On 26 June 2025, the United States (U.S.) Treasury announced an agreement with the other G7 countries regarding the application of the OECD Pillar Two rules to U.S.-parented multinational enterprises (U.S. MNEs). The G7 published a statement on 28 June 2025 that outlines the guiding principles of that agreement. Most notably, it includes an announced full exclusion for U.S. MNEs from the UTPR and IIR.
This announcement marks a significant step forward in the U.S. push against the Pillar Two rules. In response to this agreement, the U.S. Senate has removed the proposed Section 899 – a retaliatory measure – from the pending "One Big Beautiful Bill Act".
Key elements of the G7 statement
The G7 statement outlines the following core components of the proposed new architecture of global minimum taxation:
- A "side-by-side system" (i.e., Pillar Two and the U.S. tax system operating in parallel) that provides for a full exclusion from the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) for U.S. MNEs, covering both domestic and foreign profits;
- A commitment to address substantial risks of the level playing field being distorted and of base-erosion and profit-shifting, to preserve the common policy intention of the "side-by-side system";
- Work to materially simplify the Pillar Two administration and compliance; and
- Upcoming changes to the treatment of substance-based non-refundable tax credits under Pillar Two.
While no technical details are released (yet) of this "side-by-side system", the 'full exclusion' from IIR and UTPR indicates that U.S. MNEs are no longer subject to:
- Top-up Tax under the IIR on their subsidiaries (by intermediate holding jurisdictions);
- Top-up Tax under the UTPR on their U.S. based profits; and
- Top-up Tax under the UTPR on profits of other entities within their group structure.
If implemented, this agreement therefore marks a big change (and simplification) in the impact of Pillar Two on U.S. MNEs.
The announcement does not contain any proposed changes to the application of (Qualified) Domestic Top-up Taxes (QDMTT) to subsidiaries of U.S. MNEs. It therefore appears that U.S. MNEs would still be subject to the QDMTT on the profits of their subsidiaries in jurisdictions with a QDMTT.
Withdrawal of Section 899
Although the U.S. initially appeared to support the OECD's Pillar Two framework, it never enacted Pillar Two legislation. In January 2025, U.S. President Trump issued an executive order notifying that any prior commitment made on behalf of the U.S. regarding the global tax deal had no force or effect, citing concerns over extraterritorial taxation and the perceived disproportionate burden placed on U.S. MNEs. The order directed the U.S. Treasury to review foreign tax regimes for discriminatory taxes and propose countermeasures.
One such proposal was Section 899, part of the "One Big Beautiful Bill Act". It aimed to impose additional tax liabilities on U.S. sourced income of foreign investors from jurisdictions that implement Digital Services Taxes (DSTs), Diverted Profits Taxes (DPTs) and the UTPR.
However, following the agreement amongst G7 countries, the U.S. Senate has responded swiftly, removing Section 899 from the pending bill.
Open questions
Several critical technical questions remain on how this agreement within the G7 affects the Pillar Two rules:
- As of when will this "side-by-side system" be effective? Would there be retroactive effect to tax years starting on or after 31 December 2023?
- How will the exclusion for US MNEs be designed and how could this impact other jurisdictions?
- How will other members of the Inclusive Framework react to this exemption for U.S. MNEs? Could this lead to a global blending (instead of jurisdictional blending) approach when computing the effective tax rate under the Pillar Two rules?
- What will remain of the UTPR, particularly in jurisdictions that have already implemented it?
- How will this agreement be reflected in global implementation – will the EU amend its directive (noting initial comments of the European Commission that this would not be required)?
- Could a jurisdiction exclude the foreign subsidiaries of US MNEs also from QDMTT and maintain its "Qualifying" status for purposes of the QDMTT Safe Harbour?
In addition, questions on the process arise. The current news is that the deal has been made at the G7 level. However, the Pillar Two project was negotiated and agreed upon within the G20/Inclusive Framework - raising the question of how broadly supported this new deal is. Moreover, it remains unclear whether the scope of the G7 agreement is limited solely to Pillar Two, or whether it also addresses other contested measures such as DSTs and DPTs, which have long been a source of concern for the U.S. due to their perceived targeting of U.S. MNEs.
What comes next?
The coming weeks and months will be critical to see how broad the impact is of this G7 agreement, and how it impacts the Pillar Two rules in the EU and elsewhere. If U.S. MNEs are fully excluded from the scope of Pillar Two, this raises fundamental questions about the viability of a truly "global" minimum tax and the future of international tax coordination.
We will continue to monitor developments and provide further insights as more information becomes available.
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