How US multinationals escaped the global minimum corporate tax

For those who follow the fierce debates over taxing multinational corporations (MNCs), G7 finance ministers announced a big surprise at their meeting in the Canadian Rockies last month: US-based MNCs will escape the 15 percent global minimum tax endorsed by 135 countries around the world in 2021. The tax, known as Pillar Two, was first proposed by the Organization for Economic Cooperation and Development (OECD), a 38-member intergovernmental organization, back in December 2021. Many countries have begun implementing the tax, many others are working toward its adoption, but the US Congress has shown little interest.

The goal of the minimum tax was to prevent corporations—including many US-based tech behemoths—from avoiding home-based corporate taxes by creating new corporate entities in Caribbean low-tax havens or other far corners of the world.

The details of Pillar Two require 70 pages of dense text, but the essential ingredients boil down to four elements:

• The global minimum tax applies to MNCs with revenues exceeding €750 million.
• The income inclusion rule requires the ultimate parent entity (UPE) of the covered MNC group to impose a “top up” tax on any subsidiary in another country that pays less than the 15 percent effective tax rate.
• The under-taxed payments rule (UTPR) enables other countries where the MNC group operates to impose the “top up” tax if the UPE home country does not do so.
• Substance-based income exclusion provisions protect tax incentives from the 15 percent minimum tax, for example green energy or semiconductor tax credits.

The ambitious OECD tax project, known as the Base Erosion and Profit Shifting project, was formally launched in 2013, with the support of President Barack Obama. But the project found no support from congressional Republicans, and President Donald Trump opposed it in his first term. President Joseph R. Biden Jr., however, was sympathetic, leading to the December 2021 launch of the OECD tax pillars. Pillar One, also aimed at large multinationals, would tax part of their profits based on where their customers are located. It faced bipartisan congressional opposition. Trump withdrew the United States from the project soon after his inauguration for a second term.

The story of how the United States got protected from any punitive action over withdrawing from the global tax agreement is perhaps obscure but also significant in terms of the Trump administration’s economic diplomacy. The story starts with Capitol Hill and Trump’s One Big Beautiful Bill (OBBB). To deter other countries from applying Pillar Two minimum taxes to US-based MNCs, congressional Republicans at one point included in the OBBB a new US tax provision that would have given the president power to impose extra taxes on foreign-based MNCs doing business in the United States if their home countries applied discriminatory taxes on US-based MNCs. Pillar Two UTPR taxes were the most prominent target. The tax provision in the OBBB came to be known as the revenge tax.

The G7 summit meeting at a Canadian resort near Banff in June 2025 included finance ministers from Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, plus ministers from countries not members of the G7 (Australia, Brazil, India, Mexico, South Africa, South Korea, and Ukraine). The assembled ministers sought to avoid the addition of tax battles to ongoing tariff battles.

The compromise solution, brokered in part by Treasury Secretary Scott Bessent, was US agreement to drop the revenge tax from the OBBB, while other ministers agreed that the OECD Pillar Two measures would not apply to US-based MNCs. Thus, the minimum 15 percent corporate tax rate no longer applies to the subsidiaries of US multinational corporations.

It remains to be seen whether the US-based MNC carve-out will make much difference to the world of corporate taxation. The substance-based income exclusion provisions, along with other loopholes nested in Pillar Two, provide ample room for countries to work around the 15 percent minimum. Probably the biggest impact of the carve-out will be to inspire other countries to take a closer look at the Pillar Two loopholes.

While the Pillar Two compromise agreement averts one tax battle, another is looming. Canada has just agreed to rescind its Digital Services Tax (DST) to clear the way for broader trade talks with the United States, but European countries adamantly oppose a parallel concession. Starting in the first Trump administration, the United States floated the possibility of invoking Section 301 of the 1974 trade act to penalize imports from countries that apply DSTs to US tech firms. Stay tuned.