PILLAR 2 | US MNEs exempt from Pillar 2 Taxes according to G7 Tax Deal
The global minimum tax is an irritant for the US government. Already on his second day in office, US President Trump announced that the US would explore options for “Protection against Discriminatory and Extraterritorial Tax” at the expense of US companies. The “One Big Beautiful Bill Act” (OBBBA) sought to introduce a reciprocity-based tax mechanism in Section 899 of the Internal Revenue Code (IRC), which would have led to an increased tax burden for foreign taxpayers resident in Pillar 2 compliant countries. On June 28, 2025, the G7 announced a deal: The US will refrain from implementing Section 899 IRC, in return for being exempted from global minimum tax rules.
What has happened so far...
The global minimum tax stems from developments at OECD level and is a harsh reality within the EU for fiscal years beginning after December 31, 2023. Profits of MNE Groups exceeding annual revenues of EUR 750 million have since been subject to a 15% minimum tax in the EU, with the tax level being tested per tax jurisdiction.
The so-called UTPR (“Undertaxed Payments Rule”) has caused particular technical and political controversy. The UTPR enables extraterritorial taxation of low-taxed profits: If, for example, a US group generates profits in Indonesia that are subject to a tax burden of less than 15% there, these profits can be taxed at any “constituent entity” based within the EU or at any permanent establishment located within the EU. Each individual company or permanent establishment of the group within the EU is therefore potentially liable to tax on the MNE Group’s global profits. This caused a great deal of outrage in the US, as US MNEs would, in particular, be affected by the UTPR.
In an executive order dated January 20, 2025, President Trump – without explicitly referring to Pillar 2 – declared war on the aforementioned UTPR: “Because of the Global Tax Deal and other discriminatory foreign tax practices, American companies may face retaliatory international tax regimes if the United States does not comply with foreign tax policy objectives.” Considerations regarding “Protection against Discriminatory and Extraterritorial Tax” were announced, which were to have been implemented on May 25, 2025, in a draft law entitled “One Big Beautiful Bill Act” (OBBBA): Section 899 of the draft IRC would have subjected taxpayers from countries that have implemented either a UTPR or a digital services tax to higher US tax rates – a so-called “revenge tax.” On June 26, 2025, US Treasury Secretary Scott Bessent tweeted surprisingly that “OECD Pillar 2 taxes will not apply to US companies”, rendering Section 899 IRC obsolete and subject to deletion without replacement. Since then, the technical details of the deal have been eagerly awaited.
The deal and what is known about it...
On June 28, 2025, the G7 published a “Joint Statement” that vaguely defines the elements of the deal. According to this, Pillar 2 and US tax law will coexist “side by side” ("Side-by-Side System") in the future. US parented MNE Groups should be exempted from both the IIR (“Income Inclusion Rule”) and the UTPR in recognition of the minimum tax mechanisms provided for in US national law. In return, the US will remove the “revenge tax” envisaged in Section 899 IRC draft.
It is noteworthy that the Joint Statement now emphasizes that the BEPS project (base erosion and profit shifting) should be continued jointly at the level of the 140-country Inclusive Framework. The statement emphasizes the following principles:
- US MNEs should be exempt from the IIR and UTPR through the “side-by-side” system.
- The “side-by-side” system should address risks related to a level playing field and base erosion and profit shifting.
- Alongside with the design of the “side-by-side” system, work should continue on simplifications for Pillar 2 (obviously adressed to the work on permanent Safe Harbours for Pillar 2).
- Alongside with the design of the “side-by-side” system, work should also be continued on the tax treatment of substance-based non-refundable tax credits that would ensure greater alignment with the treatment of refundable tax credits (QRTCs - “Qualified Refundable Tax Credits”) within the framework of Pillar 2.
The G7 concludes by emphasizing that delivery of a side-by-side system aims to facilitate further progress to stabilize the international tax system, including a constructive dialogue on the taxation of the digital economy and on preserving the tax sovereignty of all countries.
Conclusion – a ray of hope for the return of OECD tax multilateralism?
The G7 announcement is likely to come as a relief to businesses on both sides of the Atlantic. After several gloomy months for the “Global Tax Deal,” there appears to be political consensus once again, at least within the G7, on continuing multilateral cooperation on global tax policy, together with the US.
Nevertheless, the G7 statement should not be overestimated. The agreement is a pure political statement and must also be implemented into binding law. Within the EU, such a broad exemption for US corporations would probably require an amendment to the minimum tax directive (2523/2022), which in turn would, according to Art 115 TFEU require unanimity in Council.
For EU-parented MNE Groups, the question will of course also arise as to how the minimum tax can be continued. Will the EU actually stick to Pillar 2 if the US has effectively negotiated its way out of the framework?
Conversely, however, the minimum tax is neither at its end for US corporations: the G7 statement deliberately does not rule out supplementary national taxes. Consequently, US corporations would continue to be affected by Pillar 2-related compliance obligations (e.g. to file QDMTT returns) in the same way as EU corporations.
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