Tax News & Views International Weekly: Pillar Two Back Taxes by Eide Bailly

Key Takeaways

• • • While the side-by-side exemption will protect U.S. companies moving forward, Pillar Two taxes still apply for tax years 2024 and 2025.
    • The administrative and political burdens to applying the side-by-side agreement proved too challenging to overcome.
    • Existing safe harbors will cover the prior years, however.
    • New disclosure requirements shed light on offshore tax structures.
    • Questions surround tariff refund process.

The United States got a lot of what it asked for in the negotiations with the Organization for Economic Cooperation and Development over the 15% global minimum tax. Thanks to the side-by-side agreement worked out between the Trump administration and officials from other OECD member countries, businesses won’t have to worry about paying the primary taxes under the new regime, also known as Pillar Two.

But one thing it didn’t get was full retroactivity for the agreement. While companies will be exempt from most (though not all) Pillar Two taxes for 2026 and onward, the system still applies for the 2024 and 2025 tax years. While only a temporary issue, it could still be a significant headache for many companies that have been worried about the compliance costs for the detailed and often complex OECD system.

Retroactivity became a non-starter for both political and administrative reasons—especially as most countries had already enacted Pillar Two laws, and the European Union had issued a Pillar Two directive that still stands. This is also why the elements of the side-by-side agreement are designed as “safe harbors,” in theory to help administer established laws.

While the new safe harbors will only apply for 2026 and onward, companies will be able to use pre-existing safe harbors, including the “transitional” country-by-country reporting (CBCR) safe harbor and the under-taxed profits rule (UTPR) safe harbor. The CBCR allows companies to use global reports, already required under transparency rules, to comply with the Pillar Two reporting requirements. And the UTPR exempts companies in jurisdictions with at least a 20% statutory corporate tax rate—the U.S. rate is 21%—from the under-taxed profits rule, one of the taxing tools countries have threatened to use against U.S. entities.

Both of those safe harbors were meant to be temporary, but the UTPR safe harbor was extended until the end of 2025, and the CBCR safe harbor will be operative through 2027.

Those two rules may deal with the biggest potential compliance challenges, but there are always cases that will slip between the cracks. U.S. companies may have to worry about subsidiaries in other countries being subject to Pillar Two taxes, for instance. While the big story is that U.S. companies won’t have to deal with the most onerous effects, this is one of several ways that they won’t be able to ignore Pillar Two, either.