Understanding the OECD Inclusive Framework, Pillar Two, and the Architecture of the Global Minimum Tax
International corporate taxation is undergoing its most consequential reform in nearly a century. At the center of this transformation is the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS)—a multilateral platform designed to modernize global tax rules for an economy defined by digitalization, mobility of capital, and highly integrated multinational enterprises (MNEs).
These reforms are not merely technical. They are reshaping how countries compete for investment, how revenues are allocated, and how fairness is defined in the global economy.
What Is the OECD Inclusive Framework?
The OECD Inclusive Framework on BEPS brings together more than 140 jurisdictions—advanced economies, emerging markets, and developing countries—on an equal footing to develop and implement coordinated international tax standards.
Its core objective is to address weaknesses in the international tax system that allow profits to be shifted away from the jurisdictions where real economic activity and value creation occur. Unlike earlier OECD-led initiatives, the Inclusive Framework explicitly recognizes the developmental implications of tax policy and gives developing countries a formal voice in shaping global rules.
The Framework’s most ambitious outcome is the Two-Pillar Solution, agreed in principle in 2021. While Pillar One reallocates certain taxing rights over highly digitalized and consumer-facing businesses, Pillar Two introduces a global minimum corporate income tax and has far broader reach across sectors and jurisdictions.
What Is Pillar Two?
Pillar Two, also known as the Global Anti-Base Erosion (GloBE) rules, establishes a minimum effective corporate tax rate of 15% for large MNE groups with consolidated annual revenues of €750 million or more.
Rather than harmonizing national tax rates, Pillar Two ensures a minimum level of taxation through a system of top-up taxes. Where profits are taxed below 15% in a particular jurisdiction, additional tax is imposed—somewhere within the group structure—to bring the overall effective rate up to the minimum.
This approach places a floor under global tax competition and reduces the attractiveness of profit shifting to low-tax or no-tax jurisdictions.
To operationalize this, Pillar Two relies on three interlocking rules: the Qualified Domestic Minimum Top-Up Tax (QDMTT), the Income Inclusion Rule (IIR), and the Undertaxed Profits Rule (UTPR).
The Qualified Domestic Minimum Top-Up Tax (QDMTT)
A central—yet sometimes misunderstood—feature of Pillar Two is the Qualified Domestic Minimum Top-Up Tax (QDMTT).
A QDMTT is a domestic tax implemented by a jurisdiction to ensure that large MNEs operating within its borders pay at least the 15% minimum effective tax rate on their local profits. When properly designed and recognized as “qualified” under OECD standards, a QDMTT takes priority over top-up taxes imposed by other countries.
In practical terms, this means that if profits in a jurisdiction are taxed below 15%, the host country can collect the top-up tax itself rather than allowing the parent jurisdiction or other countries to collect it under the Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR).
For many countries—especially developing economies—QDMTTs are strategically important. They:
- Preserve domestic taxing rights
- Reduce revenue leakage to foreign jurisdictions
- Align national tax systems with global standards without raising headline corporate tax rates
QDMTTs also fundamentally change the calculus of tax incentives. Traditional tax holidays or reduced rates may no longer deliver net benefits to large MNEs if the tax savings are simply offset by a domestic top-up tax.
The Income Inclusion Rule (IIR)
The Income Inclusion Rule (IIR) is the primary enforcement mechanism of Pillar Two.
Under the IIR, the jurisdiction of the ultimate parent entity has the right to impose a top-up tax on low-taxed income earned by subsidiaries in other countries. If a subsidiary’s effective tax rate falls below 15%, the parent jurisdiction “tops up” the tax to reach the minimum level.
The IIR closely resembles controlled foreign corporation (CFC) rules but operates within a globally coordinated framework with standardized calculations and definitions. A controlled foreign corporation (CFC) is a foreign company that is majority-owned and controlled by residents or companies of another country, which then subjects its income to the controlling country’s tax rules to prevent tax evasion. Many countries, including the UK, Germany, Japan, Australia, New Zealand, and others, have their own CFC rules to protect their domestic tax bases.
From a policy perspective, the IIR discourages profit shifting by ensuring that low taxation in one jurisdiction does not eliminate tax liability—it merely reallocates where the tax is paid.
The Undertaxed Profits Rule (UTPR)
The Undertaxed Profits Rule (UTPR) serves as a secondary or backstop rule. If neither a QDMTT nor an IIR applies—perhaps because the relevant jurisdictions have not implemented qualifying rules—the UTPR allows other jurisdictions where the MNE has operations to collect the remaining top-up tax.
This is typically achieved through mechanisms such as:
- Denial of deductions
- Equivalent adjustments based on payroll or tangible asset presence
The UTPR ensures that low-taxed profits do not escape the global minimum tax net, reinforcing the collective nature of Pillar Two and reducing opportunities for arbitrage between jurisdictions.
Transparency and the GloBE Information Return (GIR)
Compliance with Pillar Two relies heavily on transparency. Large MNE groups are required to submit a GloBE Information Return (GIR)—a standardized OECD reporting template providing detailed data on income, taxes paid, and effective tax rates across jurisdictions.
The GIR enables tax administrations to conduct risk assessments, verify top-up tax calculations, and coordinate enforcement. Importantly, reporting obligations generally remain even where safe harbors or side-by-side arrangements apply.
Implications for Developing Countries and Special Economic Zones
For developing countries—and particularly those that rely on special economic zones (SEZs) and fiscal incentives to attract investment—Pillar Two represents a structural shift.
Tax incentives based purely on reduced corporate income tax rates are increasingly ineffective for large MNEs subject to the global minimum tax. As a result, competitiveness is shifting toward non-fiscal incentives: infrastructure, logistics, regulatory certainty, skills development, market access, and governance quality.
At the same time, tools like QDMTTs offer an opportunity for host countries to retain revenue while aligning with global norms.
A New Global Tax Reality
The OECD Inclusive Framework and Pillar Two mark a decisive move toward a more coordinated, disciplined, and transparent international tax system. While implementation challenges remain—particularly for capacity-constrained administrations—the direction of travel is clear.
Global tax competition is not disappearing, but it is being redefined. The future belongs to jurisdictions that understand how to combine tax policy, investment strategy, and governance into a coherent development model—one that works within, rather than against, the new global minimum tax architecture.
