Pillar Two / GLOBE Minimum Tax: IIR, QDMTT, UTPR, ETR Computation, and U.S. MNE Exposure Under the OBBBA NCTI Framework

The OECD's Pillar Two initiative is the most significant restructuring of international tax since the TCJA. For the first time, large multinational groups face a coordinated, jurisdiction-by-jurisdiction floor on how little tax they can pay anywhere in the world. For U.S. international tax practitioners, the challenge is acute: the U.S. has not enacted domestic Pillar Two legislation, so U.S. multinationals bear the full weight of foreign Pillar Two obligations without the domestic symmetry -- a QDMTT, an IIR, or a retaliatory shield -- that other major economies have put in place for their own multinationals.

This guide is written for CPAs, tax attorneys, and enrolled agents advising U.S. multinationals operating in Pillar Two-adopting jurisdictions. It covers the GloBE framework architecture, ETR computation mechanics, the QDMTT safe harbor and transitional CbCR safe harbor, the interaction with U.S. foreign tax credits and the OBBBA's NCTI regime, and the specific exposure that U.S. constituent entities face under the UTPR in the absence of a U.S. QDMTT. All statutory citations, regulatory references, rates, and example amounts must be verified at IRS.gov, the OECD's BEPS portal, and against the domestic legislation of each relevant jurisdiction before reliance in any specific client matter. This guide is for informational purposes only and does not constitute legal or tax advice.

Section 1: The GloBE Framework -- Architecture and Policy Background

Origins: BEPS Pillar Two and the GloBE Model Rules

The Global Anti-Base Erosion (GloBE) rules are the product of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which released the GloBE Model Rules in December 2021 as the authoritative template for Pillar Two domestic legislation. The Model Rules were followed by a detailed Commentary in March 2022 and by successive packages of Administrative Guidance in 2023 and 2024. Jurisdictions that commit to the framework agree to enact domestic legislation based on the Model Rules, though each jurisdiction's enacted law is the operative source of law in that jurisdiction -- the Model Rules themselves are not binding law in any country.

The policy objective is straightforward: prevent large MNE groups from shifting profits to very low-tax jurisdictions by ensuring that, wherever those profits are earned, the group pays at least a minimum effective rate. If a constituent entity's jurisdiction collects less than the minimum, another jurisdiction in the chain (typically the ultimate parent jurisdiction) collects the shortfall. The mechanism does not tell any country what rate to set on domestic income; it says only that if a country sets a rate below the floor, another jurisdiction is entitled to collect the difference.

Scope: Which MNE Groups Are In-Scope

The GloBE Model Rules state a revenue threshold for in-scope MNE groups. Practitioners should verify the current threshold against the GloBE Model Rules and the domestic legislation of each relevant jurisdiction for the applicable tax year, rather than relying on any general figure in secondary materials. The threshold is based on the MNE group's consolidated annual revenue in at least two of the four fiscal years immediately preceding the tested year. Group revenue is determined by reference to the consolidated financial statements of the ultimate parent entity.

Certain entities are excluded from GloBE even if the group is in-scope: government entities, international organizations, non-profit organizations, pension funds, and certain investment funds may be excluded constituent entities under the Model Rules. Verify the specific exclusions against the GloBE Model Rules and the applicable jurisdiction's domestic legislation, as exclusion eligibility is determined by reference to the specific entity's status under the implementing jurisdiction's law.

The Three Charging Rules

Pillar Two operates through three interlocking charging rules. Together they form a coordinated system designed to ensure that the minimum top-up reaches the group regardless of which jurisdiction holds the ultimate parent entity or where constituent entities are located.

• Income Inclusion Rule (IIR): The primary rule. The ultimate parent entity (UPE) -- or, in a cascading structure, an intermediate parent entity (IPE) -- includes in its taxable income a top-up amount equal to its allocable share of the low-taxed income of constituent entities located in jurisdictions with ETRs below the minimum. The IIR is applied at the parent entity level and collected by the parent entity's jurisdiction. Jurisdictions that have enacted an IIR tax the parent on the subsidiary's under-taxed income, much as the U.S. GILTI regime did on a global basis (but now on a jurisdiction-by-jurisdiction basis under GloBE).
• Undertaxed Profits Rule (UTPR): The backstop. If the top-up tax attributable to a low-taxed constituent entity is not fully collected under an IIR (because, for example, the UPE's jurisdiction has not enacted an IIR, as is the case with the U.S.), the UTPR allows other jurisdictions where the MNE has constituent entities to collect the uncollected top-up tax. The UTPR is allocated among UTPR-adopting jurisdictions based on payroll and tangible assets within each jurisdiction. This is the mechanism by which U.S. constituent entities of foreign MNE groups can face Pillar Two tax liabilities in UTPR-adopting jurisdictions. Verify the UTPR allocation and collection mechanics against the GloBE Model Rules and the applicable jurisdiction's domestic legislation.
• Subject to Tax Rule (STTR): A source-country rule allowing developing countries to impose a withholding or other tax on certain related-party payments (typically interest, royalties, and service fees) that are subject to a nominal tax rate below a threshold in the recipient's jurisdiction. The STTR is implemented through bilateral treaty modification and is primarily relevant to U.S. treaty partners with significant inbound payment flows from U.S. MNEs. The STTR is not the focus of this guide; practitioners advising on cross-border payments into STTR-adopting treaty jurisdictions should analyze applicable treaty modifications separately.

Section 2: The U.S. Position -- No Domestic Pillar Two Legislation and the Section 899 Story

The U.S. Has Not Enacted Pillar Two

The United States committed to the OECD Inclusive Framework process and participated in the development of the GloBE Model Rules, but the U.S. has not enacted domestic Pillar Two legislation. The OBBBA (Pub. L. 119-21, signed July 4, 2025) addressed a wide range of international tax issues -- most significantly replacing GILTI with the NCTI regime under IRC 951B -- but it did not enact a QDMTT, an IIR, or a UTPR. This is a settled legislative fact as of the date of this guide.

The practical consequence is that the U.S. tax system does not currently impose a top-up tax on under-taxed foreign income of U.S. MNEs through a GloBE-compliant mechanism, and it does not shield U.S. constituent entities from foreign top-up taxes through a QDMTT. U.S. MNEs must instead comply with the domestic Pillar Two laws of each jurisdiction where they operate -- without the domestic symmetry that a U.S. IIR or QDMTT would provide.

The OBBBA's NCTI Regime and Pillar Two

While the OBBBA did not enact Pillar Two legislation, it did substantially alter the U.S. international tax landscape in ways that interact with Pillar Two. The most significant change is the replacement of the GILTI regime (IRC 951A) with the Net Controlled Taxable Income (NCTI) framework under IRC 951B, effective for tax years of CFCs beginning after December 31, 2025. The NCTI regime changes the rate at which U.S. tax is imposed on CFC income, the deduction available under IRC 250, and the deemed-paid foreign tax credit mechanics. All of these changes affect how the U.S. tax burden on CFC income interacts with the GloBE ETR computation -- and specifically whether NCTI taxes count as "covered taxes" for GloBE purposes. That question is addressed as an open issue in Section 11. Verify all NCTI mechanics and rates against the OBBBA statutory text and IRS.gov.

Section 3: The Effective Tax Rate -- GloBE ETR Computation Mechanics

The ETR Formula

Under the GloBE Model Rules, the effective tax rate for a jurisdiction is computed as the ratio of Covered Taxes to GloBE Income for all constituent entities located in that jurisdiction, aggregated on a jurisdictional basis. The formula is expressed as:

ETR = Covered Taxes / GloBE Income (per jurisdiction)

If the ETR is below the minimum rate specified in the GloBE Model Rules (verify the current minimum rate against the Model Rules and each applicable jurisdiction's domestic implementation), a top-up tax obligation is triggered. Verify this formula and the specific rate against the GloBE Model Rules; do not treat any figure cited in secondary materials as definitive without confirming against the primary source.

Covered Taxes

Covered taxes are generally taxes on income or profits that are accrued in the financial accounts of the constituent entity under the GloBE Model Rules. This includes current and deferred taxes on income, adjusted for certain items specified in the Model Rules. Key adjustments include:

• Inclusions: Taxes paid at the entity level on income included in GloBE Income; taxes on distributed profits in certain dividend tax systems; CFC taxes paid by a parent on behalf of the constituent entity (subject to specific rules in the Model Rules); and taxes imposed under controlled foreign company regimes (the blended CFC tax regime).
• Exclusions: Taxes that are non-qualifying refundable tax credits; taxes on excluded income; top-up taxes paid to another Pillar Two jurisdiction (which would create circular counting); and certain other specified items. The specific list of exclusions is in the GloBE Model Rules and must be verified against the applicable jurisdiction's domestic legislation.
• Deferred tax adjustments: The GloBE rules include a deferred tax adjustment mechanism that adds deferred tax expense to covered taxes (subject to a floor and recapture provisions) to more accurately reflect the tax burden on the period's income rather than just cash taxes paid. The deferred tax adjustment is subject to detailed rules in the Model Rules; verify against the primary source.

All Covered Taxes inclusions and exclusions must be verified against the GloBE Model Rules (Article 4) and the domestic legislation of the applicable jurisdiction before any ETR computation. This guide provides a conceptual orientation and does not substitute for a jurisdiction-by-jurisdiction review of each item.

GloBE Income

GloBE Income for a constituent entity starts with the entity's net income or loss for the period as determined under the accounting standard used in the ultimate parent entity's consolidated financial statements (IFRS, U.S. GAAP, or other recognized standards), then applies a series of GloBE-specific adjustments. Key adjustments include:

• Dividend and equity gain exclusions: Dividends and other distributions received on ownership interests held for at least one year (verify the holding period requirement against the GloBE Model Rules), and gains or losses on the disposition of ownership interests that would qualify for the participation exemption, are excluded from GloBE Income. The specific scope of the exclusion must be verified against GloBE Model Rules Article 3.
• Stock-based compensation: A timing election allows entities to substitute the tax-deductible amount for stock-based compensation (in lieu of the financial accounting expense) in computing GloBE Income. This election can be significant for U.S. technology and pharmaceutical MNEs that grant large equity awards. Verify the election mechanics against the GloBE Model Rules and the applicable jurisdiction's domestic legislation.
• Policy disallowed expenses: Certain items that are disallowed for GloBE Income purposes regardless of financial accounting treatment -- including bribes and fines -- must be added back. Verify the specific list against GloBE Model Rules Article 3.
• Asymmetric foreign currency gains and losses: Under an election available in the Model Rules, entities may exclude asymmetric foreign currency gains and losses from GloBE Income to reduce volatility. Verify availability and mechanics against the Model Rules.

The Top-Up Tax Computation

Once the ETR is determined, the top-up tax for a jurisdiction is computed on "excess profit" -- GloBE Income reduced by the substance-based income exclusion (SBIE) described in Section 4. The conceptual formula is:

Top-Up Tax = (Minimum Rate -- ETR) x (GloBE Income -- SBIE)

This formula is illustrative of the GloBE conceptual structure and must be verified against the GloBE Model Rules, OECD Administrative Guidance, and the applicable jurisdiction's domestic legislation before use in any ETR computation. The specific minimum rate, the SBIE percentages, and any additional adjustments (including the QDMTT safe harbor and transitional safe harbors described in Section 6) may modify the effective top-up obligation.

Section 4: The Substance-Based Income Exclusion -- Carving Out Payroll and Tangible Assets

Purpose of the SBIE

The substance-based income exclusion (SBIE) is a carve-out from the GloBE top-up tax base that is designed to protect a portion of MNE returns that genuinely reflect economic substance in a jurisdiction -- that is, income attributable to real payroll costs and tangible assets on the ground -- from the minimum top-up obligation. The policy rationale is that a minimum tax aimed at profit shifting should not penalize MNEs for genuine substance-based activities. An MNE that maintains a large manufacturing plant and substantial workforce in a jurisdiction, even a low-tax one, is producing income through real economic activity rather than tax structuring.

The Two Components of the SBIE

The SBIE has two components: a payroll carve-out and a tangible asset carve-out. Each is computed as a specified percentage of the relevant cost or value base. The GloBE Model Rules provide for a transitional period during which higher carve-out percentages apply, stepping down over time to the steady-state percentages. Because these percentages change year over year during the transitional period and are specified in the Model Rules rather than fixed by any universal agreement, practitioners must verify the applicable percentages against the GloBE Model Rules (Article 5.3 and the transitional provisions in Article 9.1) for the specific year and jurisdiction. This guide does not state specific percentages in order to avoid stating a figure that may differ from the applicable year's rules.

• Payroll carve-out: A percentage of "eligible payroll costs" of constituent entities located in the jurisdiction. Eligible payroll costs include wages, salaries, and other employee compensation (excluding amounts included in the carrying value of eligible tangible assets). Verify the definition of eligible payroll costs against the GloBE Model Rules and the applicable jurisdiction's domestic legislation.
• Tangible asset carve-out: A percentage of the "eligible tangible assets" carrying value of constituent entities located in the jurisdiction. Eligible tangible assets include property, plant and equipment; natural resources; the right-of-use assets for tangible assets under lease accounting; and certain other categories. Intangible assets and financial assets are excluded from the tangible asset carve-out. Verify the scope of eligible tangible assets against the GloBE Model Rules.

The combined SBIE (payroll carve-out plus tangible asset carve-out) is subtracted from GloBE Income to produce the excess profit subject to top-up. An MNE with a large physical presence in a jurisdiction -- high payroll and significant tangible assets -- will have a substantial SBIE that reduces the top-up base, potentially to zero even if the ETR is below the minimum.

Section 5: The QDMTT -- Qualified Domestic Minimum Top-Up Tax

What Is a QDMTT

A Qualified Domestic Minimum Top-up Tax (QDMTT) is a domestic minimum tax that a jurisdiction enacts to claim Pillar Two top-up revenue for itself before the IIR parent jurisdiction can collect it. The logic is straightforward: if Country X enacts a QDMTT that imposes the same top-up tax that the GloBE IIR would impose, then the constituent entities in Country X have already paid the required minimum, and there is no shortfall for the IIR parent (or UTPR-adopting jurisdictions) to collect. The Pillar Two revenue stays in Country X rather than flowing to the UPE's jurisdiction.

For a domestic minimum tax to be a "qualifying" QDMTT under the GloBE framework, it must satisfy the criteria set out in the OECD Administrative Guidance and be confirmed through a peer review process. The peer review process is administered by the OECD Inclusive Framework; jurisdictions that pass peer review receive an acknowledgment that their QDMTT is qualifying, which triggers the QDMTT safe harbor described below. Verify which jurisdictions have been determined to have a qualifying QDMTT by consulting the current OECD peer review outcomes at the OECD's BEPS portal.

The QDMTT Safe Harbor

Where a jurisdiction has a qualifying QDMTT, the QDMTT safe harbor applies: the IIR top-up tax and UTPR top-up tax that would otherwise be imposed by other jurisdictions on constituent entities in the QDMTT jurisdiction are reduced to zero. The constituent entities have already paid the minimum in the source jurisdiction; no additional collection by other jurisdictions is needed. This is the most protective mechanism available to constituent entities in a given jurisdiction, because the QDMTT safe harbor is permanent (not merely transitional) once a jurisdiction has a qualifying QDMTT in place.

The QDMTT safe harbor does not require any specific computation by the MNE group to invoke it; the existence of the qualifying QDMTT in the constituent entity's jurisdiction is itself the trigger. However, practitioners should confirm the QDMTT safe harbor availability for each relevant jurisdiction and tax year by checking the OECD peer review outcomes and the domestic legislation, because a QDMTT that fails peer review or that contains provisions inconsistent with the GloBE standards may not qualify.

The U.S. Has No QDMTT -- Exposure Consequences

Because the U.S. has not enacted a QDMTT as of the date of this guide, there is no domestic U.S. top-up tax that shields U.S. constituent entities of foreign MNE groups from UTPR exposure in other jurisdictions. A foreign MNE group with a U.S. constituent entity faces the following situation: the U.S. subsidiary's income is not subject to a U.S. QDMTT; if the UPE's jurisdiction has not enacted an IIR (or the IIR does not reach the U.S. income), UTPR-adopting jurisdictions may be entitled to collect top-up tax on the under-taxed U.S. constituent entity income. The UTPR exposure is particularly salient for U.S. subsidiaries of foreign MNE groups where the U.S. effective tax rate is below the GloBE minimum after GloBE adjustments -- a situation that can arise even though the nominal U.S. corporate tax rate exceeds the GloBE minimum, because of deductions, credits, and timing differences that reduce the ETR as computed under GloBE rules. Verify the specific UTPR exposure for each client based on the applicable jurisdiction's domestic UTPR legislation and the group's computed ETR.

Section 6: Safe Harbors -- Transitional CbCR Safe Harbor and Simplified Calculations

The Transitional Country-by-Country Report Safe Harbor

The OECD Administrative Guidance introduced a transitional safe harbor allowing MNE groups to avoid a full GloBE computation for a jurisdiction if the jurisdiction satisfies one of three simplified tests derived from the MNE's Country-by-Country Report (CbCR). For U.S. filers, the CbCR is filed as Form 8975 (Country-by-Country Report) pursuant to the requirements of IRC 6038 (verify current instructions and filing thresholds at IRS.gov). The three tests -- the de minimis test, the simplified ETR test, and the routine profits test -- each offer a basis for concluding that no top-up tax arises for a jurisdiction in the transitional year without requiring the full GloBE computation.

The transitional CbCR safe harbor is available for a specified transitional period; verify the current end date of the transitional period against the OECD Administrative Guidance and each jurisdiction's domestic implementation of the safe harbor, as the transitional period may not extend uniformly across all jurisdictions or all safe harbor tests. The safe harbor is not available for stateless constituent entities or for certain other specifically excluded situations; verify the full list of exclusions against the OECD Administrative Guidance.

The Three Simplified Tests (Transitional)

• De minimis test: The jurisdiction's total revenue (as reported in the CbCR) is below a threshold, and the jurisdiction's total profit before income tax is below a separate threshold (or is a loss). Verify the current threshold amounts in EUR against the OECD Administrative Guidance; the thresholds are specified in the guidance and must be applied without adjustment for exchange rates in a manner specified in the guidance.
• Simplified ETR test: The simplified ETR for the jurisdiction -- computed as the income tax accrued (per the CbCR) divided by the profit before income tax (per the CbCR) -- equals or exceeds a transitional simplified ETR threshold that varies by year. Verify the applicable threshold for the specific year against the OECD Administrative Guidance.
• Routine profits test: The jurisdiction's profit before income tax (per the CbCR) does not exceed the SBIE amount computed for that jurisdiction using CbCR-based payroll and asset figures. This test effectively determines that the jurisdiction's income is fully covered by the substance carve-out. Verify the computation against the OECD Administrative Guidance.

CbCR Data Quality and the Safe Harbor Risk

The transitional CbCR safe harbor relies on CbCR data, which is prepared under the OECD transfer pricing CbCR standard and not under GloBE financial accounting rules. Discrepancies between CbCR data and GloBE financial accounting income can affect the reliability of the simplified tests. A jurisdiction that passes a simplified test based on CbCR data may or may not pass a full GloBE ETR test if the full computation were performed. For planning purposes, MNE groups should evaluate both the CbCR safe harbor availability and the underlying GloBE ETR for key jurisdictions, because the safe harbor is temporary and the group will eventually need to perform the full computation when the transitional period ends.

CbCR data quality issues -- including jurisdictions where the CbCR aggregates multiple entities with materially different profit and tax profiles -- can cause a jurisdiction to fail a simplified test even though the full GloBE computation would produce a lower top-up obligation. In those cases, the group may be better served by performing the full GloBE computation rather than relying on the safe harbor. Verify the CbCR data quality for each jurisdiction before electing the safe harbor.

De Minimis Revenue and Income Exclusion (Permanent)

Separate from the transitional CbCR safe harbor, the GloBE Model Rules include a permanent de minimis exclusion: if a jurisdiction's average GloBE Revenue is below a stated threshold and its average GloBE Income (or loss) is below a separate stated threshold, no top-up tax arises for that jurisdiction. Verify the current threshold amounts against the GloBE Model Rules (Article 5.5) and the applicable jurisdiction's domestic implementation; the thresholds are stated in EUR and must be applied using the method specified in the Model Rules. The de minimis exclusion is permanent (unlike the transitional CbCR safe harbor) and applies once the averages over a three-year period satisfy both tests.

Section 7: UTPR Exposure for U.S. Constituent Entities of Foreign MNE Groups

How the UTPR Reaches U.S. Entities

The Undertaxed Profits Rule is the backstop mechanism in the GloBE framework. When a constituent entity's income is under-taxed (ETR below the minimum) and the jurisdiction of the ultimate parent entity has not enacted an IIR that collects the top-up on that income, UTPR-adopting jurisdictions are permitted to collect the uncollected top-up tax from constituent entities within their own borders. The top-up amount is allocated to UTPR-adopting jurisdictions based on the proportion of the MNE group's payroll and tangible assets located in each UTPR-adopting jurisdiction, as specified in the GloBE Model Rules.

For a foreign MNE group with a U.S. constituent entity, the following conditions can produce UTPR exposure in UTPR-adopting jurisdictions:

• The MNE group is in scope (revenue threshold met for the applicable years; verify against the GloBE Model Rules and applicable domestic legislation).
• The UPE's jurisdiction (here, a foreign country) has not fully collected the top-up tax on the under-taxed income through its own IIR or the U.S. has not provided QDMTT protection.
• A UTPR-adopting jurisdiction has enacted UTPR and is eligible to collect the uncollected top-up amount from the U.S. constituent entity.

The specific UTPR collection mechanics -- how the tax is imposed on the U.S. constituent entity in the UTPR-adopting jurisdiction -- depend on that jurisdiction's domestic legislation implementing the UTPR. Some jurisdictions deny deductions to the constituent entity equal to the allocated top-up amount; others impose a direct charge. Verify the mechanism under the applicable foreign jurisdiction's domestic law.

Why the Absence of a U.S. QDMTT Matters for UTPR Exposure

If the U.S. had enacted a qualifying QDMTT, the QDMTT safe harbor would apply to U.S. constituent entities, reducing the IIR and UTPR top-up tax for those entities to zero. Because the U.S. has not done so, there is no domestic shield. Even where the U.S. imposes substantial income tax on the constituent entity's income at the U.S. federal level, the GloBE ETR computation may produce an ETR below the minimum for that entity -- because GloBE income adjustments, deferred tax adjustments, and other mechanics can produce a lower GloBE ETR than the nominal U.S. effective tax rate. Practitioners should compute the GloBE ETR for the U.S. constituent entity under GloBE rules rather than assuming that the U.S. tax system will always produce a GloBE-compliant ETR.

No Enacted Retaliatory Shield

As described in the warning callout in Section 2, the Section 899-type provision that would have imposed retaliatory measures on UTPR-adopting jurisdictions was not enacted in the OBBBA. No equivalent enacted retaliatory mechanism exists as of the date of this guide. Practitioners advising foreign MNE groups with U.S. constituents should not advise clients that any retaliatory protection is available. The UTPR exposure in each relevant foreign jurisdiction must be analyzed under that jurisdiction's domestic Pillar Two legislation and the group's specific facts.

Quantifying UTPR Exposure

Quantifying a U.S. constituent entity's UTPR exposure requires: (1) computing the GloBE ETR for the U.S. constituent entity's jurisdiction (the U.S.) under GloBE rules, applying GloBE adjustments to U.S. GAAP financial accounting income and U.S. tax accruals; (2) determining whether any top-up tax shortfall arises after applying the SBIE; (3) determining which UTPR-adopting jurisdictions have payroll or tangible assets from the MNE group that create a UTPR allocation right; and (4) computing the allocation of the top-up to each UTPR-adopting jurisdiction based on the UTPR allocation formula. This analysis is complex, fact-specific, and requires detailed financial data across the group. Engage qualified international tax counsel with Pillar Two computation experience for this analysis.

Section 8: U.S. Foreign Tax Credit Interaction -- IRC 901, IRC 904, and IRS Notice 2023-80

Creditability of Pillar Two Top-Up Taxes Under IRC 901

For a U.S. MNE that pays a top-up tax to a foreign jurisdiction under that jurisdiction's IIR, QDMTT, or UTPR, the first question is whether that payment qualifies as a creditable foreign income tax under IRC 901. To be creditable, a foreign levy must be an income tax -- that is, it must be imposed on net income under the standards of Treas. Reg. 1.901-2 (verify current citation and text at IRS.gov). Whether Pillar Two top-up taxes satisfy those standards is an open question as of mid-2026. The creditability analysis depends on the specific mechanism by which the top-up tax is imposed: an IIR top-up collected by the parent jurisdiction may have different characteristics from a UTPR collected through a deduction denial in a third jurisdiction.

IRS Notice 2023-80 provided interim guidance on the treatment of certain foreign taxes in the Pillar Two context. The notice announced that Treasury and IRS were studying the creditability of Pillar Two taxes and provided some interim positions for taxpayers to rely on while final guidance is developed. Practitioners must read the notice carefully and verify whether it has been superseded by any subsequent guidance before relying on its positions. Verify the current status of Notice 2023-80 and any successor guidance at IRS.gov.

FTC Basket Classification Under IRC 904

Even if a Pillar Two top-up tax is creditable under IRC 901, the applicable foreign tax credit basket under IRC 904 determines how and to what extent the credit can be used. Under the post-TCJA and post-OBBBA basket structure, foreign income taxes are allocated among the passive income basket, the general income basket, the NCTI (formerly GILTI) basket, the foreign branch income basket, and other baskets. Pillar Two top-up taxes do not map cleanly onto any existing basket. If the top-up is treated as a tax on the same income that would be in the NCTI basket, it might go there -- but the NCTI basket's specific limitation mechanics apply, and the NCTI basket crediting rules differ from the general basket. If the top-up is treated as a general basket tax, it may be limited by the FTC limitation applicable to general basket income.

No IRS guidance has confirmed the basket classification for Pillar Two top-up taxes as of mid-2026. This is identified as an open question in Section 11. Practitioners computing U.S. FTC positions for clients that have paid Pillar Two top-up taxes must treat the basket classification as uncertain and model the range of outcomes (most favorable basket; least favorable basket) until the IRS issues guidance. Verify all basket classification positions against Treas. Reg. 1.904-4 and current IRS.gov resources. For the FTC limitation computation and basket mechanics generally, see the companion guide: IRC 904 FTC limitation, basket allocation, and deemed-paid credits for U.S. multinational groups under the OBBBA NCTI framework.

Deduction in Lieu of Credit

If Pillar Two top-up taxes are not creditable under IRC 901, U.S. MNEs may still deduct them as ordinary and necessary business expenses under IRC 164 (deduction for taxes) or IRC 162 (trade or business deduction). The deduction provides a less valuable offset than a credit (the deduction reduces taxable income by the tax amount, whereas a credit offsets tax dollar for dollar), but it is available in the absence of creditability. The deduction route also has implications for the foreign tax credit limitation: a deducted foreign tax does not reduce the FTC available on other creditable taxes. Verify the deductibility of specific Pillar Two taxes and the interaction with the FTC election under IRC 901(a) before advising clients.

QDMTT Taxes Paid by the Foreign Parent

For a U.S. MNE group where the U.S. is the UPE, foreign subsidiaries in QDMTT-adopting jurisdictions will pay QDMTT at the subsidiary level. Those subsidiary-level QDMTT payments may be treated as taxes paid by the subsidiary for purposes of the deemed-paid foreign tax credit under IRC 960 (verify current IRS guidance on whether QDMTT taxes satisfy the IRC 960 deemed-paid rules and whether they are creditable under IRC 901). The FTC implications of QDMTT taxes paid at the foreign subsidiary level are a distinct question from the creditability of IIR top-up taxes paid at the U.S. parent level. Both questions are open pending IRS guidance as of mid-2026.

Section 9: OBBBA NCTI Regime -- The Covered-Tax Question and Pillar Two ETR Impact

NCTI Replaces GILTI for Post-2025 CFC Years

The OBBBA (Pub. L. 119-21, signed July 4, 2025) replaced the GILTI regime (IRC 951A) with the Net Controlled Taxable Income (NCTI) framework under IRC 951B, effective for tax years of CFCs beginning after December 31, 2025. For calendar-year CFCs, the first NCTI year is 2026 -- the same year that Pillar Two is broadly in effect across adopting jurisdictions. The simultaneous arrival of NCTI and full Pillar Two compliance creates a significant open question: do NCTI taxes constitute "covered taxes" under the GloBE Model Rules?

The answer matters because if NCTI taxes are treated as covered taxes for the low-tax jurisdiction where the CFC operates, those taxes may raise the GloBE ETR in that jurisdiction, potentially reducing or eliminating the top-up tax obligation. If NCTI taxes are not treated as covered taxes, the ETR for those jurisdictions excludes the NCTI tax burden, and the GloBE ETR may remain below the minimum, generating a top-up obligation that is unrelieved by any U.S. tax paid on the same income. For a U.S. MNE group with CFCs in low-tax jurisdictions, the NCTI covered-tax determination could be the difference between material Pillar Two top-up exposure and no top-up at all.

The GloBE CFC Blending Regime

The GloBE Model Rules include a "blended CFC tax regime" provision (confirm article citation in the GloBE Model Rules) that allows taxes imposed on a constituent entity's income through a parent-level CFC regime to be treated as covered taxes of the constituent entity for purposes of computing the constituent entity's ETR in its home jurisdiction -- but only if the CFC regime satisfies specific criteria regarding the tax rate, the base, and the blending approach. The pre-OBBBA GILTI regime was analyzed by the OECD in its Administrative Guidance, which concluded that certain aspects of GILTI could be treated under the blended CFC tax regime rules. However, NCTI is a new construct that differs from GILTI in rate, base, and structure. The OECD has not issued guidance on whether NCTI satisfies the blended CFC tax regime criteria as of July 2026.

Practitioners must treat this question as open and unresolved. Do not advise clients that NCTI taxes are covered taxes for GloBE purposes without qualification. Monitor the OECD BEPS portal for administrative guidance updates and IRS.gov for any U.S. government positions on NCTI's GloBE treatment. For the NCTI regime mechanics and IRC 250 deduction, see the companion guide: IRC 250 NCTI deduction and the OBBBA replacement of GILTI with Net Controlled Taxable Income for post-2025 CFC years.

Impact If NCTI Taxes Are NOT Covered Taxes

If NCTI taxes are determined not to be covered taxes under GloBE -- whether because they fail the blended CFC tax regime criteria or because no OECD guidance is issued that confirms their qualifying status -- U.S. MNEs face the following scenario for CFCs in low-tax jurisdictions: the NCTI tax paid on the CFC's income at the U.S. level does not increase the GloBE ETR in the CFC's jurisdiction. The CFC's local-country taxes may be insufficient alone to reach the GloBE minimum. The result is a top-up tax obligation in the CFC's jurisdiction (or, if the U.S. has no IIR, potentially in a UTPR-adopting jurisdiction). The U.S. MNE pays both U.S. NCTI tax and a foreign Pillar Two top-up on the same CFC income, with no guaranteed FTC offset for the top-up (given the open creditability question addressed in Section 8).

Impact If NCTI Taxes ARE Covered Taxes

If NCTI taxes are treated as covered taxes for the blended CFC tax regime, the ETR in low-tax CFC jurisdictions would be increased by the portion of NCTI taxes allocable to those jurisdictions' income. Depending on the NCTI effective rate and the allocation, this could bring the jurisdictional ETR above the GloBE minimum, eliminating the top-up. This is the more favorable outcome for U.S. MNEs, and it is the outcome they would prefer. However, the specific allocation of NCTI taxes across jurisdictions for GloBE purposes is itself a complex question -- NCTI is computed on an aggregate CFC basis, and allocating it jurisdiction by jurisdiction for GloBE purposes would require a methodology that neither the OECD nor the IRS has specified as of July 2026. For FCUS status and the broader IRC 951B framework, see the companion guide: IRC 951B FCUS status, 50% threshold, and open guidance questions for foreign-controlled U.S. shareholders under OBBBA.

Section 10: U.S. Compliance Obligations and Reporting Framework

No U.S. Federal Pillar Two Return as of Mid-2026

As of mid-2026, there is no specific U.S. federal income tax return or information return for Pillar Two top-up taxes. Because the U.S. has not enacted an IIR or QDMTT, the IRS has no domestic collection obligation to support with a dedicated form. U.S. MNEs are tracking their Pillar Two obligations and making top-up tax payments under the domestic compliance systems of the foreign jurisdictions that have enacted IIR, QDMTT, or UTPR. Monitor IRS.gov for any new reporting requirements that may be issued if the U.S. enacts domestic Pillar Two legislation or if the IRS determines that existing reporting frameworks require modification to capture Pillar Two payments.

Country-by-Country Reporting: Form 8975

Form 8975 (Country-by-Country Report) is already required for U.S. ultimate parent entities of MNE groups meeting the applicable revenue threshold under IRC 6038 (verify the current filing threshold and requirements at IRS.gov and in the current Form 8975 instructions). The Form 8975 CbCR data serves as the foundation for the transitional CbCR safe harbor described in Section 6, making accurate and complete Form 8975 filing an immediate Pillar Two compliance priority for in-scope U.S. MNEs. Errors in Form 8975 data can cause a jurisdiction to fail a transitional safe harbor test that it would otherwise pass, triggering a full GloBE computation and potentially a top-up tax obligation. Verify Form 8975 filing requirements, schedules, and current instructions at IRS.gov.

Transfer Pricing Documentation

Intercompany pricing directly affects the allocation of income among constituent entities in different jurisdictions, which in turn affects the GloBE ETR in each jurisdiction. Transfer pricing adjustments that increase or decrease income in a low-tax jurisdiction can move the ETR above or below the GloBE minimum. Practitioners should review the group's transfer pricing documentation and intercompany agreements for Pillar Two impact, particularly for transactions that allocate significant income to jurisdictions with low statutory or effective tax rates. A transfer pricing adjustment that shifts income to a high-tax jurisdiction may eliminate a top-up obligation in the low-tax jurisdiction, while a shift in the other direction may create one.

Financial Accounting Disclosures: ASC 740 and IFRS

For U.S. MNEs that prepare financial statements under U.S. GAAP, Pillar Two top-up tax obligations are uncertain tax positions that may require recognition and disclosure under ASC 740-10. The FASB issued guidance in 2023 providing that the Pillar Two framework is a tax based on income and therefore falls within the scope of ASC 740. Where a top-up tax obligation is probable and estimable, it must be accrued in the financial statements. Where it is uncertain whether an obligation exists (for example, because the NCTI covered-tax question is unresolved), practitioners must evaluate ASC 740 recognition and measurement criteria. Verify current FASB guidance and any subsequent ASC 740 updates at FASB.org before advising on financial accounting treatment.

For entities that report under IFRS in foreign jurisdictions (for example, a U.S. MNE's foreign subsidiary that prepares IFRS financial statements for local reporting), the IASB issued amendments to IAS 12 in 2023 providing mandatory temporary relief from recognizing and disclosing deferred taxes arising from Pillar Two income taxes. Verify whether the IASB relief remains in effect for the applicable reporting period and confirm the applicable IFRS disclosure requirements at IFRS.org.

Foreign Jurisdiction Compliance Filings

For each foreign jurisdiction that has enacted domestic Pillar Two legislation, the constituent entities of a U.S. MNE group may be required to file local Pillar Two returns, elections (including safe harbor elections), and supporting documentation. The filing deadlines, required elections, and documentation requirements differ by jurisdiction. Practitioners advising U.S. MNEs with significant foreign operations should maintain a jurisdiction-by-jurisdiction compliance calendar for Pillar Two obligations and coordinate with local tax advisors in each adopting jurisdiction. The GloBE framework allows certain elections (QDMTT safe harbor, transitional safe harbor, SBIE elections) that may need to be made in the first applicable year; missing an election deadline may foreclose the option for that year.

• Confirm in-scope status. Determine whether the MNE group meets the GloBE revenue threshold for in-scope treatment. Verify the threshold against the GloBE Model Rules and the domestic legislation of each relevant jurisdiction for the applicable year.
• Map constituent entities by jurisdiction. Identify all constituent entities of the MNE group, their jurisdictions of tax residence, and any excluded entity status. Confirm which jurisdictions have enacted domestic Pillar Two legislation effective for the applicable year.
• Review and validate Form 8975 data. Confirm that the group's CbCR data (Form 8975) is accurate, complete, and consistent with the underlying financial data. Identify any jurisdictions where CbCR data quality issues could affect the transitional safe harbor tests.
• Compute or estimate the GloBE ETR by jurisdiction. For jurisdictions not protected by the QDMTT safe harbor or the transitional CbCR safe harbor, perform a preliminary GloBE ETR computation to identify jurisdictions with potential top-up obligations. Model both the NCTI-as-covered-tax and NCTI-not-covered-tax scenarios for low-tax CFC jurisdictions.
• Apply the SBIE. Compute the substance-based income exclusion for each at-risk jurisdiction using the applicable year's payroll and tangible asset percentages (verify against the GloBE Model Rules and the applicable jurisdiction's domestic legislation). Assess whether the SBIE reduces or eliminates the top-up obligation.
• Evaluate safe harbors. Determine availability of the transitional CbCR safe harbor, QDMTT safe harbor, and de minimis exclusion for each jurisdiction. Document the election and supporting data.
• Assess FTC implications. Evaluate whether Pillar Two top-up taxes paid in foreign jurisdictions are creditable under IRC 901 or deductible under IRC 164/162. Model basket classification scenarios. Review IRS Notice 2023-80 and any successor guidance at IRS.gov.
• Review transfer pricing for Pillar Two impact. Assess whether intercompany pricing creates or eliminates top-up obligations in key jurisdictions.
• Address financial accounting and disclosure. Assess Pillar Two uncertain tax position accruals under ASC 740. Ensure IFRS disclosure requirements are met for foreign subsidiaries that prepare IFRS statements.
• Build a foreign jurisdiction compliance calendar. Coordinate with local advisors in each adopting jurisdiction to identify Pillar Two return filing deadlines, required elections, and documentation requirements.

Section 11: Open Questions (Unresolved as of July 2026)

The following issues are unresolved or insufficiently addressed by OECD, IRS, or legislative guidance as of July 2026. Each represents a zone of meaningful uncertainty with direct compliance consequences for U.S. MNEs and their advisors. The absence of guidance does not mean a position cannot be taken; it means any position carries elevated risk and requires documentation, professional judgment, and in most cases engagement of qualified international tax counsel. Monitor the OECD BEPS portal and IRS.gov for updates on each of these items.

1. Whether NCTI Taxes Constitute Covered Taxes Under the GloBE CFC Blending Regime (Unresolved as of July 2026)

The OBBBA replaced GILTI with NCTI under IRC 951B for tax years of CFCs beginning after December 31, 2025. The OECD has issued guidance on the treatment of CFC blending regimes under GloBE, but that guidance addressed the pre-OBBBA GILTI regime, not NCTI. Whether NCTI satisfies the blended CFC tax regime criteria in the GloBE Model Rules -- and if so, how NCTI taxes are allocated across low-tax CFC jurisdictions for ETR computation purposes -- has not been addressed in any OECD administrative guidance package or IRS notice as of July 2026. This is the most consequential open question for U.S. outbound MNEs computing their 2026 Pillar Two exposure.

2. Creditability of Pillar Two Top-Up Taxes Under IRC 901 (Unresolved as of July 2026)

Whether IIR, QDMTT, or UTPR payments qualify as creditable foreign income taxes under IRC 901 and Treas. Reg. 1.901-2 has not been confirmed in final IRS guidance. IRS Notice 2023-80 provided some interim positions but did not resolve the creditability question comprehensively. The creditability analysis may differ for each type of Pillar Two tax (IIR vs. QDMTT vs. UTPR) and may depend on the specific domestic legislation of the imposing jurisdiction. Verify the current status of Notice 2023-80 and any subsequent guidance at IRS.gov.

3. FTC Basket Classification for Pillar Two Taxes Under IRC 904 (Unresolved as of July 2026)

Even if Pillar Two top-up taxes are creditable under IRC 901, their allocation to a specific FTC basket under IRC 904 is unresolved. The available baskets (passive, general, NCTI/former GILTI, foreign branch, and others) each carry different limitation mechanics and usability constraints. Pillar Two top-up taxes do not correspond to a single income source in a predictable way, and the IRS has not issued guidance on basket classification. Until guidance is issued, practitioners must model the range of basket outcomes and advise clients that the FTC benefit from Pillar Two taxes is uncertain.

4. Whether and When the U.S. Will Enact a Domestic QDMTT, IIR, or Retaliatory Measure (Unresolved as of July 2026)

The U.S. legislative path for domestic Pillar Two engagement is entirely open. Congress could enact a QDMTT (which would shield U.S. constituent entities from UTPR and collect the revenue domestically), an IIR (which would impose a top-up on U.S. MNEs' foreign low-taxed income), a retaliatory measure targeting UTPR-adopting countries (comparable to the Section 899 concept that was removed from the OBBBA), or some combination. Alternatively, Congress could decline to enact any of these and the U.S. could remain outside the Pillar Two system. All four outcomes are plausible as of the date of this guide; none can be predicted with confidence.

5. UTPR Exposure for U.S. Constituent Entities of Foreign MNE Groups -- Jurisdiction-Specific, No Federal Safe Harbor (Unresolved as of July 2026)

The specific UTPR exposure for a U.S. constituent entity of a foreign MNE group depends on: the group's GloBE ETR in the U.S. under GloBE rules; which UTPR-adopting jurisdictions have allocated UTPR collection rights based on the group's payroll and tangible assets in those jurisdictions; and the domestic legislation of each UTPR-adopting jurisdiction. There is no U.S. federal safe harbor that shields U.S. constituent entities from UTPR, and the removed Section 899 concept provides no protection. Each UTPR exposure situation is therefore jurisdiction-specific, fact-specific, and must be analyzed under the applicable foreign domestic law.

Section 12: Anti-Hybrid Mismatch Adjustments and Pillar Two Interaction

Hybrid Instruments and GloBE Income Adjustments

The GloBE Model Rules include specific provisions addressing hybrid mismatches -- situations where the same payment is deductible in one jurisdiction but not included in income in another, or where the same entity is treated as a tax resident of different jurisdictions by different countries. These mismatch situations can artificially reduce the GloBE ETR by increasing deductions (reducing GloBE Income) or reducing covered taxes in a way that does not reflect the actual economic tax burden. The GloBE framework addresses certain mismatches through adjustments to GloBE Income and Covered Taxes, though the interaction between the GloBE hybrid provisions and the domestic U.S. anti-hybrid rules under IRC 267A is an area requiring careful attention.

IRC 267A disallows deductions for certain hybrid and branch mismatch payments -- payments that generate a deduction in the U.S. but no corresponding income inclusion in the payee's jurisdiction. The interaction between IRC 267A disallowances and the GloBE adjustments to GloBE Income is not always parallel: a payment that is disallowed under IRC 267A may or may not produce a GloBE income adjustment that increases GloBE income in the relevant jurisdiction, depending on the specifics of the GloBE hybrid mismatch rules. For the U.S. anti-hybrid rules in detail, see the companion guide: IRC 267A anti-hybrid rules and their interaction with Pillar Two hybrid mismatch adjustments.

Dual-Inclusion Income

The GloBE Model Rules include a "dual-inclusion income" concept that prevents double-counting of income that is taxed in both the constituent entity's jurisdiction and the parent jurisdiction (for example, income that is taxed by both Country X and the U.S. under NCTI). Where income is dual-inclusion income, the GloBE rules allow the related taxes from both jurisdictions to be counted as covered taxes for the ETR computation, potentially raising the ETR above the minimum and reducing or eliminating the top-up obligation. The treatment of NCTI as covered taxes for dual-inclusion income purposes is part of the broader NCTI covered-tax question described in Section 9 and is unresolved as of July 2026.

Reverse Hybrid Mismatches

A reverse hybrid mismatch occurs where an entity is treated as transparent by its home jurisdiction but as opaque by the parent jurisdiction. These structures can produce gaps in the GloBE ETR computation -- income may be attributed to a jurisdiction that does not collect tax on it (because the entity is transparent there) while the parent jurisdiction may not collect tax because it treats the entity as opaque. The GloBE Model Rules have specific provisions for reverse hybrids, but the interaction with U.S. check-the-box elections and partnership classification is complex. Practitioners advising on structures that use hybrid entities or check-the-box elections in Pillar Two-adopting jurisdictions should review the GloBE hybrid provisions carefully and verify any position against the applicable jurisdiction's domestic legislation.

Section 13: Practitioner Planning Considerations for U.S. MNEs

Identifying and Ranking Jurisdictions by Pillar Two Risk

The first step in any Pillar Two advisory engagement is mapping the MNE group's jurisdictional footprint against Pillar Two adoption status. Not all jurisdictions have enacted domestic Pillar Two legislation, and the timing and specifics of each jurisdiction's adoption differ. Practitioners should build a matrix of (1) jurisdictions where the group has constituent entities; (2) whether each jurisdiction has enacted domestic Pillar Two legislation; (3) whether each jurisdiction has a qualifying QDMTT; (4) the preliminary GloBE ETR for each jurisdiction based on available financial data; and (5) the availability of safe harbors for each jurisdiction and year. This matrix forms the foundation of the Pillar Two risk assessment and prioritizes where to focus the detailed ETR computation effort.

Substance Investments and the SBIE

For MNEs with operations in jurisdictions where the GloBE ETR is marginally below the minimum, increasing the substance-based income exclusion by investing in additional payroll (headcount) or tangible assets in that jurisdiction can reduce or eliminate the top-up obligation. This is a legitimate planning response to Pillar Two because the SBIE was specifically designed by the OECD to protect genuine substance-based returns from the top-up tax. Practitioners should model the SBIE sensitivity for jurisdictions where the top-up is driven by a small ETR gap: a relatively modest increase in payroll or tangible assets may close the gap entirely. Verify the SBIE computation and applicable percentages for the year against the GloBE Model Rules before presenting substance investment scenarios to clients.

Local Financing Structures and Covered Tax Optimization

The GloBE ETR is driven by the ratio of Covered Taxes to GloBE Income. Actions that increase Covered Taxes in a low-ETR jurisdiction (without creating hybrid mismatch issues or other GloBE adjustments that reduce GloBE Income proportionally) can raise the ETR. Some jurisdictions offer local tax incentives, credits, or preferential regimes that reduce covered taxes significantly below the nominal statutory rate; MNEs benefiting from such regimes are likely Pillar Two top-up targets. Planning around those regimes -- including restructuring the benefit to be a qualifying refundable tax credit (which may be treated as covered tax rather than a GloBE income reduction, depending on the Model Rules) -- requires detailed analysis of both the GloBE rules and the local regime's qualification status.

IIR-First Allocation and Parent Entity Planning

For U.S. MNEs (U.S. UPE), there is currently no U.S. IIR to collect the top-up on low-taxed foreign income. If a foreign adopting jurisdiction has enacted an IIR and the MNE group's structure includes an intermediate parent entity (IPE) in that jurisdiction, the IPE may collect the top-up under a cascading IIR structure. Understanding the IIR cascade and the role of IPEs in the group structure is important for determining where the top-up tax is ultimately collected and by whom. Practitioners should map the UPE-to-IPE chain and identify which entities in the chain are in IIR-adopting jurisdictions, as the IIR cascade determines the ultimate payer and jurisdiction.

Section 14: Practitioner Checklist for Pillar Two Readiness

The following checklist covers the key steps in a Pillar Two readiness assessment for a U.S. MNE. All items must be verified against the GloBE Model Rules, OECD Administrative Guidance, and the domestic legislation of each relevant jurisdiction before reliance. This checklist is not exhaustive and does not substitute for engagement of qualified international tax counsel with Pillar Two experience.

• Confirm in-scope status. Verify that the MNE group's consolidated revenue meets the GloBE threshold in at least two of the four preceding fiscal years. Verify the current threshold against the GloBE Model Rules and the domestic legislation of each jurisdiction where the group has constituent entities. Document the threshold calculation and the revenue source data.
• Identify all constituent entities and their jurisdictions. Compile a complete list of entities in the MNE group, their jurisdictions of tax residence, and any that qualify for excluded entity status. Confirm which jurisdictions have enacted domestic Pillar Two legislation (IIR, QDMTT, UTPR) for the applicable year.
• Map qualifying QDMTT jurisdictions. Identify which of the group's constituent entity jurisdictions have a qualifying QDMTT as confirmed by OECD peer review. Those jurisdictions are eligible for the QDMTT safe harbor and require no further GloBE top-up computation for the QDMTT-covered year. Verify peer review outcomes at the OECD BEPS portal.
• Review Form 8975 data for transitional safe harbor eligibility. For each jurisdiction not protected by the QDMTT safe harbor, apply the three simplified tests (de minimis, simplified ETR, routine profits) using the group's Form 8975 CbCR data. Document the test results. Verify current threshold amounts and simplified ETR rates for the applicable transitional year against the OECD Administrative Guidance.
• Perform GloBE ETR computation for non-safe-harbor jurisdictions. For jurisdictions that do not qualify for any safe harbor, compute the GloBE ETR using financial accounting data adjusted for GloBE income adjustments and covered tax inclusions and exclusions. Compute the SBIE using the applicable year's percentages (verify against GloBE Model Rules). Compute the jurisdictional top-up tax.
• Model NCTI covered-tax scenarios. For low-tax CFC jurisdictions, model both the scenario where NCTI taxes are treated as covered taxes and the scenario where they are not. Document both outcomes and flag the open question in all client deliverables.
• Assess FTC implications for top-up taxes paid. Determine whether Pillar Two taxes paid in foreign jurisdictions are creditable under IRC 901 (review Notice 2023-80 and any successor guidance at IRS.gov). Model basket classification under IRC 904. Assess deductibility as an alternative if creditability is unavailable. Flag all positions as uncertain pending IRS guidance.
• Evaluate anti-hybrid exposure. Review the group's intercompany financing and hybrid entity arrangements for GloBE hybrid mismatch provisions that could reduce GloBE income or covered taxes. Coordinate the IRC 267A analysis with the GloBE hybrid adjustment analysis.
• Identify UTPR exposure for any U.S. constituent entities of foreign MNE groups. For groups where a non-U.S. entity is the UPE, compute the GloBE ETR for U.S. constituent entities under GloBE rules. Identify UTPR-adopting jurisdictions with UTPR allocation rights based on the group's payroll and tangible assets. Quantify the UTPR exposure under each relevant jurisdiction's domestic legislation.
• Build the Pillar Two compliance calendar. Identify filing deadlines, election dates, and documentation requirements for each adopting jurisdiction where the group has a compliance obligation. Coordinate with local counsel in each jurisdiction. Track the OECD and IRS.gov for guidance updates on NCTI covered-tax status, FTC creditability, and any U.S. domestic legislation.