Introduction
The introduction of a global minimum corporate tax rate of fifteen percent under the OECD/G20 Inclusive Framework’s Pillar Two framework represents the most significant transformation in international tax law in generations. For most of the twentieth century, states competed for foreign investment partly through the reduction of corporate tax rates and the design of special tax incentive regimes. The resulting “race to the bottom” in corporate taxation led to a system in which the largest multinational enterprises (MNEs) paid effective tax rates far below nominal rates, sheltering profits in low-tax jurisdictions with little genuine economic activity. Pillar Two, by establishing a floor below which the effective tax rate on MNE profits cannot fall, is designed to end this race.
The legal architecture of Pillar Two, however, is far from a simple global flat tax. It is a complex, interlocking set of domestic law rules, treaty modifications, and international soft law instruments that interact in ways that continue to generate controversy, particularly for developing countries including India. Questions about sovereignty, the derogation of tax incentive policies built into development strategies, the distributional fairness of the framework’s revenue-sharing rules, and the specific instruments through which developing countries can protect their rights to tax at source have all emerged as frontline issues in negotiations that continue, in modified form, even after the formal adoption of the framework.
Legal Framework
The Pillar Two framework, published in the OECD’s October 2021 Statement and the December 2021 Model Rules (Global Anti-Base Erosion, or GloBE Rules), operates through a primary and backup mechanism. The primary mechanism is the Income Inclusion Rule (IIR), under which a parent company’s jurisdiction imposes a top-up tax on the parent if a subsidiary in another jurisdiction pays below fifteen percent effective tax rate on its GloBE income. The backup mechanism is the Undertaxed Profits Rule (UTPR), under which, if the parent’s jurisdiction does not apply the IIR (or is itself a low-tax jurisdiction), other group entities in high-tax jurisdictions can be made to bear the top-up tax through a denial of deductions. A third mechanism is the Qualified Domestic Minimum Top-up Tax (QDMTT), which allows a jurisdiction to collect the top-up tax on its own domestic entities before it would be collected by the parent jurisdiction, thereby retaining the revenue that would otherwise flow abroad.
The framework applies to MNE groups with consolidated global revenues above 750 million euros in at least two of the four preceding fiscal years. This threshold is the same threshold used in the BEPS Action 13 Country-by-Country Reporting requirement, which is not coincidental: CbCR data forms the information backbone on which GloBE computations are made.
From a treaty law perspective, Pillar Two creates tensions with existing bilateral tax treaties in multiple respects. Tax treaties typically contain non-discrimination clauses (Article 24 of the OECD Model Convention) that require a contracting state not to subject enterprises of the other contracting state to taxation more burdensome than it imposes on its own enterprises in the same circumstances. The UTPR, which imposes additional tax on domestic entities of an MNE group based on the low taxation of foreign affiliates, has been argued by some scholars to violate non-discrimination norms. The OECD’s Commentary addresses this concern, arguing that the UTPR targets the group’s total tax burden rather than singling out foreign enterprises, but the argument is not universally accepted.
The Subject to Tax Rule (STTR) is a separate component of the Pillar Two package specifically designed to address the concerns of source-state developing countries. The STTR allows source states to impose withholding taxes on certain intercompany payments (interest, royalties, and specified other payments) where the receiving entity in the residence state pays below nine percent effective tax on those payments. The STTR thus gives source countries a priority right to tax income before residence country top-up rules can apply.
Fiscal and Regulatory Developments
India’s principal domestic legislative response to Pillar Two has been the introduction, through the Finance Act 2024 (effective from financial year 2024-25), of a Qualified Domestic Minimum Top-up Tax. The QDMTT applies to constituent entities of in-scope MNE groups located in India, imposing a top-up tax calculated to bring the effective tax rate on their GloBE income to fifteen percent. By enacting a QDMTT, India ensures that top-up revenue on Indian-located profits is collected by the Indian exchequer rather than by the parent company’s jurisdiction (typically the US, EU member states, or Japan).
The QDMTT is the fiscally optimal response for India given that Indian corporate profits that were previously undertaxed (below fifteen percent) will now be taxed at fifteen percent regardless; the QDMTT ensures India captures that incremental revenue. However, the QDMTT does not solve the deeper tension created by India’s existing tax incentive regime for Special Economic Zones and the Production Linked Incentive scheme for manufacturing, both of which reduce effective tax rates on certain income below fifteen percent. Under the GloBE rules, MNE group entities in India benefiting from these incentives would face top-up taxes either in India (via QDMTT) or abroad (via the parent jurisdiction’s IIR), effectively neutralising the incentive. This undermines India’s industrial policy, which has deployed tax incentives as instruments to attract investment in strategic sectors.
Contemporary Issues and Analysis
The most contentious developing-country critique of Pillar Two concerns the distribution of top-up tax revenue. When a low-tax jurisdiction hosts an MNE subsidiary and the parent jurisdiction collects the top-up tax via the IIR, the revenue flows to the parent jurisdiction, typically a high-income country. The host developing country receives nothing additional: its effective incentive has been cancelled (because the investor’s net tax burden rises to fifteen percent regardless) and the incremental revenue has been appropriated by the parent’s treasury. The QDMTT mechanism partially corrects this by allowing the host country to collect the top-up first, but it requires host countries to enact domestic legislation aligned with complex GloBE rules, a significant administrative burden for states with limited tax authority capacity.
India has been vocal in international forums about this revenue distribution concern. India’s Finance Ministry has argued that the Pillar Two framework, as originally designed, served primarily the interests of high-income capital-exporting states that were losing revenue to profit-shifting, while developing countries (as capital-importing states that compete through incentives) suffer a double loss: their incentives are neutralised and the incremental revenue goes abroad. India’s advocacy in the Inclusive Framework negotiations contributed to the adoption of the STTR as a mandatory minimum standard for developing countries, a significant concession from the OECD-dominated negotiating dynamic.
The UN Tax Committee’s approach has been notably divergent from the OECD’s Inclusive Framework. The UN has consistently emphasised source-state taxing rights, calling for stronger withholding taxes and rejecting the residence-state priority that underpins the IIR. In 2024, the UN General Assembly adopted a resolution calling for an intergovernmental UN Tax Convention negotiation process under UN auspices, explicitly challenging the OECD’s claim to be the primary forum for international tax rule-setting. India has supported the UN process, viewing it as more representative of developing-country interests.
The IMF’s 2023 assessment of Pillar Two’s revenue implications for low-income countries found that the revenue gains would be modest and concentrated among middle-income countries (particularly those with substantial domestic MNE sectors), while low-income countries would gain relatively little from the IIR and could lose significant FDI if incentive regimes are neutralised.
Comparative and International Perspective
The EU’s Directive implementing Pillar Two (Directive 2022/2523, adopted December 2022 and required to be transposed by December 2023) represents the most comprehensive multilateral implementation of GloBE rules. EU member states are required to implement both the IIR and the UTPR, creating a zone of consistent application covering the world’s largest single market. This accelerated the pressure on non-EU jurisdictions to implement GloBE rules or face the UTPR being applied to their MNEs’ EU operations.
The United States, despite the Biden administration’s strong support for the Pillar Two framework in the OECD negotiations (Treasury Secretary Yellen’s advocacy was instrumental), has not enacted domestic GloBE legislation. The Republican-controlled Congress refused to advance legislation, and the Global Minimum Tax remained unimplemented in US domestic law as of early 2026. This creates a remarkable anomaly: the country that drove the Pillar Two project politically has not implemented it domestically, while the UTPR applied to US MNEs by EU and other countries is generating political friction that the Trump administration characterised as an “economic attack” on US companies.
Switzerland, Ireland, and Barbados, traditional low-tax jurisdictions, have all enacted QDMTTs to retain top-up revenue within their own systems, reflecting the pragmatic fiscal logic of the QDMTT even for jurisdictions ideologically opposed to the fifteen percent floor.
India’s Position in Inclusive Framework Negotiations
India’s negotiating stance within the OECD/G20 Inclusive Framework has been marked by a consistent emphasis on developing-country prerogatives without wholesale rejection of the framework. India signed the October 2021 Statement (which is a political commitment rather than a binding treaty), signalling support for the broad objectives while reserving space to negotiate implementation details. India’s specific contributions to the negotiating outcome include advocacy for the STTR, support for the Substance-Based Income Exclusion (SBIE, which carves out a portion of payroll and tangible asset costs from the GloBE income calculation, benefiting economies with significant manufacturing activity), and insistence on adequate transition periods for developing country implementation.
India’s QDMTT enactment is broadly consistent with GloBE rules but contains certain domestic modifications that are being assessed for qualified QDMTT status (a designation that determines whether other jurisdictions’ top-up taxes are credited against the domestic top-up). The administrative challenge of computing GloBE income, which requires complex adjustments to financial accounting data, is significant for Indian tax authorities accustomed to a different compliance ecosystem.
Practical and Policy Implications
For Indian MNEs operating in low-tax jurisdictions, Pillar Two imposes new compliance burdens and potentially higher effective tax rates. For foreign MNEs with India operations, the QDMTT ensures a fifteen percent floor but does not add to their burden beyond what they would have faced under the parent jurisdiction’s IIR. The interaction with India’s SEZ incentives requires careful planning: since SBIE carve-outs for payroll and tangible assets partially offset the neutralisation of incentives, capital-intensive manufacturing in India may retain some tax advantage even under GloBE.
The broader policy implication is that the era of tax incentive competition for FDI is partially, though not entirely, over. States must now compete primarily through regulatory quality, infrastructure, labour market conditions, and market access rather than purely through tax rate reduction. For India, with a large domestic market and improving infrastructure, this shift may ultimately favour its competitive position relative to smaller economies that compete predominantly on tax grounds.
Suggestions and Reforms
The most important reform needed in the Pillar Two framework is a more equitable revenue distribution mechanism. One model would be to allocate a portion of top-up tax revenue collected by parent jurisdictions under the IIR back to the source jurisdictions where the economic activity generating the income occurred, using a formula-based apportionment. This is conceptually similar to what Pillar One (which deals with taxing rights over residual profits of the largest MNEs) attempts, though Pillar One has remained largely unimplemented.
Second, the transition rules for developing countries should be extended and made more flexible, acknowledging that GloBE compliance requires significant tax administration capacity that many developing countries are still building. The IMF and OECD Inclusive Framework could jointly fund technical assistance programmes to accelerate this capacity building.
Third, the STTR should be rapidly incorporated into India’s bilateral tax treaty network, including through the MLI mechanism, to ensure that India’s source-state taxing rights are maximally protected on intercompany payments.
Conclusion
Pillar Two represents a genuine achievement in international tax cooperation: the establishment of a global minimum tax that 137 jurisdictions have endorsed is historically unprecedented. But the framework’s design reflects the priorities of its principal architects, the high-income capital-exporting states that lose revenue to profit-shifting, more than the interests of developing states that compete through incentive regimes and rely on source-state taxation. India has navigated this tension with a combination of practical domestic implementation (the QDMTT), principled advocacy in international forums (support for the STTR and the UN tax convention process), and careful protection of existing industrial policy mechanisms. The ultimate test of Pillar Two’s legitimacy as a global framework will be whether the revenue it generates is distributed equitably between states, including those developing countries that host economic activity but have historically lost the tax revenue it generates to more powerful jurisdictions.
