How reforms to global minimum tax standards could impact dealmaking

Earlier this year the OECD/G20 Inclusive Framework published its side-by-side (SbS) package on Pillar Two after months of negotiations. The package was a response to concerns raised by the U.S. government regarding Pillar Two’s undertaxed profits rule (UTPR) and the treatment of existing U.S. credits, including in relation to R&D.

Faced with the threat of retaliatory U.S. tariffs or taxes, the OECD/G20 Inclusive Framework negotiated a compromise intended to address these concerns as well as frustrations in other jurisdictions around the complexity of the existing regime.  

Among other things, the new framework introduces new safe harbors for multinational groups in jurisdictions with eligible tax systems that subject profits to minimum levels of tax: the SbS Safe Harbor and Ultimate Parent Entity (UPE) Safe Harbor (which allow multinational enterprises to deem their top-up tax under the UTPR to be zero).  

The SbS Safe Harbor, currently available only to multinational groups with a U.S. parent, exempts qualifying businesses from two core aspects of the global minimum tax (the UTPR and the income inclusion rule, or IIR) and for transactions involving U.S. acquirers it should therefore bring greater certainty in target pricing.

However, domestic minimum top-up taxes remain in play regardless of the exemption, meaning existing M&A considerations around indemnities and accruals for pre-acquisition taxes, tax elections, information rights and joint and several liability are still live issues. Pillar Two tax due diligence and contractual protections remain essential.

One immediate practical consequence is that vendor and buy-side due diligence and modelling should now take account of the SbS Safe Harbor where relevant. Joint venture structures involving both U.S. and non-U.S. investors raise particular complexities, in part because the applicable rules depend on how the JV is classified for the purposes of the Pillar Two rules. In response, deal teams need to build optionality into their tax analysis from the outset rather than assuming a single Pillar Two compliance framework applies across all counterparties.

The extension of the Transitional CbCR Safe Harbor (the Pillar Two mechanism that temporarily exempts MNEs from full global minimum tax calculations based on data from Country by Country Reports (CbCRs)) to fiscal years beginning on or before December 31, 2027 has been welcomed by dealmakers. However the “once out, always out” rule still applies, and acquisitions or disposals can themselves trigger failure of the safe harbor in a jurisdiction.

Critically, the 2029 stocktake of how the new Pillar Two SbS package is working introduces a degree of uncertainty. Parties should not assume that the exemption for U.S.-headed groups will remain in its present form indefinitely, and those entering longer-term arrangements such as joint ventures may wish to include provisions allowing renegotiation in the event of a material change. In response, deal teams should build flexibility into contractual arrangements now and plan for the possibility that the exemption may be taken away, rather than treating the current framework as settled. 

For more insights on the changes introduced by the SbS package, read our briefing.