Pillar Two is changing. What does it mean for New Zealand?

By Joe Sothcott & Sam Mathews
 

On 4 July 2025—US Independence Day—President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. Whilst there has been a lot of coverage in the New Zealand media about the OBBBA, perhaps most relevant for Kiwis is what was absent in the version passed into law. After weeks of speculation, the US and its G7 partners reached an agreement to remove proposed section 899 from the OBBBA.

Section 899 was covered in the previous edition of Tax Alert. The section, if implemented, proposed to increase taxes for shareholders and investors into the US, or foreign businesses doing businesses in the US if they were from an ‘offending foreign country’. There have been several iterations of the section in both the House of Representatives and the Senate, but an offending foreign country included countries which had an undertaxed profits rule (UTPR). The UTPR is part of the Pillar Two rules, which is the global minimum tax of 15% developed by the OECD, the G20, and the rest of the “Inclusive Framework.” New Zealand adopted the Pillar Two rules, including the UTPR, from 1 January 2025.

While the United States never implemented the Pillar Two rules, US multinationals could have been subject to top-up tax up to 15% as a result of the UTPR. This led to the UTPR being deemed an ‘extraterritorial tax’ in the OBBBA with the hope that countries would remove their UTPRs in response (amongst other taxes objected to).

But on 28 June 2025, the G7 issued a statement announcing that an agreement that had been reached to remove section 899. The statement said that in return for the removal of section 899, there “is a shared understanding that a side-by-side system could preserve important gains made by jurisdictions in the Inclusive Framework in tackling base erosion and profit shifting and provide greater stability and certainty in the international tax system moving forward.” The OECD Secretary-General issued a statement welcoming the agreement.

What does this mean for the Pillar Two/GloBE rules?

It is still not entirely clear how a side-by-side system will operate. An option includes treating  the US Global Intangible Low-Taxed Income (GILTI) rules as the equivalent to the Pillar Two rules. It has been suggested this could be achieved by treating GILTI as a Qualifying Income Inclusion Rule under the Pillar Two rules. The result would be that US headquartered groups would not be subject to the Pillar Two rules (either through the Income Inclusion Rule or Undertaxed Profits Rule) because they will already be subject to GILTI. However, such an approach could introduce some practical difficulties given the design of two systems are quite different.

In particular, the GILTI regime is what is known as a blended worldwide tax regime. Under a blended worldwide regime, a single effective tax rate for an entire multinational group is found by aggregating income and taxes across multiple jurisdictions. In other words, an average tax rate is found across all the countries where a group operates. While this is considered less compliance-intensive, it does mean that groups that operate in low tax jurisdictions can offset this against the higher tax jurisdictions they operate in.

Pillar Two, meanwhile, operates on a jurisdictional basis. This means that an effective tax rate is calculated for each jurisdiction where a multinational operates. It has the opposite advantages and disadvantages to a global blended system. While the same outcome is the goal of both regimes—to ensure multinational groups pay a minimum level of tax—the different designs mean the two systems operate in different ways.

It has also been suggested the G7 agreement could be implemented by making permanent or extending the current UTPR transitional safe harbour. The UTPR transitional safe harbour removes any top-up taxable in respect to the jurisdiction of the Ultimate Parent Entity for fiscal years beginning on or before 31 December 2025 and ending before 31 December 2026 if the jurisdiction has a headline corporate income tax rate of at least 20%. The US corporate tax rate is 21% so US headquartered companies could be exempted this way, however it would also exempt several other countries who have not implemented the Pillar Two rules. There is also a question of how the UTPR transitional safe applies to subsidiaries of US headquartered groups.

The G7 statement is not clear on whether there will be changes for US based subsidiaries of parent’s not headquartered in New Zealand. The Income Inclusion Rule and Qualified Domestic Minimum Top-up Tax (QDMTT), the latter of which New Zealand hasn't adopted, will likely continue as they were.

What else is impacted?

The G7 statement also said there would be consideration given to changing the Pillar Two treatment of substance-based non-refundable tax credits that would ensure greater alignment with the treatment of refundable tax credits. Whether or not a tax credit is refundable within four years leads to stark differences in how it is treated in the GloBE rules. Nonqualified refundable tax credits—those which are not refundable within four years—are likely to increase the top-up tax liability. The OECD will now explore ways to align the treatments.

What next?

OECD discussions on implementing the G7 agreement are underway. The OECD is expected to be particularly focused on achieving a ‘level playing field’ to avoid a situation where one tax system offers material advantages over the other. Additionally, the OECD has indicated it will work on a simplified approach for calculating effective tax rates under the Pillar Two rules to reduce compliance burdens.

In the meantime, we do not have any details of any changes at the OECD level or in any jurisdiction. At this stage, we expect most in scope taxpayers (including those in New Zealand) will continue to prepare for Pillar Two compliance—including reporting, registrations, and consideration of the safe harbours—as before with the understanding the rules may change with respect to the US. We expect this will continue to be the case until the agreements are reached at the OECD level and subsequently enacted into law.

The G7 statement was clear that the agreement that was reached was conditional on the removal of section 899 of the OBBBA. Any effort to reintroduce section 899 or an equivalent could nullify the agreement. Similarly, in their joint statement the Chairs of the House Ways and Means Committee and the Senate Finance Committee noted that “Congressional Republicans stand ready to take immediate action if the other parties walk away from this deal or slow walk its implementation.” This is a space that may continue to be fluid for some time.

In related developments, negotiations on a UN Tax Framework are gaining momentum with the first negotiating sessions commencing this month. The UN General Assembly is expected to consider a Framework Convention along with two initial protocols concerning the taxation of cross-border services and dispute prevention/resolution by September 2027. Introducing an operational UN international tax framework alongside the OECD and US systems will likely further complicate the international tax landscape for taxpayers.  

If you have any questions, please contact your usual Deloitte advisor.