Significant Tax Measures Remain in Flux for Large Multinational Groups

The international tax landscape is increasingly fractured.

Boards of multinational companies may want to pay particular attention to the impact of and ongoing developments with respect to (i) the OECD’s Base Erosion and Profit Shifting (BEPS) Pillar Two rules, and (ii) the “One Big Beautiful Bill Act” (OBBBA).

BEPS and Pillar Two

The OECD’s BEPS Pillar Two rules and their implementation continue to dominate the agenda on global tax reform as we head into 2026.

The Pillar Two rules—agreed in principle by nearly 150 countries and jurisdictions (the so-called “Inclusive Framework”)—are designed to ensure that large corporations (i.e., those with annual consolidated revenue of at least €750 million) are taxed on their profits at a minimum rate of 15% in every jurisdiction in which they operate. Where their effective tax rate falls below 15% in any such jurisdiction, the group may be liable for a top-up tax, collected in one of the following three ways:

• First, in the low-taxed entity’s own jurisdiction, if it has a “qualified domestic minimum top-up tax” (QDMTT);
• Second, in the absence of a QDMTT, from a parent of the low-taxed entity via the application of the “income inclusion rule” (IIR); or
• Third, in the absence of a QDMTT and where the relevant parent’s jurisdiction does not enforce or has not implemented the IIR, from another group entity in any jurisdiction where the group has assets and/or employees via the application of the “undertaxed profits rule” (UTPR).

Although the UK, EU member states and many other jurisdictions have already adopted or taken steps toward adopting all or part of the Pillar Two rules, the Trump administration is hostile to them (particularly the UTPR). Thus, in January 2025, the Trump administration confirmed that the Pillar Two rules (and related commitments by the Biden administration) had no force or effect in the United States, and issued an Executive Order directing the U.S. Treasury Secretary to review other tax regimes for any “discriminatory” or “extraterritorial” tax practices that may have arisen as a result of those regimes’ implementation of the Pillar Two rules and propose any necessary countermeasures in response.

One such proposed countermeasure included in draft legislation that became the OBBBA was a “Revenge Tax,” which would have imposed onerous retaliatory taxes (e.g., additional withholding taxes on U.S.-source payments) on non-U.S. corporations and individuals resident in jurisdictions that subjected U.S. Multinational Enterprises (MNEs) to any “unfair foreign taxes” (such as the UTPR).

The proposal understandably caused alarm in jurisdictions that had begun implementing the Pillar Two rules. Significant discussions at the G7 Summit in June 2025, resulted in a joint statement announcing that the G7 had reached a shared understanding on global minimum tax. That understanding was based on the idea of a “side-by-side” solution to the application of the Pillar Two rules to U.S. MNEs, whereby:

• In recognition of certain existing U.S. minimum tax rules, U.S. MNEs would be fully excluded from the UTPR and IIR as applied by the non-U.S. G7 countries in respect of their global profits.
• In return for this exclusion, the proposed Revenge Tax was dropped from the draft legislation that became the OBBBA.

Six months of OECD negotiations followed and, on January 5, 2026, the Inclusive Framework published an agreed package of new Pillar Two measures including a safe harbor which in effect exempts U.S.-headquartered MNE groups from the scope of the UTPR and IIR (although not from QDMTTs). In addition to this “side-by-side” safe harbor, the agreed package includes simplifying measures and other safe harbors, and measures to provide greater alignment in the treatment of tax credits.  

The “side-by-side” safe harbor has effect for fiscal years beginning on or after January 1, 2026 and covers approved jurisdictions that meet certain conditions as to their domestic and worldwide tax systems—at present, only the United States has been approved, although other Inclusive Framework members are entitled to apply as well if they meet the relevant criteria.

The United States appears pleased with this outcome. U.S. Treasury Secretary Scott Bessent hailed the safe harbor as a “historic victory in preserving U.S. sovereignty.” However, more work will need to be done for Inclusive Framework countries to implement the agreement, and questions have been raised by critics as to whether the “side-by-side” safe harbor effectively undermines some of the fundamental objectives of the Pillar Two initiative.

Given the work still to do in fleshing out and implementing the new measures, remaining gaps in the “side-by-side” safe-harbor coverage (including in relation to U.S. subsidiaries of non-U.S. ultimate parent companies) and lingering threats of revenge taxation from some quarters in the United States if progress on the ground is slow, large multinational groups should continue to monitor developments and the implications for their operations.

OBBBA

The OBBBA introduced changes to U.S. tax law that may have a significant impact on large multinational groups and particularly companies with large domestic research and experimentation (R&E) activities, significant international operations or renewable energy investments.

On the U.S. domestic side, the OBBBA made a number of taxpayer-favorable adjustments to existing rules. Among them was the restoration of an immediate deduction for domestic R&E and qualified production property expenses, which is intended to make U.S.-based R&E and capital investment more attractive. Another was to increase the cap on interest deductibility (by reverting to a cap based on EBITDA-like, rather than EBIT-like, concepts), which can benefit companies with significant capital investment and amortizable intangibles.

On the U.S. foreign side, the OBBBA made changes to the rules affecting the taxation of income from controlled foreign corporations (CFCs). For instance, it replaced the GILTI regime with the so-called Net CFC Tested Income (NCTI) regime. Under the NCTI rules, a U.S. multinational will be taxed on all of its income from CFCs (thereby eliminating an exemption that existed for a base amount of non-passive income) at a rate of at least 12.6%. The effect of these changes will depend on a company’s foreign asset base, foreign tax rates and ownership structure.[1]

Another area of significant change made by the OBBBA is renewable energy related activity and investment. In particular, the new law has accelerated phase-outs for solar and wind energy tax credits and created a new “Prohibited Foreign Entity” (PFE) regime designed to reduce the involvement by China, Russia and certain other prohibited countries in the U.S. renewables supply chain. Under the PFE rules, no credits will be available for components or projects that involve material assistance from a PFE.[2]

Finally, as discussed in more detail above, the OBBBA’s proposed Revenge Tax did not make it into the final legislation. While the proposal was dropped from the OBBBA, the administration’s stated intent to use tariffs as an alternative negotiation tool signals that U.S.-international tax policy conflicts will continue. With changes from the OBBBA and an active discourse on Pillar Two continuing, companies should monitor both tax and trade policy developments closely.

[1] For additional information on these rule changes, see our July alert memo available here.

[2] For additional information on OBBBA’s changes to renewable energy incentives, see our July alert memo available here.