Pillar Two Compliance Costs | Tax Foundation Europe

Abstract

This study examines the compliance costs of OECD Pillar Two, i.e., the “Global Minimum TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.,” for multinational enterprises headquartered in the European Union. Collecting data from chief financial officers and heads of finance or tax departments, we estimate compliance cost determinants and subsequently predict the overall compliance burden. Results indicate total one-off costs of about EUR 1.2 billion (up to EUR 2.0 billion) and total recurring costs of EUR 517 million EUR p.a. (up to EUR 865 million EUR p.a.). Our findings inform the public discourse by mitigating information asymmetries between policymakers and corporations. Moreover, we contribute by establishing a cost benchmark to facilitate a systematic cost-benefit evaluation of this policy.

Introduction 

For the better part of the last decade, the global minimum tax, or Pillar Two, has dominated international tax policy discussions. Developing out of the Base Erosion and Profit ShiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. (BEPS) Project at the Organisation for Economic Co-operation and Development (OECD), Pillar Two’s main objective is to ensure that multinational enterprises (MNEs) with a consolidated group revenue of over EUR 750 million pay an effective tax rate of at least 15 percent in each jurisdiction where they earn profit. The Global Anti-Base Erosion Rules (GloBE) model of Pillar Two rules (OECD, 2021) aims to achieve this goal through policies such as a Qualified Domestic Minimum Top-Up Tax (QDMTT), an Income Inclusion Rule (IIR), and an Undertaxed Profits Rule (UTPR). The rules are interlocking and are applied by different jurisdictions. A QDMTT is applied by a country on low-tax activity within its borders. An IIR is applied by a country on the foreign earnings of companies that are headquartered in its jurisdiction. The UTPR is applied to the low-tax income of a company that has some presence in a jurisdiction, but the trigger for taxation is the existence of low-tax income elsewhere in the world. Some portion of this set of rules has been adopted by several dozen countries around the world, but the United States has not adopted the OECD rules.

Countries are actively exploring changes to these rules. The potential changes include addressing concerns about differential treatment of tax credits and payable (refundable) credits, and safe harbors that could limit compliance costs with the UTPR. There are also ongoing discussions about how to accommodate differences with the US approach. During the first six months of President Trump’s second term, the United States took a stick and carrot approach by threatening tariffs (Trump, 2025a) and retaliatory tax measures (Gravelle, 2025) against countries that enforced the Pillar Two rules (Trump, 2025b) against US firms while Congress moved to reform its minimum tax regime to net CFC-tested income, or NCTI (formerly GILTI), in the One Big Beautiful Bill Act (OBBBA) closer in line with Pillar Two outcomes (Cole and Dunn, 2025). After the removal of the Section 899 retaliatory tax proposal from the final OBBBA text, the US and other G7 countries signed a political agreement on a side-by-side solution (U.S. Department of the Treasury, 2025) that would exclude US-parented groups from the IIR and UTPR. Furthermore, the lack of implementation by large competitors like China and India leaves open the possibility that the EU will be the largest economy implementing the rules. European policymakers must decide how to balance the perceived benefits of the EU Directive relative to its real-world costs, knowing that the latter could impact the competitiveness of European MNEs.

The way in which the costs and benefits of adopting the GloBE rules have been analyzed in academic and policy communities–comparing the size of increased global revenue to the size of compliance costs–is incomplete. It is true that if every jurisdiction were to indefinitely uphold a 15 percent effective corporate tax rate through a QDMTT, then overall corporate tax revenues would increase. However, if the distribution of profits remains in place, additional tax revenues would predominantly accrue to formerly low-tax jurisdictions, with high-tax jurisdictions receiving little to no increase. At the same time, it is likely that MNEs expense compliance costs in the jurisdictions where they are headquartered, often high-tax jurisdictions. There would then be a geographical discrepancy between the revenue gainers and the location of the Pillar Two compliance costs.

Furthermore, even if the goal of limiting a race to the bottom in tax rates is achieved via OECD Pillar Two, this does not necessarily result in higher disposable tax revenues, as competition for investments may be deferred to other margins. For example, if jurisdictions resort to competing for investments via lump-sum subsidies, the net revenue effect may even be negative (Janeba and Schjelderup, 2023). In addition, competitive disadvantages for EU-based MNEs arise since Pillar Two is applicable to their worldwide activities. MNEs headquartered outside the EU27 are, often, only affected by Pillar Two with regard to their within-EU exposure, given that their jurisdictions of origin do not implement similar policies.

Building on work done by Spengel et al. (2023) on the Pillar Two compliance costs of German MNEs, in this paper, we expand the scope to include a pan-EU sample of groups affected by the EU Directive on Pillar Two. In section 2, we outline Pillar Two’s conceptual framework and recent developments. Section 3 introduces our compliance cost survey and details survey responses. In section 4, we estimate cost determinants and predict overall compliance costs for the EU27-based MNEs we identify as affected by the policy. We conclude in section 5 by discussing how policymakers should use this data to better inform a cost-benefit analysis of continuing with the Directive. While this work does not fully complete the picture of compliance costs, additional revenues, and the location of each, it does provide new evidence on the scale and distribution of compliance costs for EU firms.

References

Cole, A. and Dunn, P. (2025). The “Big Beautiful Bill”: International Tax Changes. Tax Foundation – Online: https://taxfoundation.org/blog/big-beautiful-bill-international-tax-changes/. Accessed: 2025-09-19.

Gravelle, J. G. (2025). Enforcement of Remedies Against Unfair Foreign Taxes. Online: https://crsreports.congress.gov/product/pdf/IF/IF13023. CRS Report IF13023, Version 7. Up- dated July 9, 2025. Accessed: 2025-09-19.

Janeba, E. and Schjelderup, G. (2023). The Global Minimum Tax Raises More Revenues Than You Think, or Much Less. SSRN Electronic Journal.

OECD (2021). Global Anti-Base Erosion (GloBE) Model Rules (Pillar Two). OECD Publishing, Paris.

Spengel, C., Klein, D., Müller, J., Pfrang, A., Schulz, I., Winter, S., Gaul, J., Weck, S., and Wickel, S. (2023). Die globale Mindeststeuer – Kosten und Nutzen aus deutscher Sicht. Der Betrieb, 76:1–14.

Trump, D. J. (2025a). Memorandum on America First Trade Policy (DCPD-202500145). Office of the Federal Register, National Archives and Records Administration. January 30, 2025.

Trump, D. J. (2025b). The Organization for Economic Co-operation and Development (OECD) Global Tax Deal (Global Tax Deal). Memorandum for the Secretary of the Treasury, the United States Trade Representative, and Permanent Representative to the OECD. January 20, 2025.

U.S. Department of the Treasury (2025). G7 Statement on Global Minimum Tax. U.S. Department of the Treasury – Online: https://home.treasury.gov/news/press-releases/sb0181.

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