1. The BEPS Framework: 15 Actions to Reform International Tax

The OECD’s Base Erosion and Profit Shifting (BEPS) project established 15 Actions organised around three pillars:

A key part of the OECD project is to address the tax challenges arising from globalization and digitalization of the economy.  Pillar One addresses digitalization and is still being worked on.

2. Pillar Two: The Global Minimum Tax at 15%

GloBE Rules and UK Implementation

Pillar Two introduces the Global Anti-Base Erosion (GloBE) rules, requiring qualifying multinational enterprises (MNEs) to pay an effective minimum tax rate of 15% in every jurisdiction, regardless of local rates or reliefs, through a top-up tax mechanism. The UK implemented Pillar Two for accounting periods beginning after 31 December 2025, via two charging provisions:

• Income Inclusion Rule (IIR): collected by the ultimate parent company, or the next group parent if the ultimate parent does not qualify.
• Undertaxed Profits Rule (UTPR): backstop mechanism applying where the IIR does not.
• Conditions: €750m consolidated revenue threshold in at least 2 of the past 4 years, and at least one group member located in the UK.
• Reporting: Country-by-Country Reporting (CbCR) plus local tax return compliance — notification required within 6 months of the start of the accounting period.
• The UK also introduced a Domestic Top-Up Tax to ensure the minimum rate applies to UK profits.

How the Top-Up Tax Works: Three Scenarios (a very broad and simplified example)

The mechanics of the top-up tax can be illustrated through three scenarios involving a Swiss subsidiary taxed at 10% (below the 15% threshold, generating a $5 shortfall):

• Scenario 1 – No local or parent country tax implemented: no top-up tax is collected despite the shortfall.
• Scenario 2 – Switzerland implements a Local Country Tax: Switzerland collects the $5 top-up tax directly from the Swiss subsidiary.
• Scenario 3 – The Netherlands (intermediate parent) has implemented the IIR but the US (ultimate parent) has not: the Dutch holding company pays the $5 to the Dutch tax authority (as the US have not signed up to Pillar 2).

The implementation of the Pillar Two rules are complex and will require detailed planning and training.

3. The “One Big Beautiful Bill” and Its Impact on Pillar Two

Signed into law by President Trump on 4 July 2025, the “One Big Beautiful Bill” (OBBB) initially included Section 899, which would have imposed retaliatory taxes on non-US corporations and individuals from jurisdictions applying taxes deemed “extraterritorial or discriminatory” against US taxpayers — including the UTPR, digital services taxes (DSTs) and diverted profits taxes.

Section 899 was ultimately removed following a G7 agreement reached on 28 June 2025, under which the other G7 nations (Canada, France, Germany, Italy, Japan and the UK) committed to exclude US-parented groups from both the UTPR and the IIR — for domestic and foreign profits alike. This creates a two-tier system giving US groups a structural competitive advantage and raises questions about the long-term integrity of the Pillar Two framework.

4. Digital Services Taxes: An Uncertain Future

The G7 statement made no mention of digital services taxes, despite these being explicitly targeted by the now-removed Section 899. DSTs appear likely to be addressed bilaterally through trade negotiations rather than multilaterally:

• Canada (2%): announced the repeal of its DST on 29 June 2025 as part of US-Canada trade negotiations.
• UK (2%): DST remains in force but may not survive the anticipated US-UK Digital Trade Deal.
• Germany: announced plans for a 10% digital levy on large platforms in May 2025, maintaining its stance despite US pressure.
• France (3%): DST enacted in 2019 remains in place but now faces a domestic constitutional challenge.

5. DAC 9: Simplifying Pillar Two Compliance for MNEs

In March 2025, the EU Council reached agreement on DAC 9, a further amendment to Directive 2011/16/EU on administrative cooperation in taxation. DAC 9 complement the Pillar Two Directive by streamlining filing obligations for in-scope MNEs:

• Centralized filing: MNEs may file a single top-up tax information return at group level, replacing multiple filings by each constituent entity at local level.
• Standardized exchange of information: a centralized framework for sharing filed data across EU Member States.
• Significant compliance simplification for businesses operating across multiple EU jurisdictions.

The international tax landscape is being reshaped at speed. The exclusion of US-parented groups from Pillar Two and the uncertain fate of digital services taxes signal that geopolitical dynamics are increasingly driving global tax policy.

Viraj Mehta – Tax Partner

Bourner Bullock, London