G7’s Pillar Two shared understanding:

Navigating the path forward: Strategic steps post-G7 shared understanding on Pillar Two

The G7’s announcement of a “side-by-side” approach proposes exempting US MNEs from the OECD’s Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR), subject to further consideration of the desire to maintain a level playing field and prevent opportunities for base erosion and profit shifting. This has sparked discussion and raised the potential for simplification. Yet, while this is a noteworthy development, it is important not to misinterpret its immediate impact on compliance obligations for the 2024 tax year.

Understanding the G7 shared understanding in context

On June 26th, the US Treasury announced a conceptual shared understanding with its G7 partners regarding the application of the OECD Pillar Two rules. Subsequently, on June 27, Canada (which currently holds the G7 presidency) released a G7 statement describing the principles underlying the announcement. If ultimately adopted by the OECD Inclusive Framework, this approach would exempt US-parented groups from the IIR or UTPR.

However, it is important to recognize that the G7 statement is a political milestone, and not yet a legal framework. The G7 shared understanding enabled the removal of proposed section 899 from the US’s One Big Beautiful Bill Act and has provided an environment for wider discussion among countries in the OECD Inclusive Framework. The proposed side-by-side solution will now be negotiated and, if approved, formally adopted by the OECD Inclusive Framework.

Qualifying domestic minimum top-up taxes (QDMTTs), including those already implemented by countries, would not be affected by the G7 shared understanding. In addition, the G7 shared understanding did not provide for changes for non-US-parented MNEs, which appears to indicate that an IIR may continue to be applied to a US subsidiary held by a non-US MNE.

Compliance activities: A non-negotiable

Despite the potential for future simplification, the current expectation is that US MNEs will still need to continue preparing for Pillar Two compliance. Such activities include preparing a qualified country-by-country report, meeting local obligations such as registrations and QDMTT calculations, preparing to file the GloBE Information Return (GIR), and managing associated disclosures for the 2024 tax year and beyond.

Pausing or slowing compliance now risks significant challenges given Pillar Two’s applicability for 2024 year-ends, which puts companies on a tight implementation timeline. The first returns including QDMTT data for some countries are due later this year (2025). Other returns will be required by June 30, 2026. Organizations should be prepared to meet these existing requirements. In other words, some rules are already in motion, and waiting for the shared understanding implications to work through could mean missing key deadlines.

Strategic planning and scenario analysis

In parallel to compliance activities, scenario analysis remains critical. Potential technical revisions require careful modeling and should be incorporated into both strategic planning and financial forecasting. While delaying compliance preparation could reduce an organization’s flexibility to respond to these evolving provisions, proactive scenario analysis will enable organizations to adapt swiftly to legislative shifts.

Looking ahead: Stay agile, stay ready

Although the G7 shared understanding opens the door for changes for US-parented MNEs, there’s no guarantee that law changes will arrive in time to materially impact 2024 filings. Further, the G7 shared understanding is not enacted or substantive enacted law, and accordingly US-parented MNEs should maintain existing processes with respect to the tax provision impact of Pillar Two. The recommended path is to continue building readiness and internal alignment across tax, legal, and finance functions, while keeping a close eye on evolving global and US guidance. By maintaining momentum on compliance activities and engaging in thoughtful strategic planning, organizations can position themselves to respond effectively to new developments. In this rapidly shifting landscape, timely action is not just prudent—it is essential.

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