U.S. status within Pillar 2 uncertain as OECD talk continue

Although finance ministers and central bank governors from the G20 nations indicated in their July 18 communique that they will continue negotiations to exempt U.S. companies from Pillar 2’s primary minimum tax rules ꟷ following on from a G7 agreement announced in late June ꟷ there remains considerable uncertainty regarding how and when the exemption will be implemented. 

The understanding within the G7, which lacks substantive details, resulted in the U.S. withdrawing from the new tax law a proposal, Section 899, that would have imposed retaliatory taxes on companies based in jurisdictions implementing what the U.S. deems to be discriminatory taxes. Among the taxes specifically cited in Section 899 was Pillar 2’s undertaxed profits rule (UTPR). 

The G7 agreement suggested a “side-by-side” solution under which U.S. parented groups would be exempt from the income inclusion rule (IIR) and UTPR in recognition of the existing U.S. minimum tax rules to which they are subject. The agreement aims to recognize the U.S. regime until recently known as global intangible low-taxed income (GILTI) as compatible, effectively allowing it to coexist alongside Pillar 2. Such an agreement has long been advocated by congressional tax writers, particularly among Republicans, who argue that the Biden administration should not have signed on to Pillar 2 framework without an assurance that the U.S. GILTI regime would be deemed compliant or “grandfathered” in. (Note: While the regime previously known as GILTI was amended as part of recent legislation and is now formally referred to as net CFC tested income (NCTI), the term GILTI is used throughout this article for clarity and ease of reference.]

Despite temporary mechanisms introduced to address GILTI within the Pillar 2 framework through various iterations of administrative guidance, a clear and permanent solution has remained elusive. Historically, the OECD blueprint acknowledged that GILTI shares similar objectives and scope with the Pillar 2 global anti-base erosion (GloBE) rules but also highlighted distinct differences, such as global blending, different carry-forward rules, and varying thresholds and expense allocation methodologies. These technical distinctions have complicated attempts at clear alignment.

House Republicans, including Ways and Means Committee Chair Jason Smith, R-Mo., signaled in the last Congress that they would seek to impose retaliatory measures if U.S. companies remained subject to the UTPR, introducing legislation that could not pass the then-Democrat majority Senate. With the Senate, House and White House all in Republican control this Congress, however, the party-line vehicle known as the One Big Beautiful Bill Act (OBBBA) provided an opportunity to turn the threat into a reality. The proposed Section 899 included a two-pronged retaliatory regime: one component would have imposed additional income tax and withholding charges on payments made to persons tied to jurisdictions imposing unfair foreign taxes ꟷ which specifically included digital services taxes (DSTs) and diverted profits taxes (DPTs) in addition to UTPRs; the second would have expanded the application of the base erosion and anti-abuse tax (BEAT) to companies owned by persons tied to those jurisdictions.

Upon the announcement of the G7 agreement to exclude U.S. companies from the primary Pillar 2 taxes and following a request from Treasury Secretary Scott Bessent, Smith and Finance Committee Chair Mike Crapo, R-Idaho, agreed to drop Section 899 from the OBBBA. They noted at the time, however, that “Congressional Republicans stand ready to take immediate action if the other parties walk away from this deal or slow walk its implementation.”

It remains to be seen how concrete this threat is. Several U.S. industry groups pushed back hard against the creation of Section 899, with the National Association of Manufacturers, a group influential in the legislative process that led to the Tax Cuts and Jobs Act and the OBBBA, publicly concerned about the so-called “revenge tax.” In total at least 75 groups lobbied on international tax issues during the second quarter of 2025, according to regulatory filings reviewed by Bloomberg Tax, and while not all may have been opposed to Section 899, a large cross-section of industries were, creating a political challenge to Treasury’s interest in such a tool. In addition, portions of the tax proposal may have faced procedural hurdles in the budget reconciliation process that Republicans used to pass the OBBBA along party lines.

Even without Section 899 in law, the Trump administration has other tools of leverage it may use in international tax negotiations. These include retaliatory tariffs ꟷ such as President Donald Trump began to implement during his first term in response to France’s DST ꟷ and Section 891, a never-used authority dating to the 1930s that allows the president to unilaterally double taxes on foreign individuals and companies in retaliation to “discriminatory or extraterritorial taxes” raised on U.S. companies or individuals by foreign countries.   

For now, implementation of the G7 agreement is the challenge. Working through the OECD over a number of years, more than 140 countries have committed to the two-pillar solution, and more than 60 of those have already enacted Pillar 2 legislation into law. Regardless of the agreement in principle made within the G7, key deadlines for registration and reporting are still in place, with initial filing obligations due as early as the fourth quarter of 2025. It remains uncertain whether the numerous countries that have enacted Pillar 2 laws outside of the G7 nations will back this deal ꟷ or whether they will be able to move quickly on the legal front even if they intend to support it. A number of countries also still have DSTs on the books, though some have put collection of the taxes on hold during the ongoing OECD negotiations.

The EU Commission’s initial response was that the unique treatment of U.S. multinationals could be implemented through a safe harbor without changing the EU directive regarding Pillar 2. However, some in the EU Parliament have criticized the agreement as a concession to the U.S., and other critics contend that excluding the U.S. will deeply undermine Pillar 2 and will prompt other countries to seek concessions that further unravel the original OECD deal. 

Recent remarks by U.S. Treasury Deputy Assistant Secretary for International Tax Affairs, Rebecca Burch, highlight just how unsettled the landscape remains. Burch emphasized that the G7 statement should not be viewed as an indication of what any final agreement will be and confirmed that negotiations within the OECD Inclusive Framework are ongoing.

While the G7’s position is influential, it is not binding on other jurisdictions, and full alignment across the Inclusive Framework will be necessary to fully eliminate the global impact of these rules on U.S. multinational enterprises.

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