation of the Pillar Two rules. Many groups headquartered in these territories were adopting a ‘wait and see’ approach to Pillar Two compliance planning, but must now play catch up following the release of the OECD’s ‘Side-by-Side Package’ in January 2026, securing the future of Pillar Two and its (reduced) application to these businesses.

We have a dedicated global team made up of International Corporate Tax, Tax Accounting and Tax Technology experts who can advise and assist you and your business with Pillar Two compliance. Through our global network, we can provide consistency and a joined-up approach to Pillar Two.

We can also provide advisory support in relation to the impact of Pillar Two on your group, including a review of the Side-by-Side package and what it means for long terms compliance and reporting.

We are supporting groups with the identification and implementation of technology solutions to streamline compliance and reporting processes should groups wish to insource Pillar Two compliance.

More information

Please see the below links for more Pillar Two information:

View a demo of our Pillar Two training product

View our Pillar two webinar playlist