Pillar Two Side-by-Side Challenges of EU Law, Global Tax Governance, Sovereignty. Comments for a Rational Win-Win Path Forward.

Pramod Kumar Siva and William Byrnes of Texas A&M University School of Law’s International Tax Risk Management graduate program.

Abstract

The European Union has transposed Pillar Two into EU law, requiring Member States to implement a top-up tax system, including an income-inclusion rule (‘IIR’) and an undertaxed profits rule (‘UTPR’), to ensure that every in-scope MNE pays an effective rate of at least 15 percent in each jurisdiction starting 2026.1 Republicans of the Ways and Means Committee, from whence tax legislation originates, have this week (the first week of December 2025) stated that if a Pillar Two Side-by-Side agreement (the ‘Agreement’)2 with the U.S. Treasury is not in place by year's end, then Congress will re-propose the retaliatory I.R.C. Section 899.3  Meanwhile, I.R.C. Section 891, enacted in 1934, remains as an active retaliation standby, albeit nearly all EU countries have a tax treaty with the U.S. that is ‘last in time’.

The U.S. minimum tax regime and the Pillar 2 regime are certainly not identical; otherwise, there would not be a need to hammer out a comparability agreement. But neither does the U.S. minimum corporate tax regime establish a more tax-competitive environment for U.S.-headquartered multinationals. The U.S. minimum corporate tax regime is comprised of four core elements: (1) controlled foreign corporation deemed income inclusion pursuant to Subpart F, (2) controlled foreign corporation deemed income inclusion pursuant to Net CFC Tested Income (‘NCTI’) (formerly GILTI before 2026), (3) the Corporate Alternative Minimum Tax (‘CAMT’), and (4) the Base Erosion and Anti-Abuse Tax (BEAT). The NCTI aspect of the U.S. minimum corporate tax regime does not allow either of the significant Pillar 2 exclusions: the substance-based income exclusion or the qualified refundable tax credit exception.4  When the four aspects are examined in totality, we find a robust tax web with significantly higher compliance costs than any EU regime under Pillar 2; indeed, not a lenient leaky bucket.  

We are working to complete a much longer 15,000-word version that addresses four overriding challenges for a Side-by-Side Agreement:

(1) Can the EU legitimately implement a carve-out for U.S. companies via a safe-harbor provision in its Directive without breaching EU law principles?5

(2) Does endorsing a soft-law deal brokered by a handful of countries undermine the rule of law and legislative sovereignty in global tax governance?6

(3) What are the competitive ramifications for EU-based multinationals versus U.S. MNEs under either Pillar Two or the U.S. corporate minimum tax regime?7

(4) Will developing countries like India, China, and Latin American nations be incentivized or disincentivized to adopt Pillar Two if a major player obtains special treatment, and how might their tax policy autonomy and administrative capacities be affected?8

But we felt it essential to publish this much briefer 2,500-word version to put our ideas in front of the blog’s readers, some of whom are EU and U.S. policy makers. 

The Importance of Article 32 in the EU’s Pillar 2 Directive

The EU’s Pillar Two Directive contains a seemingly innocuous provision, Article 32, which has instead become the focal point of the side-by-side controversy. Article 32 allows the EU’s top-up tax to be set to zero in each jurisdiction that is covered by a “qualifying international agreement on safe harbors”. Basically, Article 32 is a simplification measure. If all EU Member States agree to an international safe-harbor framework, such as an OECD deal simplifying Pillar Two administration, then MNE groups electing that safe harbor would not owe top-up tax in the EU for the relevant year. The OECD has indeed issued such safe harbors, including its transitional Country-by-Country Report (CbCR) safe harbor that allows taxpayers to avoid full Pillar Two calculations in low-risk scenarios, and its potential safe harbor for jurisdictions adopting a Qualified Domestic Minimum Top-up Tax (QDMTT).

We will argue that an EU/OECD Side-by-Side Agreement will be an international agreement addressing a safe harbor. The EU and other OECD participating jurisdictions would agree not to apply the IIR or UTPR on U.S. multinationals’ profits, in deference to the U.S.’s own minimum tax rules, as mentioned above. Thus, the Side-by-Side Agreement will be within the scope of Article 32.

Yet, European academics do not agree with our assessment.9 This maneuver has prompted a groundswell of concern among EU Member States and legal experts.10 At a September 2025 meeting of the EU Council’s High Level Working Party on Tax, representatives of nine Member States questioned whether Article 32 could lawfully accommodate such a broad carve-out for an entire category of MNEs based on nationality.11

For the sake of argument, if Article 32 is not the right vehicle, the European Commission can, and has indicated it may, instead adjust the Pillar Two regime through soft-law guidance to align with the G7/OECD political developments.12 The European Commission indicated that a Side-by-Side Agreement does not require an amendment to Council Directive 2022/2523. Instead, the European Commission suggested that a soft-law safe harbor could accommodate U.S.-headquartered multinationals.

A Base Erosion and Anti-Abuse Tax (BEAT) High Tax Exception Can Be Used to Bridge the (Tax) Gap?

We propose that a BEAT High Tax Exception (“HTE”) is a win-win solution for both the U.S. and the EU, that will allow the negotiators to complete the Agreement. First, we need to look at whether BEAT is adding to or subtracting from the U.S. Treasury.

Let’s start with the Joint Committee on Taxation (JCT) estimates of 2017, which stated that the Base Erosion and Anti-Abuse Tax (BEAT)13 would, from 2018 through 2027, generate additional corporate tax revenue of $149.6 billion, and in its first five years, 2018 through 2022, $51.7 billion.14 For comparative purposes, the JCT estimated GILTI’s ten- and five-year scores at a lower tax receipts impact of $112.4 billion and $48.6 billion, respectively.

Scoring the final version of the OBBBA provisions, the JCT estimated15 that the modification of the BEAT minimum tax amount to 10.5 percent from 2026, rather than the TCJA’s imposed rise to 12.5 percent, would result in a loss of BEAT tax receipts through 2029 of $9.696 billion and a $31.121 billion loss through 2034.

However, the actual BEAT receipts are not in the same ballpark. In 2018,17 479 firms paid a total base erosion minimum tax of $1.8 billion, of which approximately 50 percent came from manufacturing multinationals.18 Firms that met the base erosion percentage threshold had an aggregate base erosion percentage of 10.4 percent. Yet, after the first year of implementation, BEAT receipts nosedived, and each year fell further behind the estimates.

Just two years later (2020), the base erosion percentage had fallen to 2.9 percent.19 In 2021,20 357 firms paid an additional $1.277 billion in BEAT. Manufacturing dropped to about a third, but wholesale trade jumped from $73.5 million to $300 million of the collected BEAT. 2022 BEAT tax receipts from 324 firms declined further to $1.03 billion, roughly a fifth paid by each manufacturing and wholesale trade.21 The decline in BEAT tax receipts resulted from multinationals shifting intercompany transactions to avoid payments subject to BEAT, such as reducing related-party financing and charging for related-party services without markup.22

Why A BEAT High Tax Exception?

The determination of a U.S.-controlled foreign corporation’s subpart F and Net CFC Tested Income (NCTI) (formerly the GILTI regime before 2026) allows an annually elected exclusion for items of income that have incurred an effective foreign tax rate that exceeds 90 percent of the U.S. corporate tax rate of 21 percent, thus, more than 18.9 percent (i.e., a foreign tax rate of 19 percent qualifies for the exception).  But payments from the U.S. to related parties in countries that impose a corporate tax rate of at least 19 percent on those payments still attract the 10.5 percent BEAT.

The resulting BEAT double taxation and cash flow drag dissuade foreign multinationals from higher corporate tax jurisdictions,23 such as South Korea and Japan, from allocating long-term capital investment, such as high-tech research and manufacturing facilities, within the U.S.24 To address this BEAT disincentive, the initial Senate version of the OBBBA included a BEAT high-tax exception, as found in the CFC regime, offset with a higher BEAT rate of 14 percent for payments to low-tax jurisdictions.25

Congress should add a BEAT High Tax Exception applicable to jurisdictions that do not apply Pillar 2 to U.S.-headquartered multinationals. The fiscal score of this BEAT high-tax exception should be of negligible budgetary effect, a portion of the annual receipts that barely exceeds $1 billion.

Moreover, the U.S. also wants the EU to exempt U.S. corporations from digital services taxes that disproportionately target U.S. multinationals (i.e., discriminate against them). Yet, the EU has a salient argument that BEAT partly serves as a disguised digital service tax that discriminates against EU corporations.26 We disagree with this characterization of BEAT, but the optics muddy the U.S. ‘clean hands’ in the negotiation.

In conclusion, the U.S. has its own purpose in removing the BEAT disincentive on foreign direct investment by multinationals headquartered in high-tax jurisdictions. Yet, let Congress use this opportunity to trade with the EU. A Congressional carveout for a BEAT High Tax Exception in exchange for an EU Pillar 2 carveout and a three-year standstill on DSTs, with the express intention to include them within tax treaty protocols negotiated during this time. Congress can propose a lenient version of I.R.C. Section 899 to address jurisdictions that decide to either impose DSTs on U.S. multinationals or to ignore the Side-by-Side Agreement safe harbor.   

• 1Council Directive 2022/2523, art. 32, 2022 O.J. (L 328) 1 (EU) (providing that top-up tax is zero if the jurisdiction’s effective tax meets the conditions of a qualifying international agreement on safe harbors).
• 2G7 Statement on Global Minimum Tax, U.S. Dept. of Treas. (June 28, 2025).
• 3I.R.C. § 899, proposed in the OBBBA but withdrawn days before passage, is explained in our previous article arguing for the repeal of the UTPR. See Pramod Kumar Siva and William Byrnes, Good Intentions, Bad Tools: A Case for Repealing the UTPR, 119 Tax Notes Int'l 385 (July 21, 2025).
• 4OECD/G20 Inclusive Framework on BEPS, Tax Challenges Arising from the Digitalisation of the Economy: Global Anti-Base Erosion Model Rules (Pillar Two) (Dec. 20, 2021), https://www.oecd.org/tax/beps/global-anti-base-erosion-model-rules-pillar-two.pdf. OECD/G20 Inclusive Framework on BEPS, Pillar Two Model Rules Commentary (2022) (explaining the policy rationale for various Pillar 2 provisions, including safe harbors, and emphasizing that safe harbors are meant to simplify administration by avoiding full calculations where risks are low, not intended as sweeping exclusions for entire jurisdictions). OECD, Pillar Two Minimum Tax: Administrative Guidance (Feb. 2023) (introducing a temporary CbCR safe harbor and indicating future work on further safe harbors, e.g. a UTPR safe harbor for high-tax jurisdictions).
• 5See Dennis Weber, A Full Carve-Out for U.S. Groups for Pillar 2: An EU Constitutional Trojan Horse?, Kluwer Int’l Tax Blog (Oct. 6, 2025).
• 6Pieter Baert, Side by Side? The Future of Pillar Two Minimum Corporate Tax Rules, Eur. Parl. Research Serv., At a Glance Note (Sept. 15, 2025) (noting that under a side-by-side approach, non-U.S. jurisdictions would likely not apply UTPR to U.S. MNEs, and highlighting differences between Pillar 2’s design and the U.S. GILTI/CAMT regimes, including potential level playing field concerns due to variations in tax liabilities and administrative complexity).
• 7Maarten de Wilde, After the Pillars: A Call for a European Corporate Tax 2.0, Kluwer Int’l Tax Blog (July 17, 2025). Prof. de Wilde observes that Europe’s concession to the U.S. on Pillar 2 reflects shifting geopolitical power and points out that U.S. minimum tax rules are in some respects more lenient (e.g., global blending and exclusion of specific domestic incentives such that European companies could face higher tax costs than U.S. companies under current Pillar 2 rules.
• 8Maarten de Wilde, After the Pillars: A Call for a European Corporate Tax 2.0, Kluwer Int’l Tax Blog (July 17, 2025) (Prof. de Wilde further observes that China and India, having not implemented Pillar 2, may seek similar carve-outs for their MNEs, especially if Europe agrees not to tax U.S. companies’ low-taxed profits.  
• 9My esteemed friend Prof. Dennis Weber holds the opposite opinion. See Dennis Weber, A Full Carve-Out for U.S. Groups for Pillar 2: An EU Constitutional Trojan Horse?, Kluwer Int’l Tax Blog (Oct. 6, 2025) wherein he argues that Article 32 was intended for narrow safe harbors and that using it to exempt U.S. companies would undermine EU constitutional law, effectively turning soft OECD agreements into binding EU law without proper legislative process.
• 10Pieter Baert, Side by Side? The Future of Pillar Two Minimum Corporate Tax Rules, Eur. Parl. Research Serv., At a Glance Note (Sept. 15, 2025).
• 11Dennis Weber, A Full Carve-Out for U.S. Groups for Pillar 2: An EU Constitutional Trojan Horse?, Kluwer Int’l Tax Blog (Oct. 6, 2025).
• 12European Tax Adviser Fed’n (ETAF), Weekly Tax News: Monday 7 July 2025 (July 7, 2025), https://etaf.tax/weekly-tax-news-monday-7-july-2025. Reporting that the European Commission indicated no amendment to Council Directive 2022/2523 would be required following G7 developments. Instead, the Commission suggested that a soft-law safe-harbor could accommodate U.S. groups. This supports the proposition that the Commission may seek to adjust Pillar Two through guidance rather than a formal legislative procedure.
• 13I.R.C. § 59A.
• 14JCT, JCX-67-17 (Dec. 18, 2017).
• 15JCT, JCX-26-25 (May 28, 2025).
• 16Source for 2019 and 2020: Figure 2 Components of US Tax Liability on Income From Foreign Affiliates, Did Tax Cuts and Jobs Act of 2017 Increase Revenue on US Corporations’ Foreign Income?, Budget Model, Penn Wharton, (Oct 12, 2023). Source for 2018, 2021 and 2022, Table 1. Form 8991: Tax on Base Erosion Payments of Taxpayers with $500 Million or More of Average Annual Gross Receipts, Selected Items, by Sector, Tax Year, IRS, Statistics of Income Division.
• 17Source: Table 1. Form 8991: Tax on Base Erosion Payments of Taxpayers with $500 Million or More of Average Annual Gross Receipts, Selected Items, by Sector, Tax Year 2018, IRS, Statistics of Income Division (July 2021).
• 18Base Erosion and Anti-Abuse Tax (BEAT), Tax Year 2018, IRS, Pub. 5586 (11-2021) Cat. No. 737730.
• 19Source: Table 1. Amount of Items Related to GILTI, FDII, and the BEAT for Corporate Taxpayers, Tax Years 2018 and 2020, JCT, JCX-35R-23 (July 17, 2023).
• 20Source: Table 1. Form 8991: Tax on Base Erosion Payments of Taxpayers with $500 Million or More of Average Annual Gross Receipts, Selected Items, by Sector, Tax Year 2021, IRS, Statistics of Income Division, (Sept. 2024).
• 21Source: Table 1. Form 8991: Tax on Base Erosion Payments of Taxpayers with $500 Million or More of Average Annual Gross Receipts, Selected Items, by Sector, Tax Year 2022, IRS, Statistics of Income Division, Study (Sept. 2025).
• 22Andrew Lautz, The 2025 Tax Debate: GILTI, FDII, and BEAT Under the Tax Cuts and Jobs Act, Bipartisan Policy Center (April 8, 2025). The no markup ‘service-cost method’ is authorized by Treas. Reg. § 1.482-9.
• 23OECD (2025), Corporate Tax Statistics 2025, OECD Publishing, Paris, at 37, https://doi.org/10.1787/6a915941-en.
• 24Alan Cole and Patrick Dunn, The Future of BEAT, Tax Foundation (July 24, 2025).
• 25U.S. Senate Finance Committee Section-By-Section (June 16, 2025) § 70331, at 17, https://www.finance.senate.gov/imo/media/doc/finance_committee_section-by-section_title_vii3.pdf.
• 26Patrick Driessen, Is the U.S. BEAT a Digital Services Tax?, 119 Tax Notes Int'l 415 (July 21, 2025).