As multinational enterprises (MNEs) prepare year-end reporting and refine their global tax strategies, the implementation of the Global Anti-Base Erosion (GloBE) Model Rules, commonly referred to as Pillar Two, represents a critical development with significant implications not only for tax compliance but also for financial reporting.
For finance and accounting teams, understanding and incorporating Pillar Two considerations is essential for accurate tax provision calculations and compliance with ASC 740 (Accounting for Income Taxes). Even companies not immediately subject to the new minimum tax may still face disclosure, modeling and data-management requirements.
Therefore, being aware of the Pillar Two rules enables organizations to better assess their global tax exposures, ensure proper financial statement disclosures and maintain alignment with evolving international tax standards.
What is Pillar Two?
Pillar Two is the Organisation for Economic Co-operation and Development’s (OECD’s) global initiative for a 15% minimum corporate tax rate on large MNEs with consolidated annual revenues exceeding 750 million EUR (approximately 800 million USD) in at least two out of the last four years preceding the current fiscal year. Pillar Two’s primary objective is to reduce incentives for companies to shift profits to low or no-tax jurisdictions, and it attempts to promote tax fairness and enhance the integrity of the international tax system. It should be noted that the OECD only publishes guidelines. In order to be effective, the Pillar Two rules must be adopted by each member country and therefore can result in significant differences in the rules, including around the threshold noted above, as well as the operative rules described below.
Pillar Two rules operate through a layered approach intended to guarantee the minimum tax is collected somewhere within the multinational group. Key components of the framework include:
Qualified Domestic Minimum Top-Up Tax (QDMTT): The QDMTT is a domestic minimum tax imposed by a jurisdiction of the subsidiary to increase the effective tax rate on local profits of in-scope multinational enterprises (MNEs) when their ETR falls below the 15% minimum. Taxes paid under the QDMTT are creditable against the top-up tax calculated under the Income Inclusion Rule or the Undertaxed Payments Rule. By implementing the QDMTT, a jurisdiction secures the primary right to collect additional tax revenue on low-taxed income within its borders, reducing the risk that such revenue is collected by other countries under the global minimum tax framework.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Income Inclusion Rule (IIR): The IIR requires a parent entity to increase its taxable income in its resident country, resulting in additional tax (functioning like a top-up) when the income of a subsidiary or constituent entity is taxed below the minimum effective tax rate (ETR), currently set at 15%. This ensures that profits are subject to at least the minimum tax, regardless of where they are earned. A MNE must calculate its ETR separately for each jurisdiction. This calculation incorporates adjustments that differ from financial accounting and domestic tax rules.
Undertaxed Profits Rule (UTPR): The UTPR operates as a backstop to the IIR or QDMTT where a parent entity jurisdiction has not adopted an IIR or QDMTT. The UTPR denies deductions or requires adjustments for payments made to related parties in jurisdictions where income is taxed below the minimum rate. This rule helps prevent base erosion through deductible payments to low-taxed affiliates when the IIR or QDMTT does not apply.
Subject to Tax Rule (STTR): The STTR is a treaty-based rule that allows some source countries, particularly developing economies, to impose taxes on certain related-party payments, such as interest or royalties, that are subject to low effective tax rates. This rule targets specific base erosion concerns that may not be fully addressed by the IIR or UTPR. While some countries have signed the multilateral convention, to date, no countries have implemented such rule in any bilateral income tax treaties.
Pillar Two global implementation: A rapidly changing landscape
Jurisdictions around the world are in various stages of adopting Pillar Two into domestic law, with many pursuing implementation in the near future. More than 50 countries—including the EU member states, the UK, Canada, Australia, South Korea and Japan—have enacted Pillar Two rules (in full or in part), many effective for fiscal years beginning in 2024 or 2025. Other countries are in various stages of drafting or negotiating applicable domestic laws. Notably, the U.S. has not passed any legislation to implement Pillar Two. Additionally, the U.S. has indicated that it does not intend to implement any Pillar Two legislation apart from guidance on which taxes would be eligible for a foreign tax credit in the U.S.
Prior to the passing of the One Big Beautiful Bill Act (OBBBA) in 2025, the G7 countries reached an agreement with the U.S., resulting in ongoing negotiations for a "side-by-side" system, intended to allow U.S. domestic rules to replace Pillar Two for U.S.-based MNEs, effectively exempting U.S. MNEs from top-up tax under IIR or UTPR regimes. While some countries initially raised objections to this agreement, on Jan. 5, 2026, more than 145 countries agreed to amend a 2021 global minimum tax agreement which will include simplifications and carve-outs to ensure that U.S. multi-nationals are only subject to the U.S. global minimum tax rules or adopting local jurisdiction QDMTTs.
While this agreement is welcome news for U.S. headquartered MNEs, they should still closely monitor local legislative developments as the carve-outs will still need to be enacted into local law and further need to consider related filing requirements (i.e., GloBE information return and other local country filing requirements). For more on this, see our related article explaining the side-by-side solution that has arrived for Pillar Two.
ASC 740 implications
GloBE taxes, calculated based on financial statement net income with certain modifications, are considered income taxes and therefore fall under the scope of ASC 740.
These taxes operate alongside local country income tax systems to make sure companies pay a minimum level of tax. According to the latest guidance from Financial Accounting Standards Board FASB (see Tentative FASB Board Decisions – Feb. 1, 2023), GloBE taxes essentially function as alternative minimum taxes (AMTs). Because of this classification, companies don’t record deferred taxes specifically for GloBE top-up taxes or adjust existing deferred taxes to reflect GloBE rates. Instead, the additional tax expense is included on the financial statements as it’s incurred.
Since GloBE taxes act as minimum taxes, it’s only natural to wonder how they affect valuation allowance considerations. After all, some deferred tax assets might reverse without actually generating future cash tax savings due to these top-up taxes.
Looking back, when the U.S. introduced the Base Erosion and Anti-Abuse Tax (BEAT) tax in 2018, the FASB clarified that companies aren’t required to factor BEAT into their assessments of deferred tax asset realizability under the regular tax system, though they can choose to do so as an accounting policy election. The same principle applies to the U.S. corporate alternative minimum tax (CAMT). Similarly, for Qualified Domestic Minimum Top-Up Taxes (QDMTTs), companies may elect to either consider or disregard their impact when evaluating deferred tax assets; but whichever policy they choose must be applied consistently across all instances of that specific AMT regime.
When it comes to valuation allowance considerations related to the IIR and UTPR, companies generally don’t include these in their deferred tax asset realizability assessments. ASC 740-10-30-5 requires deferred taxes to be determined separately for each tax-paying component within each jurisdiction. This means it would be inconsistent to factor in potential IIR or UTPR taxes imposed by a different jurisdiction when assessing deferred tax assets in a low-tax jurisdiction. That said, some companies may choose alternative approaches that consider taxes from other jurisdictions when evaluating valuation allowances—depending on their accounting policies.
In summary, companies have flexibility when it comes to GloBE and valuation allowances. They’re not required to consider GloBE taxes in their valuation allowance assessments, but they can opt to do so as part of their accounting policy.
Beyond the financial statement impact, GloBE also raises disclosure considerations. While GloBE top-up taxes are classified as AMTs under U.S. Generally Accepted Accounting Principles and don’t have specific disclosure requirements, companies should evaluate whether disclosures are appropriate. It’s important to consider how these taxes might affect existing disclosures, such as the effective tax rate reconciliation or accounting for uncertainty in income taxes. Additionally, SEC registrants may want to include information about GloBE top-up taxes in their risk factors or management’s discussion and analysis, especially if these taxes are expected to materially increase income tax expense in the future.
For public business entities adopting ASU 2023-09, Improvements to Income Tax Disclosures, effective for annual financial reporting periods beginning after Dec. 15, 2024, taxes imposed under the IIR are generally included in the effects of cross-border tax laws category of the tabular effective tax rate reconciliation, when applied at the federal level in the company’s home country on GloBE income earned abroad. However, if the IIR is imposed by another country, such as on an intermediate parent entity within the group, the IIR should generally be reported in the foreign tax effects category and attributed to that country. The same approach applies to the QDMTT, which is typically included as an “other reconciling item” in the foreign tax effects category when imposed by a foreign tax authority.
As individual foreign countries adopt local tax legislation enacting the OECD sponsored side-by-side system, companies will need to continue track legislative enactment and effective dates in assessing changes to ongoing GloBE income tax liabilities for ASC 740 purposes in 2026 and future years.
Conclusion
Pillar Two represents the most significant global tax reform in decades. Its reach extends well beyond minimum tax payments as it impacts tax planning, financial reporting and corporate governance. As implementation increases worldwide, tax professionals who proactively integrate Pillar Two into their tax provision processes will be best positioned to manage uncertainty and ensure compliance.
Baker Tilly’s tax professionals will continue to monitor the situation, providing timely updates and strategic insight. If you have questions on how this may impact your tax situation, please contact your Baker Tilly tax advisor.
