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At a Sept. 23 public hearing of the European Parliament’s Subcommittee on Tax Affairs, European Commission director Benjamin Angel provided additional insights into the “side-by-side” tax system being discussed at the OECD Inclusive Framework level to exclude U.S. multinationals from certain components of the Pillar Two Global Minimum Tax rules. (See previous Grant Thornton article for background.)
Notably, Angel commented that any “side-by-side” accommodation for U.S.-parented groups would require clear safeguards and specific qualifying criteria, noting that today’s overall U.S. multinational taxation may be roughly equivalent to Pillar Two but could change with future policy shifts. The goal of the side-by-side system, agreed to by G7 countries this summer, would be to create a criteria-based, non-U.S.-centric framework that preserves a level playing field and aligns with the spirit of the Pillar Two rules that more than 140 countries agreed to.
From an EU law perspective, amending the bloc’s directive to deem the U.S. system “equivalent” appears difficult, given jurisdictional blending and rule-of-law considerations. The commission’s preference is to route any U.S. accommodation through an OECD-linked safe harbor, leveraging the directive’s dynamic link to OECD safe harbor guidance. Even then, member states would need to enact changes into local legislation. As things stand, the undertaxed profits rule (UTPR) — allowing jurisdictions to impose a top-up tax on multinationals paying a global tax of less than 15% — could still apply to U.S. groups unless and until a safe harbor is agreed and implemented.
Angel emphasized that the EU is acting in good faith to reach a balanced, rules-consistent outcome, while also pushing forward on permanent safe harbors to support longer-term stability. He also highlighted uneven global adoption — major economies including China and India participate in the discussions but are not fully aligned — and the need to reach an international understanding quickly so EU countries can legislate any required changes.
Grant Thornton Insight:
With the UTPR now operative across the EU and the timing of any OECD-linked safe harbor uncertain, U.S.-parented groups should continue preparing and modeling UTPR exposure based on currently enacted law. There is a long path to meeting the U.S.’ stated Dec. 31 target for an OECD agreement and, even if it is reached, coordinated (and potentially retroactive) transposition by all EU member states appears challenging. The hearing nonetheless signaled a direction — toward a criteria-based, safeguarded side-by-side and compliance simplification — that warrants close monitoring but not yet a change in planning assumptions.
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