In October 2021, 136 nations agreed to rewrite international corporate tax rules that had not been substantially updated since the 1920s. The Organisation for Economic Co-operation and Development designed the reform, the most ambitious attempt yet to stop multinational enterprises from shifting profits to low-tax territories. The project has two parts. Pillar One reallocates some taxing rights to the markets where a firm's users and customers sit. Pillar Two sets a global minimum corporate tax rate of 15% and gives other governments the right to collect the difference if a multinational pays less. The OECD estimates that Pillar Two alone will generate roughly $150 billion in additional global tax receipts each year.
The G20 mandated the reform after the 2008 global financial crisis. Public anger grew as large enterprises reported billions in profit but paid minimal tax. The OECD's Inclusive Framework on BEPS now has over 140 member states and territories, all working to turn the political agreement into domestic law.
The Problem: Base Erosion and Profit Shifting
How multinationals make profit disappear
The project addresses strategies known collectively as base erosion and profit shifting (BEPS). Multinationals exploit gaps and mismatches in tax rules to make profits vanish for tax purposes or to shift them to locations with very low or zero rates. A common method is transfer pricing: a firm sells goods or services from a high-tax subsidiary to a related entity in a low-tax territory at an artificially high price, moving profit across borders on paper. Another is treaty shopping, where a group routes income through a nation with a favorable tax treaty to reduce withholding taxes. A third uses debt. A subsidiary in a high-tax country borrows from a related party in a low-tax location and deducts the interest payments, shrinking its taxable income.
The cost to governments
The OECD estimates that BEPS practices cost governments between $100 billion and $240 billion in lost revenue each year, roughly 4% to 10% of global corporate income tax receipts. Developing economies bear a disproportionate share of the loss because they rely more heavily on corporate tax.
Pillar One: Taxing Rights Where the Users Are
How Amount A reallocates profit
Pillar One reallocates a portion of the residual profit of the largest and most profitable multinationals to market jurisdictions. Residual profit means profit above a routine return. The rule targets groups with global turnover above €20 billion and profitability above 10%. A share of that excess profit, between 20% and 30% depending on the final technical design, is allocated to nations where the group's users or customers are located, regardless of whether the business has a physical presence there.
Why this breaks with a century of precedent
This is a fundamental change. Historically, a country could only tax a foreign firm's profit if that firm had a permanent establishment, such as a factory or office, within its borders. Pillar One removes that requirement for the covered groups. The practical effect is largest for big digital platforms that earn income from users in many markets but have few physical assets. Amount A is the main reallocation. Amount B, a separate workstream, aims to simplify transfer pricing for baseline marketing and distribution activities. As of October 2023, the multilateral convention to implement Pillar One had been signed but faced ratification delays in several key capitals.
Pillar Two: The Global Minimum Tax of 15%
How the top-up tax works
Pillar Two introduces a global minimum corporate tax rate of 15%. It applies to multinational groups with annual turnover exceeding €750 million, a threshold set by the OECD. The rule does not force any government to raise its own corporate tax rate. Instead, it gives other nations the right to collect a top-up tax if a multinational's effective tax rate in any territory falls below 15%.
The three interlocking rules
The mechanism has two main parts. The Income Inclusion Rule (IIR) requires a parent entity to pay top-up tax on the low-taxed income of its subsidiaries. If the parent's home country does not apply the IIR, the Undertaxed Payments Rule (UTPR) activates, denying deductions or imposing an equivalent adjustment in other group entities. A third element, the Subject to Tax Rule (STTR), is a treaty-based rule that lets source countries impose a withholding tax on certain related-party payments if the payment is subject to a nominal tax rate below 9%. The STTR is designed to protect developing nations that might otherwise see their tax base eroded by deductible payments to low-tax affiliates. The OECD expects the global minimum tax to generate roughly $150 billion in additional global tax receipts each year.
Implementation Timeline and the Inclusive Framework
Pillar Two races ahead
Pillar Two moved faster than Pillar One. The European Union adopted a directive requiring member states to implement the IIR and UTPR by the end of 2023, with the UTPR applying from 2024. Several governments outside the EU, including Japan, South Korea, and Australia, also moved to enact domestic legislation. The United States had not fully implemented the Pillar Two rules as of October 2023, though it had proposed similar provisions in earlier legislation.
Pillar One waits on ratification
Pillar One has been slower. The multilateral convention, which contains the legal framework for Amount A, was opened for signature in October 2023 but had not yet entered into force. It requires ratification by a critical mass of signatories, including at least 30 jurisdictions that together account for a significant share of the covered firms. The US political situation, where a treaty requires Senate approval, has added uncertainty. The Inclusive Framework continues to meet regularly to resolve technical details, including the scope of Amount B and the rules for removing existing digital services taxes once Pillar One is in effect.
What the Reform Means for Companies and Governments
The compliance burden for multinationals
For multinational enterprises, the reform means that shifting profit to a zero-tax territory no longer guarantees a tax saving. Even if the subsidiary pays nothing in its own country, the parent or other group members will face a top-up tax of 15% on that profit. The compliance burden is significant: businesses must calculate their effective tax rate in every territory where they operate, using a standardized set of rules that includes adjustments for deferred taxes, payroll, and tangible assets.
A new revenue stream for governments
For governments, the reform provides a new revenue stream at a time when many are struggling with high debt levels. The $150 billion annual estimate from Pillar Two is about 10% of current global corporate income tax receipts. Developing economies stand to benefit from the STTR, which gives them a tool to tax outbound payments that currently escape their net. However, the complexity of the rules and the need for coordination across over 140 nations means that full implementation will take years, and some states may choose not to participate. The reform is the biggest change to international corporate taxation in a century, but its final impact depends on how many governments actually enforce the rules.
Outcome: An Ongoing Project With Real but Uncertain Effects
Where the project stands
As of October 2023, the OECD's two-pillar solution is a political agreement in the process of becoming law. Pillar Two is further along: dozens of nations have enacted or are close to enacting the global minimum tax. The OECD estimates that once fully implemented, the minimum tax will generate roughly $150 billion in additional annual receipts. Pillar One, which reallocates taxing rights to market jurisdictions, has not yet entered into force due to ratification delays.
What changes and what doesn't
The reform does not end tax competition. Countries can still set their corporate tax rate at 0% if they wish. What changes is that a multinational that uses that low rate will face a top-up tax elsewhere. The incentive to shift profit to a tax haven is removed, but the incentive to attract real investment through low rates remains. The Inclusive Framework will continue to meet to address technical issues and monitor implementation. The question that remains is whether the political consensus will hold as nations begin to see which ones gain revenue and which ones lose taxing rights under the new rules. The answer is not yet established here.
Key Facts
- Global minimum tax rate: 15%
- Annual turnover threshold for Pillar Two (set by the OECD): €750 million
- Estimated additional annual global tax receipts (Pillar Two): $150 billion
- Inclusive Framework member states and territories: Over 140
- BEPS annual revenue loss estimate: $100 billion to $240 billion
