The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

The Pillar 2 Global Minimum Tax: Implications September 22, 2023
for U.S. Tax Policy
Jane G. Gravelle
In response to concerns about multinational corporations shifting profits to low-tax countries, the
Senior Specialist in
Organisation for Economic Co-operation and Development (OECD) and the G20, through an
Economic Policy
inclusive framework of 141 countries, developed a proposed global minimum tax (GLoBE) of

15%. On December 15, 2022, the European Union (composed of 27 countries) adopted the Pillar
Mark P. Keightley
2 minimum tax; several other countries are also adopting the tax.
Specialist in Economics

The overarching goal of GLoBE is to address profit shifting, where multinational enterprises
(MNEs) use techniques such as transfer pricing and location of debt to reduce income in high-tax

countries and increase income in low-tax countries. About 69% of the foreign profits of U.S.
multinationals are located in eight identified tax haven jurisdictions and in “stateless entities and other countries” generally
subject to low or no local taxes.
GLoBE would impose a rate of at least 15% on the earnings of large MNEs in each country they operate in via an additional,
or top-up, tax. The minimum tax would be imposed on all constituent entities (parents, subsidiaries, branches, or permanent
establishments) in each country with lower taxes, so that the overall effective tax rate on earnings of the MNE in that country
is increased to 15%. GLoBE is based on financial income but, to target intangible income in each country of operation, would
apply the additional tax to income after a deduction for a share of the book value of tangible assets and for a share of payroll
costs. The allowance for these deductions is referred to as the substance carve-out, and would begin at 8% for tangible assets
and 10% for payroll before eventually equaling 5% after a 10-year phase-down period.
The right to tax income goes first to the source country through a qualified domestic minimum top-up tax (QDMTT). If the
source country does not impose a top-up tax on income earned in the country, the home country of the parent company can
collect the tax through the income inclusion rule (IIR) by increasing the income of the parent subject to tax. If neither of these
taxes apply, then countries where other constituent entities (such as subsidiaries and branches) are located can collect the tax
by denying deductions for those constituent entities through the undertaxed payments rule (UTPR).
Tax credits would reduce taxes, but refundable credits, transferable credits, and grants would increase income. Other tax
deductions would reduce taxes, but a provision addresses timing differences for items such as accelerated depreciation.
GLoBE applies to entities that are consolidated in MNE accounts and excludes income and losses included under the equity
method of accounting.
The United States currently has its own minimum tax on foreign-source income—the tax on global intangible low-taxed
income (GILTI)—that is similar to the IIR. The Build Back Better Act (H.R. 5376) would have increased the GILTI tax rate
and imposed it on a country-by-country basis, along with other changes, to more closely align the GILTI rules with GLoBE.
The Administration’s FY2023 budget proposals would repeal the current base erosion and antiabuse tax (BEAT), an
alternative tax on a base that includes certain payments to foreign affiliates, and impose a domestic top-up tax and an
undertaxed payments rule. The final version of the bill, the Inflation Reduction Act (P.L. 117-169), did not adopt these
changes, although it adopted an alternative minimum tax on large corporations.
GLoBE could increase taxes on multinationals’ operations in the United States, even absent U.S. action with respect to the
GLoBE proposal. Other countries could impose taxes on U.S. earnings of multinational firms triggered by a low U.S.
effective tax rate through the UTPR or IIR. Thus, GLoBE could reduce the benefit of domestic tax incentives such as tax
credits. Major tax credits include the research credit, the low-income housing tax credit, and credits for renewable energy.
At the same time, several aspects of the GLoBE proposal would limit its effect on domestic tax policy and incentives to
encourage certain types of investment. These include the carve-out for payroll and tangible assets, adjustments for timing
differences between financial and tax accounting, and the exclusion for investments accounted for under the equity method.
Outside of the research credit, it appears other credits would generally not be affected because they fall under the equity
method exclusion, and transferable energy credits would have only a minimal effect. Additional taxes could be triggered by
other provisions as well, although some highly aggregated tax-rate calculations suggest the effect would be limited or perhaps
concentrated in certain industries. The potential effect on the research credit, or any other affected credit, could be reduced by
making it refundable.
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Contents
Introduction ..................................................................................................................................... 1
Profit Shifting: Methods and Evidence ........................................................................................... 3
Methods ..................................................................................................................................... 3
Evidence .................................................................................................................................... 4
The OECD/G20 Pillar 2 Proposal ................................................................................................... 5
Overview of the Minimum Tax ................................................................................................. 5
The Top-Up Tax ........................................................................................................................ 6
Treatment of Credits, Grants, Deductions, and Losses ............................................................. 8
The U.S. Tax Proposals ................................................................................................................... 8
Changes to GILTI in the Build Back Better Act........................................................................ 8
FY2023 Budget Proposals ....................................................................................................... 10
Implications for Revenues and Incentives ...................................................................................... 11

Tables
Table 1. Most Popular Places to Report Profits for U.S. Companies, 2019 .................................... 4
Table 2. Comparison of Basic Features of GLoBE and GILTI ....................................................... 9
Table 3. Effective Tax Rates in the United States by Major Industry Group, 2019, and the
Permanent OECD Carve-Outs.................................................................................................... 13

Contacts
Author Information ........................................................................................................................ 14

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The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy

Introduction
Following the 2007-2009 financial crisis, policymakers were increasingly concerned that the tax
planning strategies used by multinational corporations were leading to profits being shifted to
low- or no-tax jurisdictions. While profit shifting has been a long-standing policy concern,1 the
more developed economies appeared particularly concerned that the practice was eroding their
respective corporate tax bases and resulting in substantial tax revenue losses. Governments
around the world had incurred large budget deficits to address the severe economic downturn
caused by the financial crisis, and they began to look toward curbing profit shifting as a method
to raise revenue to address fiscal imbalances. Additionally, portions of the public and some
policymakers perceived that multinational corporations were not paying their fair share of taxes.
In 2012, the Organisation for Economic Co-operation and Development (OECD), at the request
of the G20, launched its Base Erosion and Profit Shifting (BEPS) project. The project laid out 15
steps (or actions) that would be compiled into an overarching Action Plan countries could use to
coordinate a modernization of the international tax system.2 In October 2015, the OECD
published its final Action Plan, which was endorsed by the finance ministers of all G20 countries,
including the United States.3 The release of the final Action Plan was followed by the creation of
the OECD/G20 Inclusive Framework on BEPS, with the goal of bringing together OECD/G20
member countries and nonmember countries to collaborate on equal footing in implementing the
proposals contained in the BEPS Action Plan. As of December 2022, 142 countries are members
of the Inclusive Framework.4
In October 2021, the Inclusive Framework announced that nearly all of its members, including
the United States, had agreed to a two-pillar solution to Action 1 of the Action Plan, which calls
for addressing tax challenges of the digital economy.5 Pillar 1 proposes to allocate corporate
profits above a threshold (i.e., residual profits) to market jurisdictions (i.e., to countries where
customers and users are located) in exchange for repealing existing and halting new digital
services taxes (DSTs). Thus, Pillar 1 deals primarily with nexus, or determining which countries
have the right to tax corporate profits. Pillar 2, which is the focus of this report and discussed in
more detail below, proposes a coordinated global 15% minimum tax regime under a set of global
base erosion (GLoBE) rules.
On December 15, 2022, the European Union (composed of 27 countries including major trading
partners such as Germany and France, and Ireland where many multinational firms have

1 See CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane G. Gravelle.
2 Organisation for Economic Co-operation and Development (OECD), BEPS 2015 Final Reports, 2015,
https://www.oecd.org/tax/beps-2015-final-reports.htm. Also see CRS Report R44900, Base Erosion and Profit Shifting
(BEPS): OECD/G20 Tax Proposals, by Jane G. Gravelle.
3 OECD, “G20’s ownership and support to BEPS deliverables,” press release, October 9, 2015, https://www.oecd.org/
tax/g20-ownership-and-support-to-beps-deliverables.htm; and G20, “G20 Leaders’ Communiqué, Antalya Summit, 15-
16 November 2015,” press release, November 16, 2015, http://www.g20.utoronto.ca/2015/151116-communique.pdf.
4 OECD, https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf, updated December 2022.
5 OECD, “International community strikes a ground-breaking tax deal for the digital age,” press release, October 10,
2021, https://www.oecd.org/tax/beps/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-
age.htm. For a summary of the two-pillar solution, see OECD, Two-Pillar Solution to Address the Tax Challenges
Arising from Digitalization of the Economy, October 2021, https://www.oecd.org/tax/beps/brochure-two-pillar-
solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf.
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subsidiaries) adopted Pillar 2.6 Other countries moving toward adopting Pillar 2 include Australia,
Canada, Japan, Hong Kong, New Zealand, Norway, Singapore, and South Korea.7
The Joint Committee on Taxation (JCT) has estimated that the adoption of GLoBE by countries
that have already committed to Pillar 2 would result in a U.S. revenue loss of $175 billion or a
revenue gain of $224 billion from 2023 to 2033, depending on how U.S. corporations respond
with respect to profit shifting.8 These estimates, which the JCT terms the “lower bound” and
“upper bound,” form the basis for JCT’s “modified baseline.” The JCT used its modified baseline
to estimate the revenue effects of various scenarios involving the rest of the world (i.e., those not
already committed to Pillar 2) and the United States.
The JCT estimated that U.S. revenues would be reduced by $122 billion between 2023 and 2033
relative to its modified baseline if the rest of the world adopts GLoBE and the United States does
not.9 If both the rest of the world and the United States adopt GLoBE, JCT estimated reduced
U.S. revenues of $57 billion, relative to the modified baseline. If the United States adopts GLoBE
and the rest of the world does not, JCT estimated increased U.S. revenues of $237 billion, relative
to the modified baseline. If the United States adopts the major components of GloBE aside from
the undertaxed payments rule (UTPR, commonly referred to as the undertaxed profits rule), and
the rest of the world does not, JCT estimated increased U.S. revenues of $102.6 billion, relative to
the modified baseline.
Subsequent to the JCT estimates, the OECD issued additional guidance that could alter the effect
of GLoBE. That guidance indicated that transferable energy credits would be treated as
refundable credits, which would result in only a minor change in effective tax rates that could
trigger the tax. Secondly, it announced a delay in the application of one part of the tax—the
UTPR—for a year (to 2026) for countries with a statutory corporate tax rate of 20% or more.10
Members of Congress have proposed retaliatory taxes for countries imposing the UTPR. H.R.
3665 (Smith) would increase the tax rate of U.S.-source income and H.R. 4695 (Estes) would
increase the base of the alternative base erosion and anti-abuse tax. Some members of the Ways
and Means Committee have urged countries to adopt their own version of the U.S. approach to
taxing foreign-source income (the tax on global intangible low-taxed income, or GILTI, discussed
below) to address base erosion.

6 Council of the European Union, General Secretariat, Communication, December 15, 2022,
https://data.consilium.europa.eu/doc/document/CM-5860-2022-INIT/en/pdf. For further discussion, see Ernst and
Young, EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules,
December 15, 2022, https://globaltaxnews.ey.com/news/2022-6224-eu-member-states-unanimously-adopt-directive-
implementing-pillar-two-global-minimum-tax-rules.
7 See PwC’s Pillar 2 Tracker Online, https://www.pwc.com/gx/en/services/tax/pillar-two-readiness/country-
tracker.html#:~:text=
Under%20an%20OECD%20Inclusive%20Framework,the%20digitalization%20of%20the%20economy.
8 Joint Committee on Taxation, Possible Effects of Adopting the OECD’s Pillar 2, Both Worldwide and in the United
States, June 2023, https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf. See the appendix for a
list of countries already committed to Pillar 2.
9 In all the scenarios discussed here, JCT assumes that if adoption occurs it would happen in 2025.
10 OECD, Tax Challenges Arising from the Digitalisation of the Economy—Administrative Guidance on the Global
Anti-Base Erosion Model Rules (Pillar Two), July 2023, https://www.oecd.org/tax/beps/administrative-guidance-
global-anti-base-erosion-rules-pillar-two-july-2023.pdf.
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Profit Shifting: Methods and Evidence
Methods
Corporations shift profits to low- or no-tax jurisdictions using two primary methods: (1) transfer
pricing, and (2) the location of debt.11 Transfer pricing refers to the pricing of transactions
involving the exchange of goods, services, and assets between firms under the same ownership
umbrella (parent company). To properly reflect income, the prices of goods, services, and assets
exchanged by companies under the same ownership umbrella, also referred to as related firms,
should be the same as those that would be agreed upon by two unrelated firms in the market. If
transactions between related firms are in fact occurring at such prices, then they are referred to as
being made at arms length. For example, transfer pricing would apply when a U.S. firm that has
developed intellectual property (IP) sells the rights to use the IP in a particular geographic
location to a subsidiary in a low-tax country. Examples of IP, also known as intangible assets, are
algorithms, copyrights, design plans, drug formulas, patents, trademarks, and the like. The
growing importance of intangible assets is part of the motivation behind the two-pillar solution to
Action 1.12
Profits can be shifted from high-tax to low- or no-tax jurisdictions if transactions between related
firms are not priced in accordance with the arms-length principle. Continuing with the example
above, if the U.S. firm charges an artificially low price to the subsidiary, profits reported in the
low-tax country will be artificially high (because the subsidiary has a lower cost), while profits in
the United States will be artificially low (because the U.S. firm receives less income). With a
greater share of profits being reported in the low-tax country, the company’s overall tax is
reduced.
Debt-location concerns are related to where a multinational corporation borrows. One
straightforward way a corporation can use debt to reduce taxes is to borrow in relatively high-tax
countries and deduct the associated interest payments. Deductions reduce taxes in proportion to
the applicable tax rates, which results in the deduction of interest payments reducing taxes the
most in higher-tax jurisdictions. Another approach, known as earnings stripping, involves a
subsidiary in a low-tax jurisdiction lending to another subsidiary or parent in a high-tax
jurisdiction. The related firm in the high-tax jurisdiction will then make interest payments on the
loan, and those interest payments will be deductible in the high-tax country, thus reducing taxes.
Action 4 of the BEPS Action Plan specifically addresses limiting interest deductions to curb profit
shifting. The United States and around half of the 141 Inclusive Framework members already
have rules in place to limit interest deductions.13
A recent estimate suggests that transfer pricing accounts for the majority (72%) of profit
shifting.14 It is important to note that decisions about transfer pricing and the location of debt do

11 For more information on profit shifting, see CRS Report R40623, Tax Havens: International Tax Avoidance and
Evasion, by Jane G. Gravelle.
12 For more on the growing importance of intangible assets, see CRS Report R47003, Corporate Income Taxation in a
Global Economy, by Jane G. Gravelle, Mark P. Keightley, and Donald J. Marples.
13 For more information on Action 4, see Organisation for Economic Co-operation and Development, Action 4
Limitation on Interest Deductions, https://www.oecd.org/tax/beps/beps-actions/action4/. For more information on U.S.
rules on deducting interest payments and earnings stripping, see CRS Report R40623, Tax Havens: International Tax
Avoidance and Evasion, by Jane G. Gravelle.
14 Jost H. Heckemeyer and Michael Overesch, Multinationals’ Profit Response to Tax Differentials: Effect Size and
Shifting Channels, Center for European Economic Research, Discussion Paper 13-045, 2013, https://ftp.zew.de/pub/
zew-docs/dp/dp13045.pdf.
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not solely reflect the desire to shift profits; they can also be made to support real economic
business activity. Additionally, international corporate tax planning strategies are extremely
complex and require navigating not only U.S. tax law, but also the laws of each jurisdiction in
which a corporation has subsidiaries. Corporations must also factor in bilateral international tax
treaties between countries.15
Evidence
U.S. companies reported earning profits of $1.2 trillion abroad in tax year 2019, according to
Internal Revenue Service (IRS) data.16 Table 1 shows that the 10 most popular places to report
profits were responsible for 54% (or $639.2 billion) of the total $1.2 trillion in overseas earnings.
Eight of the 10 reporting jurisdictions (i.e., excluding Canada and the U.K.) are generally
considered by international tax experts to be “tax havens” or “tax preferred.”17 Canada and the
U.K. are major industrialized countries with close trading ties to the United States, which
explains their inclusion in Table 1.
Table 1. Most Popular Places to Report Profits for U.S. Companies, 2019
Profits
Rank
Jurisdiction
(millions)
Profits as % of Overseas Total
1
United Kingdoma
$104,797
8.8%
2
Netherlands
$99,467
8.4%
3
Switzerland
$71,994
6.1%
4
Cayman Islands
$70,203
5.9%
5
Ireland
$69,142
5.8%
6
Singapore
$65,347
5.5%
7
Luxembourg
$46,477
3.9%
8
Bermuda
$44,595
3.8%
9
Puerto Ricob
$34,755
2.9%
10
Canada
$32,435
2.7%
Top 10

$639,210
54.0%
Stateless entities and

other countries not
$195,431
16.5%
separately specifiedc
All Foreign

$1,184,313
100.0%
Jurisdictions
Source: U.S. Internal Revenue Service, Statistics of Income Tax Stats, International Business Tax Statistics, Country-by-
Country Report: Major Geographic Region and Selected Tax Jurisdiction with Positive Profit Before Income Tax, 2019.
a. The United Kingdom includes England, Northern Ireland, Scotland, and Wales.

15 For more on profit shifting methods, see CRS Report R40623, Tax Havens: International Tax Avoidance and
Evasion, by Jane G. Gravelle.
16 U.S. Internal Revenue Service, Statistics of Income Tax Stats, International Business Tax Statistics, Country-by-
Country Report: Major Geographic Region and Selected Tax Jurisdiction with Positive Profit Before Income Tax,
2019.
17 For more information on tax havens, see CRS Report R40623, Tax Havens: International Tax Avoidance and
Evasion, by Jane G. Gravelle.
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b. Puerto Rico enacts and administers a tax code that is distinct from the federal tax code.
c. The IRS defines stateless entities as those “that are not residents of any tax jurisdiction.” The IRS also does
not indicate the countries in its “other countries” category.
Table 1 indicates that a significant share of overseas profits (16.5%) was reported by stateless
entities and in “other countries” outside the approximately 100 countries the IRS provides
information on. The IRS defines stateless entities as those “that are not residents of any tax
jurisdiction,” but warns that researchers are “strongly cautioned against inferring that income
reflected on the stateless line is not subject to tax.”18 The IRS also does not indicate the countries
in its “other countries” category. While the profits reported by stateless entities and companies
with operations in “other countries” may not be subject to zero tax, the cash tax paid by this
group in the aggregate was 0.7%. A number of notable tax havens are not individually identified
in the IRS data and are likely included in the stateless entity and other country category,
including, for example, the Bahamas, British Virgin Islands, Jersey, Isle of Man, Guernsey, Malta,
and Seychelles. The IRS data do capture the larger tax havens (as seen in Table 1) and all major
developed countries.
The OECD/G20 Pillar 2 Proposal
Overview of the Minimum Tax
Pillar 2 proposes a coordinated global 15% minimum tax targeted at the intangible income of
multinational enterprise (MNE) groups under a set of global base erosion rules. The tax would be
levied on financial income after a deduction for substantive activities, and would apply to MNE
groups with revenues exceeding €750 million (equivalent to approximately $780 million as of
June 15, 2022) in two of the past four years.19 The proposed tax is similar in some ways to the
current U.S. tax on global intangible low-taxed income (GILTI), but also differs in important
aspects, as discussed in the next section. Most notably, the GLoBE tax would apply separately to
the operations of constituent entities (e.g., subsidiaries and branches) in each country, rather than
applying on an overall basis to all foreign-source income, as is the case with GILTI. A constituent
entity with operations in a country that are generating less than €10 million of revenues or less

18 Internal Revenue Service, Tax Year 2019 Country-by-Country Report Data Sources and Limitations,
https://www.irs.gov/pub/irs-soi/19itdocumentationcbc.pdf.
19 Pillar 2 also includes two treaty-based rules. One is a provision called the subject to tax rule (STTR), which is not
part of GLoBE and would be implemented separately. It provides for a top-up tax on payments between related parties
where the source country has ceded taxing rights through a treaty and the recipient country is a low- or no-tax
jurisdiction. These payments generally involve interest and royalties. The rate is 7.5% to 9%. See OECD/G20 Base
Erosion and Profit Shifting Project, Addressing the Tax Challenges Arising from the Digitalisation of the Economy,
July 2021, https://www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-
the-economy-july-2021.pdf. These payments are subject to a lower rate but are taken into account in determining the
overall effective rate; SSTR would apply before the income inclusion rule (IIR). It is expected that STTR would be
requested largely by developing countries. The other provision is the switch-over rule, which allows jurisdictions that
have agreed in treaties to exempt income of foreign branches to overturn those agreements and move to a foreign tax
credit to address double taxation. The United States taxes income of foreign branches and allows foreign tax credits to
prevent double taxation. For the rules, see OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges
Arising from the Digitalisation of the Economy: Global Anti-Base Erosion Model Rules (Pillar Two), at
https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-
model-rules-pillar-two.pdf. The OECD has also provided a Commentary with additional information, at
https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-
model-rules-pillar-two-commentary.pdf. More recent guidance was proposed in February 2023, at
https://www.oecd.org/tax/beps/agreed-administrative-guidance-for-the-pillar-two-globe-rules.pdf.
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than €1 million in losses would be excluded from the 15% minimum tax for those specific
operations.
Key Terms
•
Multinational Enterprise (MNE) Group—a company consisting of an ultimate parent entity that owns or
controls at least one other business entity with operations in a different jurisdiction.
•
Ultimate Parent Entity—a business entity with a direct or indirect control ing ownership interest in another
business entity and that is not owned by another entity.
•
Constituent Entity—a business entity (including an ultimate parent entity, subsidiary, permanent
establishment, or branch) that is included in the consolidated financial statement of a MNE group.
•
Excluded Entity—a business entity that is not considered a constituent entity, including government entities,
international organizations, nonprofits, pension funds, investment funds, and real estate investment vehicles
that are ultimate parent entities. Excluded entities are exempt from the GLoBE regime.
Source: OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from the Digitalisation of the
Economy: Global Anti-Base Erosion Model Rules (Pillar Two), 2021, at https://www.oecd.org/tax/beps/tax-challenges-
arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pil ar-two.pdf. The OECD has
also provided a Commentary with additional information. See Article 10 Definitions, at https://www.oecd.org/tax/
beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pil ar-two-
commentary.pdf.
Under the GLoBE rules, an effective tax rate would be calculated for all constituent entities of a
MNE group located in each country. Income from interests accounted for under the equity
method in financial accounting, where a share of after-tax income is included in profits, is
excluded. The equity method applies when there is a significant, but not controlling, interest in
the entity, typically where the ownership share is between 20% and 50% in corporations and
certain partnerships, although it depends on the circumstances and entity structure. For example,
in a limited partnership, limited partners are not considered controlling if the general partner
controls the investment, even if a limited partner owns a large share of the investment. For
purposes of GLoBE, the income and tax items attributable to these entities would be excluded
from the calculation. International shipping income would also be excluded from coverage, as
would investment funds and tax-exempt organizations, such as charities and pension funds.
To target intangible income in each country of operation, the minimum tax would apply to
income after a deduction for a share of the book value of a constituent entity’s tangible assets and
for a share of the value of payroll. The allowance for these deductions is often referred to as the
substance carve-out, and would eventually equal 5% after a 10-year phase-in period. The
deductible share of tangible assets would initially equal 8% and decline by 0.2 percentage points
per year for the first five years, and then decline by 0.4 percentage points per year over the next
five years to reach 5%. The deductible share of payroll would begin at 10% and decline by 0.2
percentage points per year for the first five years, and then by 0.8 percentage points per year over
the next five years to reach 5%. According to the OECD, the substance carve-out is intended to
allow tax incentives for routine activities without triggering the top-up tax. The OECD also
claims that the carve-out will cover a broad range of industries because it includes a deduction for
payroll as well as tangible assets.20
The Top-Up Tax
Under the GLoBE rules, a top-up, or additional, tax would be levied to increase a constituent
entity’s effective tax rate (ETR) to 15% if the entity’s tax was below the 15% minimum rate in its

20 See OECD, Global Anti-Base Erosion Model Rules, Frequently Asked Questions, Question 7, https://www.oecd.org/
tax/beps/pillar-two-model-GloBE-rules-faqs.pdf.
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country of operation. The calculation to determine whether a constituent entity’s effective tax rate
was below 15% would be made before deducting the substance carve-out. The top-up tax would
then be applied to income after deducting the substance carve-out. For example, assume a
constituent entity has an effective tax rate of 10% before deducting the substance carve-out. Also
assume that the entity has a carve-out equal to 20% of income. Then the top-up tax would be 4%
(5% times [100% minus 20%]).
The top-up tax would be achieved in one of three ways according to the following order:
• First, the country in which the entity is operating can impose its own top-up tax,
known as a qualified domestic minimum top-up tax (QDMTT), to bring the
entity’s ETR up to 15%. This would preserve the first right of taxation to the
source country, which would benefit from the tax revenue.21
• Second, if the source country does not impose a QDMTT, the country in which
the ultimate parent entity is located can impose a top-up tax on the parent entity
under the income inclusion rule (IIR). This rule would include the income of the
foreign constituent entity that has an ETR of less than 15% in the income of the
ultimate parent entity sufficient to raise the rate on the foreign constituent entity’s
income to 15%. If the parent entity owns less than 80% of the entity (called a
partially owned parent entity, or POPE), then the POPE would be responsible for
the top-up tax. In either case, the tax revenue would accrue to the country in
which the parent (or POPE) is located, and not the low-taxed entity’s country of
operation. The IIR is expected to be effective in 2024.
• Third, if the ultimate or partially owned parent entity’s home country does not
adopt an IIR, then all other countries in which the MNE group has constituent
entities could increase the effective tax rate on the constituent entities operating
within their borders by invoking the UTPR. The UTPR would allow the denial of
deductions in an amount to produce an additional tax liability equal to the needed
top-up tax in the low-tax jurisdiction such that the 15% minimum tax is achieved.
Deductions could be denied for payments to group companies and third-party
entities, and for other items as determined by local law, including depreciation
and interest. An additional tax could also be applied. The right to the top-up tax
increase would be allocated to countries imposing the UTPR based on 50% of
their share of total tangible assets in the entities imposing the UTPR group plus
50% of their share of employees in the entities imposing the UTPR. The UTPR
would, therefore, be imposed by countries on constituent entities that are neither
in the source nor headquarters country, and all revenue would accrue to the
countries imposing the tax. It would serve as a backstop to ensure that the
minimum tax is imposed. If adjustments could not be made to collect the full top-
up tax, any uncollected tax would be passed forward to be collected in the future.
The UTPR is expected to be effective in 2025 for most countries that have
adopted GLoBE, but the imposition of the tax on countries with a statutory
corporate tax rate of at least 20% (which includes the United States) is delayed
until 2026.

21 Although there is no set way to structure this tax, it presumably would be imposed on the parent if a U.S.-parented
firm and its other domestic constituent entities pay low taxes, since this is the entity that pays taxes, and on the U.S.
subsidiary if its parent firm is foreign.
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Treatment of Credits, Grants, Deductions, and Losses
Under GLoBE rules, refundable credits (to be received within four years) and grants would be
counted as increases in income (but not taxable) rather than reductions in taxes. This treatment
was recently extended to certain transferable credits. Thus, for example, if the tax rate is 20%
before credits and there is a refundable credit equal to 15% of income, the effective tax rate
would be reduced to 17.4% (0.20/1.15) and no top-up tax would apply. If, however, the credit was
nonrefundable, the tax rate would be reduced to 5%, and a 10% top-up tax would apply to
achieve the 15% minimum rate unless there was an applicable exception. One exception would
pertain to tax credits that accrue to operations that are treated under the equity method of
accounting.22 The equity method is used when a company must account for the profits or loss of
another entity it has a substantial, but not controlling, ownership interest in. Under GLoBE rules,
the income attributable to these entities is not included in the consolidation of earnings and would
therefore be excluded from the effective tax rate calculation for purposes of the minimum GLoBE
tax. Thus, tax credits attributable to such operations would not be affected by GLoBE.
The GLoBE calculation of the tax allows for temporary timing differences in the financial and tax
accounting treatment of deductions (such as depreciation), so lower taxes for this reason (e.g., tax
depreciation occurs before book depreciation) would not trigger a top-up tax. (This tax benefit
can be recaptured, however, if not resolved in five years for certain items, although this five-year
rule does not apply to cost recovery.) Any losses are valued at the minimum tax rate and carried
forward as credits to offset future taxes.
The U.S. Tax Proposals
Several proposals have been made to conform the U.S. tax system to the Pillar 2 proposals,
including the revisions to GILTI in the Build Back Better Act that were not enacted and the
proposed replacement of the base erosion and anti-abuse tax (BEAT) with the undertaxed
payments rule (UTPR) in the FY2023 budget proposals. An Administration official has indicated
the need to undertake reforms in light of the adoption of Pillar 2 by the European Union and the
consideration of Pillar 2 now taking place in Australia, Japan, Switzerland, and the United
Kingdom.23
Changes to GILTI in the Build Back Better Act
As noted, the United States has a minimum tax on global intangible low-taxed income, which is
similar in some ways to GLoBE, but different in important respects. GILTI only corresponds to
the income inclusion rule and thus does not address low tax rates on the parent company. The
Build Back Better Act (BBBA; H.R. 5376) proposed revisions to GILTI. Table 2 compares the
GLoBE provisions with GILTI as it currently stands and as proposed under the BBBA. As can be
seen, the proposed changes in the BBBA would bring GILTI rules closer to GLoBE, including a
similar tax rate and a per-country application. These changes were not adopted in the final version
of H.R. 5376, the Inflation Reduction Act (P.L. 117-169). That act adopted an alternative
minimum tax based on adjusted financial statement income that would increase taxation of some

22 The equity method generally applies when the firm has a substantial interest but does not have control. For an
investment in a corporation, control is generally based on more than 50% ownership, but it varies for other types of
investments depending on context and structure. For example, for passive investments in limited partnerships, the
equity method would apply when the general partner (who may own a negligible share) has control.
23 Stephanie Soong, U.S. Must Reform GILTI in Line With OECD Pillar 2, Grinberg Says, Tax Notes Today Federal,
December 19, 2022.
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large multinational corporations, although it is uncertain how this tax would be taken into account
under GLoBE.24
Table 2. Comparison of Basic Features of GLoBE and GILTI
GILTI as Proposed in

GLoBE
GILTI (Current Law)
the BBBA
Tax Rate
15.0%
10.5% (13.125% after
15.015% with some tax
2025) with some tax
applying to income earned
applying to income earned in countries with tax rates
in countries with tax rates of 15.8% or less if the
of 13.125% or less (16.4%
foreign tax credit limit
after 2025) if the foreign
applies
tax credit limit applies
How Tax is Applied
Per Country
Overall
Per Country
Tax Base
Financial Income
Taxable Income
Taxable Income
Substance Carve-Out
5% of tangible assets, 5%
10% of tangible assets
5% of tangible assets
(deduction)
of payrol costs after a10-
year phase-down (rates
start at 8% of tangible
assets and 10% of payrol )
Avoiding Double Taxation Add-on or top-up tax,
Foreign tax credit
Foreign tax credit
applied based on priority
allowed, but limited to
allowed, but limited to
80% of foreign taxes
95% of foreign taxes
Losses
15% of losses carried
No loss carryforward
One-year loss
forward as future credits
carryforward
Other features
Credits for deferred

income and deductions to
address timing differences
between tax and financial
income
Excluded Industries
International shipping
International shipping
International shipping
income
income and foreign oil
income
and gas extraction income
Source: Congressional Research Service.
An important difference between current-law GILTI and GLoBE is the overall treatment of
foreign income and foreign tax credits. Income, losses, and foreign tax credits are measured on an
overall basis for all foreign countries under GILTI. As a result, losses in one jurisdiction can
offset income in another, and credits in excess of U.S. taxes in a high-tax jurisdiction can offset
U.S. taxes in low-tax jurisdictions. GLoBE would apply separately to each country, and the
BBBA would apply this per-country treatment under GILTI.
The GILTI base is taxable income, whereas the base under GLOBE is financial income.
Presumably, GLoBE proposes using financial income because financial accounting rules are more
standardized across countries, whereas computing taxable income depends on the structure of
each individual country’s tax system. The GLoBE rules include provisions to address timing
differences based on when income and expense are recognized under tax accounting and financial

24 See CRS Report R47328, The 15% Corporate Alternative Minimum Tax, by Jane G. Gravelle for a discussion of the
new alternative minimum tax, including how it might relate to GLoBE.
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accounting principles. GLoBE also allows for tax rules regarding deferred compensation, such as
stock options.
Tax rates are also lower under the current GILTI regime than under GLoBE. Although the current
GILTI tax rate is 10.5%, the GILTI tax actually applies if the foreign tax rate is slightly higher
due to the limitation on foreign tax credits. Specifically, GILTI taxes will apply as long as the
foreign tax rate is below the U.S. tax rate divided by the share of foreign tax credits allowed,
which is 80%. Thus, the 10.5% tax applies to income earned in foreign tax jurisdictions with rates
less than 13.125% (0.105/0.8) under current law. After 2025, when the GILTI tax rate increases to
13.125%, GILTI taxes will apply to income earned in foreign tax jurisdictions with rates less than
16.4% (0.13125/0.8).
GLoBE and GILTI take different approaches to reducing double taxation. The method of avoiding
double taxation under GLoBE is to apply the minimum tax as a top-up tax with the right to tax
first belonging to the source country, via a QDMTT, then belonging to the home country of the
parent company (or partially owned parent entity) through the IIR, then finally to the countries
where other constituent entities operate through the UTPR. The method of avoiding double
taxation under GILTI is allowing a credit against U.S. taxes for up to 80% of foreign taxes paid.
A study by the Penn Wharton Budget Model computed effective tax rates for 51 countries under
the OECD proposal, the current GILTI rules, and the rules in the BBBA.25 All of the countries in
Table 1 except Canada and the U.K. would experience increased taxes under GLoBE compared
to present law, suggesting that, without change, other countries could collect additional taxes on
U.S. foreign operations. With the changes proposed in the BBBA, the U.S. tax rate would be
higher than the GLoBE rate except in Canada, so the United States would collect the residual
taxes. The study also indicated the importance of the per-country rule in producing tax rates
higher than the GLoBE rate. Overall, under current law, U.S. multinationals are estimated to
collect a residual tax of 2.1% with the combined U.S. and foreign tax rate of 12.7%. GLoBE
would increase the residual tax to 6.1% for a total of 16.7%. That is, other countries would collect
revenues of 4% of income. With the changes in the BBBA, the U.S. residual tax would rise to
7.4% and the total tax to 18.1%, with the United States collecting those additional revenues.
FY2023 Budget Proposals
The Administration’s FY2023 budget proposals contain some additional provisions to conform
the U.S. tax system with GLoBE and to ensure that the United States exercises its rights to
taxation.26
Under current law, the base erosion and anti-abuse tax provides for an alternative calculation of
tax by adding certain payments to related foreign parties (such as interest and royalties) and
taxing this income at 10%. Payments for the cost of goods sold are not included. BEAT does not
allow tax credits, including the foreign tax credit, except for a temporary allowance of the
research credit along with 80% of the low-income housing tax credit and two energy credits.
After 2025, the BEAT rate will rise to 12.5% and no credits will be allowed.

25 Penn Wharton Budget Model, Effective Tax Rates on U.S. Multinationals’ Foreign Income Under Proposed Changes
by the House Ways and Means and the OECD, September 28, 2021, https://budgetmodel.wharton.upenn.edu/issues/
2021/9/28/effective-tax-rates-multinationals-ways-and-means-and-oecd#:~:text=
In%20aggregate%2C%20PWBM%20estimates%20that,the%20statutory%20rate%20of%2035%25.
26 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2023 Revenue
Proposals, March 2022, https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf.
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The Administration’s proposal would replace BEAT with a UTPR similar to the proposal in
GLoBE that would apply to multinational firms with $850 million in revenues in two of the past
four years. As with GLoBE, it would be applied to financial income and allocated based on the
share of employees and tangible assets. The proposal would also apply a QMDTT to ensure that
the United States collects the top-up tax on U.S.-source income. This measure is projected to raise
$239 billion over 10 years, although there is no separate estimate for the QMDTT, which would
apply to domestic operations. The proposal states that it will ensure that taxpayers benefit from
tax credits and other tax incentives encouraging U.S. jobs and investments, though specifics of
how this will be accomplished are not provided.
The Administration also proposes raising the corporate tax rate to 28%, while maintaining the
proposed treatment of GILTI in the BBBA. Under GILTI, the 15.015% rate results from a 28.5%
deduction of income under a 21% corporate tax rate (i.e., 1-0.285) multiplied by 21% equals
15.0155. Leaving the deduction of 28.5% raises the GILTI rate to 20% with a 28% tax rate (i.e.,
(1-0.285) x 0.28).
Implications for Revenues and Incentives
GLoBE has a broader scope than GILTI. GILTI and its proposed revisions focus on U.S. taxation
of its own multinationals’ operations abroad. GLoBE could affect U.S. multinationals’ operations
in the United States as well as abroad through the UTPR, even absent U.S. action with respect to
the GLoBE proposal. This is because the UTPR could be imposed by a foreign country on a
foreign constituent entity of U.S. multinationals (e.g., foreign subsidiary of a U.S. parent) by
disallowing deductions or making equivalent changes. The UTPR would be equivalent to raising
the tax in the United States, since it is triggered by the tax rate in the United States, even though it
is collected by a foreign government. Similarly, a domestic U.S. investment made by a foreign
multinational could be subject to taxes in the country where the foreign parent is located through
an IIR or in the country where another constituent entity of the MNE group is located through the
UTPR.
The Joint Committee on Taxation (JCT) has estimated that the adoption of GLoBE by countries
that have already committed to Pillar 2 would result in a U.S. revenue loss of $175 billion or a
revenue gain of $224 billion from 2023 to 2033, depending on how U.S. corporations respond
with respect to profit shifting.27 These estimates, which the JCT terms the “lower bound” and
“upper bound,” form the basis for JCT’s “modified baseline.” The JCT used its modified baseline
to estimate the revenue effects of various scenarios involving the rest of the world (i.e., those not
already committed to Pillar 2) and the United States. (These effects were estimated before the
July 2023 revisions that extended the date for implementation of the UTPR and treated
transferable credits as refundable rather than nonrefundable credits.)
The JCT estimated that U.S. revenues would be reduced by $122 billion between 2023 and 2033
relative to its modified baseline if the rest of the world adopts GLoBE and the United States does
not.28 If both the rest of the world and the United States adopt GLoBE, JCT estimated reduced
U.S. revenues of $57 billion, relative to the modified baseline. If the United States adopts GLoBE
and the rest of the world does not, JCT estimated increased U.S. revenues of $237 billion, relative
to the modified baseline. If the United States adopts the major components of GloBE aside from

27 Joint Committee on Taxation, Possible Effects of Adopting the OECD’s Pillar 2, Both Worldwide and in the United
States, June 2023, https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf. See the appendix for a
list of countries already committed to Pillar 2.
28 In all the scenarios discussed here, JCT assumes that if adoption occurs it would happen in 2025.
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the undertaxed payments rule (UTPR) and the rest of the world does not, JCT estimated increased
U.S. revenues of $102.6 billion, relative to the modified baseline.
Thus, if GLoBE is widely adopted (and it has already been adopted by the European Union and a
number of other important trading partners), changes in U.S. taxes as proposed in the BBBA or
by the Administration (increasing GILTI and adopting the UTPR and the domestic top-up tax)
might shift the receipt of revenue to the United States, but higher taxes will apply to both foreign
entities and domestic operations. This issue has led to concerns about the effects on domestic
investment.
At the same time, several aspects of the GLoBE proposal would limit its effect on domestic tax
policy and incentives that have been provided to encourage certain types of investment. First, the
carve-out for payroll and tangible assets will reduce any top-up tax. Second, incentives that
involve only timing differences, such as accelerated depreciation, should not be affected by
GLoBE because the proposal contains adjustments for temporary timing differences between
financial and tax accounting. Bonus depreciation is the most significant tax incentive in the
current U.S. code and allows investment in equipment to be deducted immediately rather than
over a period of time. Bonus depreciation is scheduled to be phased out over five years beginning
in 2023, although tangible assets will still have accelerated depreciation. Similarly, GLoBE would
allow deductions for stock options, which often reduce effective tax rates for financial purposes,
to be treated as under the tax law, so they would not be affected.
The third aspect is the treatment of provisions in the form of credits. The major U.S. business tax
credits include the research and experimentation (R&E) tax credit, the low-income housing tax
credit (LIHTC), and credits for renewable energy; there are also smaller credits programs, such as
the new markets tax credit (NMTC) and the historic rehabilitation tax credit (HTC). None of
these credits are refundable, except for some business energy credits, and, without an exception,
they could trigger a top-up tax and potentially reduced investment in the activities that generate
these credits.29 Community development interest and advocacy groups expressed this concern to
Treasury Secretary Yellen in an April 5, 2022, letter.30 However, outside the R&E tax credit, and
some business energy credits that relate to the core business, most of the investments using these
credits are accounted for using the equity method and appear not to be affected by GLoBE.31
Moreover, the business energy credits, as transferable credits, would have a limited effect on the
effective tax rate because they are treated as refundable credits.32 The R&E credit and remaining
business credits not accounted for under the equity method would lower the effective tax rates,
which would introduce the potential for a top-up tax to apply and for the credit’s incentive to be
significantly diminished.

29 The BBBA proposed making the energy credits refundable, which would significantly reduce any impact of GLoBE.
30 Letter to Janet Yellen, U.S. Secretary of the Treasury, April 5, 2022, https://cdn.ymaws.com/www.nalhfa.org/
resource/resmgr/alert_files/Community_Development_Financ.pdf.
31 Most of the investment financing raised through LIHTC and renewable energy credits is from banks and financial
institutions. The interest from banks and financial institutions in LIHTC is partly motived by the Community
Reinvestment Act, though both LIHTC and the renewable tax credits are attractive to banks because they typically
expect to have tax liabilities to offset with the credits. A review of recent 10K reports of three of the largest banks
indicated use of this method as well as significant low-income housing credits. For more information on the LIHTC
investor landscape, see CohnReznick, LLP, Housing Tax Credits Investments: Investment and Operational
Performance, November 18, 2019. For more information on the renewable tax credits investor landscape, see Oliver
Metcalfe and Tara Narayanan, “U.S. Clean Energy Boom Strains Tax Equity Supply,” BloombergNEF, August 12,
2021.
32 See CRS In Focus IF12439, Energy Tax Credits and the Global Minimum Tax, by Jane G. Gravelle and Donald J.
Marples.
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One option to preserve these credits’ incentives under the GLoBE framework would be to make
them refundable. This change would cause the credit to increase income rather than reduce taxes,
significantly reducing its impact on effective tax rates. One study estimated that making all
general business credits refundable would cost $193 billion over FY2023-FY2032, although this
cost would be reduced to $172 billion if it excluded the refundability of previously accrued
credits.33
Like the research credit, the deduction for foreign-derived intangible income (FDII) could also
lead to a top-up tax. FDII allows a deduction for income associated with foreign-derived income
of intangible assets held in the United States. It was enacted to equalize the treatment of
intangible assets held in the United States with those held abroad that benefit from the lower tax
rates imposed by GILTI. Tax-exempt interest income is another tax preference that could lower
effective tax rates.
Aggregated data from the IRS’s Country-by-Country report can be used to examine industry-level
effective tax rates under GLoBE, and the effect of substance carve-outs (Table 3).34 Effective tax
rates were calculated as U.S. taxes accrued (to capture timing differences) divided by profits from
the United States. This table relates to the permanent effects, since the carve-outs are larger
during a 10-year transition period.
Table 3. Effective Tax Rates in the United States by Major Industry Group, 2019, and
the Permanent OECD Carve-Outs
Percentage
Percentage
Total
Reduction in
Reduction in
Percentage
Tax Base Due
Tax Base Due
Reduction in
Effective
to Wage
to Capital
Base Due to
Industry
Tax Rate
Carve-Outs
Carve-Outs
Carve-Outs
Agriculture, Fishing, Forestry, Mining,
-0.9%
7.3%
159.2%
166.5%
Oil and Gas Construction, Utilities,
Construction
Manufacturing
12.8%
4.4%
18.3%
22.7%
Wholesale and Retail Trade,
7.9%
9.8%
25.8%
35.6%
Transportation, Warehousing
Information
20.8%
4.1%
19.3%
23.4%
Finance, Insurance, Real Estate
11.1%
2.6%
17.0%
19.6%
Professional, Scientific, and Technical
16.9%
13.7%
13.7%
27.4%
Services
Management of Companies, Other
18.2%
9.4%
18.1%
27.6%
Services
Source: CRS calculations from Internal Revenue Service, Statistics of Income, International, Country-by-Country
Report: Tax Jurisdiction Information, Major Industry Group, Geographic Region, and Selected Tax Jurisdiction,
https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report.

33 See Peter R. Merrill et al., “Where Credit Is Due: Treatment of Tax Credits Under Pillar 2,” Tax Notes, March 20,
2023, pp. 1967-1979.
34 Effective tax rates for specific companies or more specific industries are not available. These data generally cover the
firms that would be subject to GLoBE. Inclusion in IRS data is triggered by revenues in the previous year, while
inclusion in GLoBE is triggered by two out of the past four years. GloBE revenue triggers are measured in euros, while
IRS reporting is based on dollars.
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Notes: Taxes accrued in the United States divided by profit in the United States. Profit is reduced by 5% of
employees multiplied by $67,000 plus 5% of tangible assets when incorporating carve-outs. Average wages are
from Statista, https://www.statista.com/statistics/243842/annual-mean-wages-and-salary-per-employee-in-the-
us/#:~:text=Annual%20mean%20wages%20and%20salary%20per%20employee%20in%20the%20U.S.%202000%2D
2020&text=In%202020%2C%20the%20average%20wage,and%20payments%2Din%2Dkind.
Although the high degree of aggregation makes the numbers in Table 3 less informative, there are
differences in tax rates. Some are well above 15%. In cases where the top-up tax applies, it will
typically be reduced by the deduction of carve-outs. In addition, compensation relating to stock
options and similar forms of compensation would be allowed as deductible items, raising the
effective tax rate compared to financial income. Thus, it seems unlikely that GLoBE would have
a significant impact on domestic tax incentives, especially in the near term.

Author Information

Jane G. Gravelle
Mark P. Keightley
Senior Specialist in Economic Policy
Specialist in Economics

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
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Congressional Research Service
R47174 · VERSION 18 · UPDATED
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