Proposed punitive US tax rule removed following G7 agreement on global minimum tax

Under the proposed agreement, US companies would be exempt from the OCED’s global minimum tax rules, and in return the US would withdraw section 899 of president Trump’s ‘One Big Beautiful’ budget reconciliation Bill that would have imposed retaliatory taxes on non-US businesses. Broadly, section 899 targets residents of jurisdictions that have imposed so-called “unfair tax practices”. It was expected that the OECD’s global minimum tax rules would be caught by section 899, meaning that businesses headquartered in any jurisdiction introducing the OECD rules would be exposed to a section 899 charge.

Corporate tax expert Eloise Walker of Pinsent Masons said: “The announcement that the US has agreed to remove section 899 of the One Big Beautiful Bill is welcome. Many UK-headquartered multinational businesses are likely to be relieved that they will no longer be exposed to significant punitive US taxes.”

The OECD’s global minimum tax rules form part of its two-pillar framework to address the challenges of the digitalisation of the global economy. Pillar 2, also known as the global base erosion rules (‘GloBE rules’), seeks to ensure that large multinational groups pay a minimum effective tax rate of 15% on their worldwide corporate profits. The rationale is to create a more standardised international regulatory environment and minimise opportunities for tax avoidance by groups shifting profits from high tax to low tax jurisdictions.

The Pillar 2 framework was agreed in October 2021 by over 130 countries. There had been continuing uncertainty regarding how, if at all, the US would introduce Pillar 2 before Trump issued an executive order, withdrawing the US from implementing Pillar 2, on 20 January.

Walker said: “The announcement of the G7’s special ‘side by side’ agreement with the US is likely to generate increased uncertainty about the continued implementation of the Pillar 2 framework across OECD member countries. It remains to be seen whether other countries will now try and negotiate separate side agreements and specific exemptions.”

Pillar 2 consists of two separate tax rules. The first – an income inclusion rule (IIR) requires the ultimate parent of a multinational group with annual revenues of at least €750 million to pay a top-up tax if any of its subsidiaries located in another jurisdiction are taxed below an effective rate of 15%. The second rule – the under-taxed profits rule (UTPR) – is effectively a backstop tax, ensuring that a minimum 15% tax on profits applies in every jurisdiction in which the group operates. The UTPR ensures that any top-up taxes that are not paid under another jurisdiction’s Pillar 2 rules are brought into account.

The UK has introduced legislation implementing Pillar 2: an IIR was introduced from 31 December 2023 and a UTPR from 31 December 2024. The US global minimum tax rate is currently 10.5%. Consequently, the introduction of Pillar 2 was expected to lead to top-up taxes being imposed on US companies by the EU, the UK and other participating countries.

Jamie Robson, also a corporate tax expert at Pinsent Masons, said: “Exemption from the UTPR would have been particularly important to the US on the basis of its expected impact on US headquartered groups, since this is the rule that would have allowed other jurisdictions to tax a ‘slice of the pie’ of any Pillar 2 top-up amounts that are allocated to the US as a jurisdiction outside of the Pillar 2 framework.”

The G7’s statement also announced that when implementing the agreement with the US, it would be looking to introduce “material simplifications to the overall Pillar 2 administration and compliance framework.”

Robson said: “The Pillar 2 framework is already implemented in many jurisdictions, including the UK and, whilst simplicity is always welcome, it is hoped that any changes introduced do not create unnecessary uncertainty and complexity for businesses and jurisdictions that are already operating within the framework.”