BEPS 2.0: What will happen to Pillar 2?

During the autumn of 2025, the future of Pillar 2 (the global minimum tax) has been subject to intense discussions. Two questions have particularly dominated: (1) Will Pillar 2 survive now that the US has withdrawn, and (2) will there be a permanent safe harbour rule?

Pillar 2 has already been implemented in 55 countries, with an additional four countries in the process of introducing the rules. Despite this, there has been an intense debate about what will happen to Pillar 2 and whether the system will survive at all after Trump’s statement earlier this year that the US does not accept Pillar 2 taxation of American subsidiaries of US-owned groups. At last week’s IFA conference in Lisbon, it became clear that two issues are at the top of the Inclusive Framework’s agenda; the relationship between the US and Pillar 2, and the design of the permanent safe harbour rule. Exactly how these issues will be resolved is still somewhat unclear, but there are strong indications that Pillar 2, including a permanent safe harbour rule, will continue to exist side-by-side with the US tax system.

The US position is clear. No Pillar 2 taxes should be levied on US companies owned by a US ultimate parent entity (UPE). If this cannot be ensured, the US has threatened to reintroduce Section 899, which would result in significantly increased withholding taxes on payments to countries that impose such Pillar 2 taxes. The solution currently under discussion is a so-called “Side-by-Side Approach”, where the US tax system would be respected as a so-called “side-by-side regime” (SbS regime) within the Pillar 2 framework and applied side-by-side with different countries’ Pillar 2 rules.

In September, leaked working papers from the OECD revealed what would characterize an SbS regime. According to media reports (mainly Bloomberg Tax and Tax Notes), the working papers included a proposal that groups with a UPE located in a country with an SbS regime would be exempted from Pillar 2 taxation, both as regards the UPE and the subsidiaries in this country.

An SbS regime should generally meet the following three criteria:

1. it must be a comprehensive tax system for the taxation of domestic income in the home country;
   
   
2. the tax system must ensure a certain minimum taxation of profits in foreign subsidiaries; and
   
   
3. the tax system must accept and give foreign tax credit for domestic top-up tax (QDMTT).

Currently, only the US is being considered as meeting all these criteria, though it is possible that additional countries could become relevant in the future. If an agreement with the US is reached, it would mean that US-owned groups would be exempt from both the main rule (IIR) and the alternative rule (UTPR). In practice, this implies that US subsidiaries of a Swedish-owned group would still be taxed under the main rule (IIR), while US subsidiaries of a US-owned group would not be taxed under the main rule.

An important aspect of this, however, is that domestic top-up tax rules (QDMTTs) would still be applied and, as today, have precedence over, for example, local CFC rules. The current plan is that the Inclusive Framework and the US will reach an agreement before the end of this year. However, several important questions remain, for instance whether this agreement would be given retroactive effect. Pillar 2 applies already from year 2024 in many countries, while a possible agreement with the US could be reached first in 2025 (or later). According to the US, the exemption from Pillar 2 taxation of US-owned groups should apply retroactively, but several countries lack legal authority to enact retroactive legislation.

It could also be mentioned that there are ongoing discussions about the treatment of incentives and tax credits within the framework of Pillar 2, which is particularly relevant for the US given the negative effect that US R&D tax credits have on the ETR calculation.

In parallel with the discussions about the US and Pillar 2, intensive work is also conducted in order to develop a permanent safe harbour rule. During a long period of time now, businesses have urged for a less complex Pillar 2 compliance process, where a permanent safe harbour rule definitely would simplify both ETR-calculations and Pillar 2 reporting.

Key for business has been less (but important) adjustments, simple rules for countries with tax losses, and the possibility to apply a permanent safe harbour rule every year (even if a country did not meet the requirements in a previous year). An important question that has not yet been resolved is what financial statements should be used as the basis for the tests. In this respect there is a strong desire to use the data for consolidated financial statement purposes. 

The Inclusive Framework appears to have listened to companies’ concerns, at least to some extent, and the permanent safe harbour rule is expected to include e.g., an adjustment for tax-exempt equity gains on shares. Calculations are still expected to be made on a jurisdictional basis. The permanent safe harbour rule is also expected to always apply the fifteen percent threshold, rather than the increasing percentages prescribed by the transitional CbCR safe harbour rule. In addition, the principle of “once out, always out” is expected to be removed, which would imply a new opportunity for countries to re-enter the safe harbour system even after falling out of scope for a specific year.

The intention is to complete this work before the end of this year, even though an agreement between the Inclusive Framework and the US on the Side-by-Side Approach remains the highest priority.

Discussions regarding the US and Pillar 2 have been on the agenda throughout the entire year. When Trump announced in January that the US no longer considered itself bound by the agreement that the previous Biden administration had entered into, many began to speculate whether this could be the end of Pillar 2. At the same time, more than fifty countries have already implemented Pillar 2 rules and more countries are on their way to doing so, which is why an abandonment of Pillar 2 would be seen as a political defeat.

According to what was said at the IFA conference in Lisbon last week, an agreement between the Inclusive Framework and the US now appears to be within reach, with the proposed solution being a Side-by-Side Approach where the US tax system is to be accepted and applied side-by-side with other countries’ Pillar 2 rules. As things stand now, it is therefore very unlikely that the Pillar 2 rules would be abandoned. 

As for the permanent safe harbour rule, things look promising. There is a possibility that we will have a permanent safe harbour rule in place already before year-end, and due to the adjustment for tax-exempt equity gains on shares, our assessment is that many jurisdictions will be able to avoid full ETR calculations. It should be noted, however, that the permanent safe harbour rule is not based on the CbC report and is not quite as easy to apply as the transitional CbCR safe harbour rule. Nevertheless, it is expected to provide a more reasonable outcome that better reflects the group’s actual tax burden.

Most of our clients have already made significant progress in preparing for upcoming reporting requirements, both for the annual report and the upcoming Pillar 2 reporting. However, a few Swedish groups have not progressed as far in their preparations, mainly due to their doubtfulness whether the Pillar 2 rules would survive. We strongly recommend mapping out upcoming deadlines as soon as possible, and also to analysing which countries will require full ETR calculations, as performing these calculations may be quite time-consuming.

Additionally, it can be mentioned that some companies are hesitant to implement a comprehensive technology solution for Pillar 2, which, for instance may be related to a change of consolidation system in the group, or because internal processes have not yet been fully established. However, we want to emphasize that it is possible to find a flexible solution for technical support that can be used for short-term needs at this stage while being adapted later to fulfil long-term needs when the final Pillar 2 processes have been set.

Please feel free to contact us if you have any questions regarding BEPS and Pillar 2.

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