Plain English
Pillar Two is not a transfer pricing rule in itself, but it interacts constantly with transfer pricing outcomes. It requires large groups (generally those with revenue above EUR 750m) to pay at least a 15% effective tax rate in every country they operate, calculated using the Global Anti-Base Erosion (GloBE) rules. If a country's effective rate falls below 15% — often because of low statutory rates or generous incentives — a top-up tax is collected elsewhere in the group. Since GloBE effective tax rate calculations start from financial accounting profit by jurisdiction, transfer pricing outcomes that move profit between countries now also move Pillar Two exposure.
Technical definition
The Global Anti-Base Erosion (GloBE) Rules, agreed under the OECD/G20 Two-Pillar Solution and implemented via domestic legislation (often based on the EU Minimum Tax Directive), impose a minimum effective tax rate of 15% on the profits of multinational enterprise groups with consolidated revenue of at least EUR 750m in at least two of the four preceding fiscal years, calculated on a jurisdictional blended basis using an Income Inclusion Rule, Undertaxed Profits Rule, and optional Qualified Domestic Minimum Top-up Tax, with jurisdictional GloBE income derived substantially from financial accounting profit, which is itself shaped by transfer pricing outcomes.
Why it matters
It fundamentally changes the incentive calculus behind many historical transfer pricing structures — shifting profit to a low-tax entity no longer guarantees a lower effective tax rate once a top-up tax claws back the difference, making some legacy structures economically pointless from a pure rate-arbitrage perspective.
How it works in practice
- 01Determine whether the group meets the EUR 750m consolidated revenue threshold.
- 02Calculate jurisdictional GloBE income and covered taxes, starting from financial accounting figures with specified adjustments.
- 03Compute the jurisdictional effective tax rate by dividing adjusted covered taxes by GloBE income.
- 04If the effective rate is below 15%, calculate the top-up tax percentage and apply it to excess profit after substance-based carve-outs.
- 05Collect the top-up tax via a Qualified Domestic Minimum Top-up Tax if adopted locally, or otherwise via the Income Inclusion Rule or Undertaxed Profits Rule.
Worked example
Transfer pricing feeding a Pillar Two top-up
A group's IP-holding entity in a jurisdiction with a 10% statutory rate reports GloBE income of EUR 100m after a transfer pricing policy allocates it a significant royalty stream from operating entities. Because the entity's effective tax rate is 10%, below the 15% GloBE minimum, and after applying a modest substance-based carve-out reduces the top-up base only slightly, a top-up tax of roughly 5% (EUR 5m, subject to the carve-out calculation) becomes due, collected either locally via a domestic minimum top-up tax or by the parent jurisdiction's Income Inclusion Rule. The group's transfer pricing policy therefore no longer delivers the same net tax benefit it did before Pillar Two applied.
Common mistakes
- Treating Pillar Two and transfer pricing as entirely separate workstreams when GloBE calculations are directly downstream of transfer pricing outcomes.
- Assuming the substance-based carve-out (based on payroll and tangible assets) offsets more profit than it actually does for asset-light or IP-heavy entities.
- Underestimating the data burden: GloBE calculations typically require jurisdiction-by-jurisdiction financial data beyond what existing tax provision processes produce.
Audit red flags
- Legacy low-tax IP or financing structures with no Pillar Two impact assessment performed.
- No integration between the transfer pricing team and the team modelling GloBE effective tax rates.
- Jurisdictions with statutory rates near or below 15% not flagged for detailed GloBE modelling.
Documentation & data
Documents to hold
- GloBE information return and jurisdictional effective tax rate calculations.
- Reconciliation between transfer pricing policy outcomes and GloBE income by jurisdiction.
- Substance-based carve-out calculations (payroll and tangible asset data) by entity.
Data you need
- Jurisdictional financial accounting profit and covered tax data.
- Payroll and tangible asset data supporting the substance-based carve-out.
- Group consolidated revenue history to confirm the EUR 750m threshold test.
Who owns this internally: Group tax, typically with a dedicated Pillar Two workstream lead coordinating closely with transfer pricing and financial reporting.
Jurisdiction notes
- European Union
- Implemented via the Minimum Tax Directive (2022/2523), binding on all member states from fiscal years beginning in 2024.
- OECD/G20 Inclusive Framework broadly
- Over 55 jurisdictions had taken steps to implement Pillar Two as of the mid-2020s, though implementation timing and QDMTT adoption vary.
- United States
- Has not adopted the GloBE rules domestically as of the mid-2020s, creating ongoing interaction questions with its own GILTI regime.
Notes by role
CFOs & finance leaders
Pillar Two changes the ROI calculation on transfer pricing-driven tax planning — model any legacy low-tax structure's GloBE exposure before assuming its historical tax benefit still holds.
In-house tax teams
Build a joint transfer pricing/Pillar Two data model early — most of the data GloBE needs already exists in local files and financial statements, just not currently linked.
Frequently asked
- Does Pillar Two replace transfer pricing rules?
- No, it operates alongside transfer pricing rules; transfer pricing still determines where profit is booked, while Pillar Two ensures a 15% minimum effective rate applies wherever that profit lands.
- Which groups are in scope for Pillar Two?
- Multinational groups with consolidated revenue of at least EUR 750m in at least two of the preceding four fiscal years.
Sources & status
- Primary source
OECD Global Anti-Base Erosion Model Rules (Pillar Two)
OECD, 2021
- Primary source
EU Council Directive 2022/2523 (Minimum Tax Directive)
European Union, 2022
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
Pillar Two implementation is currently one of the fastest-growing adjacent specialisms for transfer pricing professionals, given the shared data and jurisdictional profit allocation foundations.
Careers in transfer pricing