Pillar Two Global Minimum Tax: Impact on India Operations & IIR/UTPR Rules

Why Pillar Two Matters for India Operations

The OECD/G20 Inclusive Framework's Pillar Two rules establish a 15% global minimum effective tax rate for multinational enterprises (MNEs) with consolidated revenues exceeding EUR 750 million (approximately INR 6,750 crore). As of early 2026, over 50 jurisdictions have enacted or are actively implementing Pillar Two legislation, fundamentally changing how MNEs plan their India operations.

India occupies a unique position in this landscape. The country's headline corporate tax rate of 25.17% under Section 115BAA (or 17.16% for new manufacturing under Section 115BAB) means India is generally above the 15% minimum. However, when tax incentives such as SEZ benefits, area-based deductions, and R&D super-deductions reduce the effective tax rate below 15%, Pillar Two's top-up tax mechanisms activate, potentially eroding the very incentives India uses to attract foreign direct investment.

India has not yet enacted domestic Pillar Two legislation as of March 2026, but it has been actively participating in the OECD Inclusive Framework negotiations and is expected to introduce a Qualified Domestic Minimum Top-Up Tax (QDMTT) framework. The Union Budget 2025-26 included preliminary provisions signalling India's intent to align with the global framework.

The Three Pillars of Pillar Two: IIR, UTPR, and QDMTT

Income Inclusion Rule (IIR)

The IIR operates as the primary rule under the GloBE framework. It requires the ultimate parent entity (UPE) of an MNE group to calculate a top-up tax on the income of any constituent entity (CE) that is subject to an effective tax rate below 15% in a given jurisdiction.

For India operations, this means:

• If a foreign parent company's Indian subsidiary has an effective tax rate below 15% (after GloBE adjustments), the parent's home jurisdiction applies the IIR to collect the top-up tax
• The top-up tax is calculated as the difference between 15% and the subsidiary's jurisdiction-level ETR, applied to the excess profit (GloBE income minus the substance-based income exclusion)
• The IIR follows the ownership chain from the UPE downward, meaning intermediate parent entities may also bear the IIR obligation if the UPE's jurisdiction has not implemented Pillar Two

Undertaxed Profits Rule (UTPR)

The UTPR serves as a backstop mechanism. If the IIR does not fully capture the top-up tax, for example because the UPE's jurisdiction has not enacted Pillar Two, the UTPR allocates the residual top-up tax to other jurisdictions where the MNE group has operations.

The UTPR allocation formula is based on two factors weighted equally:

• Number of employees in the jurisdiction
• Net book value of tangible assets in the jurisdiction

For MNEs with significant Indian operations but a UPE in a non-implementing jurisdiction (such as the United States, which has not enacted Pillar Two), the UTPR could result in other jurisdictions imposing a top-up tax that relates to the Indian subsidiary's low-taxed income. Conversely, if India implements a UTPR, Indian operations could be required to bear a share of top-up tax related to low-taxed entities elsewhere in the group.

Qualified Domestic Minimum Top-Up Tax (QDMTT)

The QDMTT allows a jurisdiction to collect the top-up tax domestically before the IIR or UTPR can apply. This is strategically significant for India because:

• Without a QDMTT, tax revenue from Indian operations with sub-15% ETRs would flow to the parent's home jurisdiction under the IIR
• A QDMTT ensures India retains the right to tax this income domestically
• The QDMTT must calculate the ETR and top-up tax using GloBE rules to qualify

India is expected to implement a QDMTT, potentially alongside a domestic IIR, to protect its tax base. Countries such as the UK, South Korea, Japan, and members of the EU have already implemented QDMTTs, and India's delay puts it at a temporary disadvantage.

Effective Tax Rate Calculation Under GloBE Rules

The GloBE ETR calculation differs significantly from India's domestic corporate tax computation. Understanding this difference is critical for MNEs assessing their India exposure.

Step 1: Determine GloBE Income

GloBE income starts with the financial accounting net income (or loss) of each constituent entity in a jurisdiction, adjusted for specific items including:

• Excluded dividends and equity gains/losses
• International shipping income
• Asymmetric foreign currency gains/losses
• Policy disallowed expenses (fines, bribes, penalties)
• Prior period errors and changes in accounting principles
• Accrued pension expenses vs. actual contributions

Step 2: Calculate Adjusted Covered Taxes

Covered taxes include current income tax expense plus deferred tax adjustments. Key India-specific considerations:

• MAT (Minimum Alternate Tax) credit utilisation must be carefully tracked, as it affects the timing of when taxes are counted
• Withholding taxes borne by the entity are included as covered taxes
• Deferred tax liabilities must be tracked for a five-year recapture period
• Taxes paid under transfer pricing adjustments count as covered taxes once actually paid

Step 3: Compute the Jurisdictional ETR

The formula is straightforward:

Jurisdictional ETR = Adjusted Covered Taxes / Net GloBE Income

If the result is below 15%, a top-up tax percentage applies:

Top-Up Tax Percentage = 15% - Jurisdictional ETR

Step 4: Apply the Substance-Based Income Exclusion (SBIE)

The SBIE carves out income attributable to real economic substance, reducing the base on which top-up tax is charged. The exclusion is calculated as:

• Payroll carve-out: A percentage of eligible payroll costs for employees in the jurisdiction. This starts at 10% in 2024, declining by 0.2% annually to 5% by 2033
• Tangible asset carve-out: A percentage of the net book value of eligible tangible assets. This starts at 8% in 2024, declining by 0.2% annually to 5% by 2033

For MNEs with large Indian manufacturing operations employing thousands of workers with significant fixed assets, the SBIE can substantially reduce or even eliminate the top-up tax exposure.

Impact on India's Tax Incentive Regime

Pillar Two's most consequential effect on India is its potential to neutralise long-standing tax incentives. Consider the following scenarios:

Section 115BAB Manufacturing Incentive

New manufacturing companies incorporated after 1 October 2019 that commenced production by 31 March 2024 can opt for a 15% base rate (17.16% effective with surcharge and cess). After GloBE adjustments, some of these entities could have an ETR at or near 15%, meaning minimal or no top-up tax applies. However, if additional incentives such as accelerated depreciation push the ETR below 15%, top-up tax exposure arises.

SEZ Units

SEZ units historically enjoyed 100% tax exemption on export profits for the first five years, 50% for the next five years, and 50% of ploughed-back profits for another five years under Section 10AA. While many of these benefits have been grandfathered, entities still benefiting from them could face effective rates well below 15%.

Under Pillar Two, the tax savings from SEZ benefits become illusory for in-scope MNEs. If India does not implement a QDMTT, the parent's home jurisdiction collects the top-up tax, meaning the foreign treasury benefits rather than the Indian subsidiary.

Area-Based Incentives and R&D Deductions

Deductions under Sections 80-IC, 80-IE (for businesses in specified states like Uttarakhand, Himachal Pradesh, and the North-Eastern states) and the erstwhile weighted R&D deduction under Section 35(2AB) could also reduce ETRs below 15% for some MNE subsidiaries.

Safe Harbour and Transitional Rules

The OECD has introduced several safe harbour mechanisms to ease the compliance burden during the initial implementation period.

Transitional CbCR Safe Harbour

For fiscal years beginning on or before 31 December 2026 (extended by one year under the December 2025 Side-by-Side Package), MNEs can use their Country-by-Country Reporting (CbCR) data instead of full GloBE calculations. The safe harbour applies if any of three tests are met in a jurisdiction:

1. De minimis test: Total revenue below EUR 10 million and profit before tax below EUR 1 million
2. Simplified ETR test: Simplified ETR at or above the transition rate (15% for FY starting in 2024 and later)
3. Routine profits test: Profit before tax does not exceed the SBIE amount

For Indian-headquartered MNEs, this extends the transitional CbCR safe harbour through FY28, providing additional compliance relief.

Side-by-Side (SbS) Safe Harbour

The SbS Safe Harbour, available for fiscal years beginning on or after 1 January 2026, is designed mainly for jurisdictions that operate qualified domestic minimum taxes. Since India has not yet enacted a QDMTT, this safe harbour currently has limited applicability for Indian operations.

Substance-Based Tax Incentive (QTI) Safe Harbour

MNEs can continue benefiting from qualified tax incentives based on real economic substance. The QTI allowance is added to covered taxes, effectively eliminating the top-up tax attributable to qualifying incentives. However, a substance cap limits the allowance based on payroll costs or depreciation of tangible assets.

Practical Steps for MNEs with Indian Operations

Given the evolving nature of India's response to Pillar Two, MNEs should take several proactive steps:

Step 1: Run a GloBE ETR Diagnostic

Calculate your Indian subsidiary's estimated GloBE ETR using financial accounting data. This requires mapping Indian GAAP or Ind AS financials to GloBE income adjustments and identifying all covered taxes.

Step 2: Assess SBIE Impact

Quantify the substance-based income exclusion by computing the payroll and tangible asset carve-outs. For manufacturing-heavy Indian operations with large workforces, the SBIE can often eliminate the top-up tax entirely.

Step 3: Model the QDMTT Scenario

Assume India will implement a QDMTT within 12-18 months. Model the financial impact under both scenarios (with and without QDMTT) to understand the cash tax impact.

Step 4: Review Tax Incentive Utilisation

Evaluate whether current tax incentives (SEZ, Section 115BAB, area-based deductions) deliver genuine after-tax savings after accounting for Pillar Two top-up tax. Some incentives may need to be restructured or abandoned.

Step 5: Upgrade Transfer Pricing Documentation

GloBE calculations rely on entity-level financial data. Ensure transfer pricing policies produce arm's-length results that withstand both Indian and GloBE scrutiny. The interaction between transfer pricing adjustments and GloBE ETR calculations creates additional complexity.

Step 6: Prepare GIR Filing Infrastructure

The GloBE Information Return (GIR) requires detailed jurisdiction-level data. Indian subsidiaries should begin collecting and formatting the required data fields, even before India formally mandates filing.

India's Strategic Response: What to Expect

India faces a strategic imperative in responding to Pillar Two. Key expected developments include:

• QDMTT enactment: India is widely expected to introduce a QDMTT, likely modelled on the OECD's Administrative Guidance, to retain the right to tax low-taxed income domestically
• Redesigned incentives: Tax incentives may shift from income-based exemptions (which reduce ETR below 15%) to expenditure-based credits (which may qualify as QTIs under the substance-based carve-out)
• IIR adoption: India may adopt a domestic IIR to tax the low-taxed foreign income of Indian-headquartered MNEs (groups like Tata, Reliance, Infosys with overseas subsidiaries)
• UTPR consideration: A UTPR could allow India to collect top-up tax attributable to low-taxed entities in other jurisdictions, though this is politically sensitive

For foreign companies with Indian operations, the critical action is to engage with professional advisors who understand both Indian tax law and GloBE rules. Tax advisory services that bridge this gap are essential for accurate modelling and compliance planning.

Cross-Border Structuring Implications

Pillar Two affects several common cross-border structures involving India. Foreign companies evaluating FDI structures must now factor GloBE implications into every structuring decision.

Holding Company Structures

MNEs that route investments into India through intermediate holding companies in jurisdictions like Singapore, Mauritius, or the Netherlands should reassess the ETR at each level. If a holding company has minimal substance and low tax, the IIR or UTPR could impose a top-up tax even if India itself is above 15%. The DTAA benefits that made these structures attractive do not directly reduce Pillar Two exposure. Companies using the automatic route for FDI should model the combined impact of treaty benefits and Pillar Two obligations before finalising structures.

Commissionaire and Limited-Risk Distributor Arrangements

Where MNEs structure Indian operations as limited-risk entities to minimise permanent establishment exposure, the GloBE ETR calculation must be done at the jurisdiction level. If the low-risk entity has minimal taxes but the SBIE also applies, the net impact requires careful modelling. The transfer pricing risks associated with these structures are compounded under Pillar Two, as adjustments affect both the Indian ETR and the counterpart jurisdiction's ETR.

IP Licensing and Royalty Structures

Royalty payments from Indian subsidiaries to foreign group entities affect the GloBE income of both the payer (India) and the recipient jurisdiction. Withholding tax on royalties (typically 10% under most DTAAs, or 20% without a treaty) counts as a covered tax for the Indian entity. If royalty deductions push the Indian entity's ETR below 15%, and the recipient jurisdiction is also low-taxed, top-up tax may apply in both jurisdictions. Filing obligations under Form 15CA-15CB for outbound remittances add another layer of compliance complexity.

Indian-Headquartered MNEs with Foreign Subsidiaries

Pillar Two is not only relevant for foreign companies investing in India. Indian MNEs with overseas subsidiaries in low-tax jurisdictions (such as the UAE, Ireland, or Singapore) will face IIR obligations if India enacts the rule. The FLA return filing for outbound investments and Pillar Two reporting will need to be coordinated. Groups such as Tata, Reliance, Wipro, and Infosys with substantial overseas operations should begin preparing GloBE-compliant data collection systems now.

Interaction with India's GAAR Provisions

India's General Anti-Avoidance Rules (GAAR), effective since April 2017, already target arrangements whose principal purpose is obtaining a tax benefit. Pillar Two creates an additional layer of anti-avoidance that operates independently of GAAR. Key differences:

• GAAR applies to arrangements lacking commercial substance and is triggered by the Indian tax authority on assessment. Pillar Two operates automatically based on the jurisdictional ETR calculation
• GAAR can deny treaty benefits. Pillar Two does not deny treaty benefits but effectively neutralises the tax savings by imposing a top-up tax elsewhere
• Structures that survive GAAR scrutiny may still face Pillar Two top-up tax if the resulting ETR is below 15%

For MNEs, this means compliance programmes must address both GAAR risk and Pillar Two exposure. Professional tax advisory that covers both domestic anti-avoidance and international GloBE compliance is essential.

Key Takeaways

• MNEs with consolidated revenues above EUR 750 million must assess their Indian subsidiary's GloBE ETR. India's standard 25.17% rate is above the 15% threshold, but tax incentives (SEZ, Section 115BAB, area-based deductions) can push the ETR below 15%, triggering top-up tax
• India is expected to implement a QDMTT to retain domestic taxing rights. Without it, top-up tax revenue on Indian operations flows to the parent's home jurisdiction under the IIR
• The substance-based income exclusion (payroll and tangible assets) can significantly reduce or eliminate top-up tax for manufacturing-heavy Indian operations with large workforces
• Tax incentive planning must now factor in Pillar Two. Income-based exemptions may lose their value for in-scope MNEs, while expenditure-based credits aligned with economic substance may retain efficacy
• MNEs should begin collecting GloBE-compliant data, modelling ETR scenarios, and engaging with advisors who understand the interaction between Indian tax law and the GloBE framework