OECD Pillar One & Pillar Two (Global Minimum Tax)

By Dev Rao | Updated March 2026

What Is the OECD Two-Pillar Solution?

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) developed a two-pillar solution to address the tax challenges arising from the digitalization of the economy. Agreed by 147 member jurisdictions, this framework represents the most significant reform to international corporate taxation in a century. Pillar One reallocates a portion of multinational enterprise (MNE) profits to market jurisdictions — the countries where customers and users are located — regardless of physical presence. Pillar Two establishes a 15% global minimum effective tax rate on MNE groups with consolidated annual revenue exceeding EUR 750 million (approximately INR 6,800 crore), through the Global Anti-Base Erosion (GloBE) Rules.

For foreign companies operating in India and Indian MNEs with overseas operations, both pillars carry profound implications. India is an active participant in the Inclusive Framework, has already withdrawn its Equalization Levy in alignment with Pillar One commitments, and is expected to implement Pillar Two domestic legislation. As of March 2026, India has amended accounting standards (AS-22) in anticipation of GloBE compliance but has not yet enacted specific Pillar Two legislation.

Legal Basis

• OECD/G20 Inclusive Framework Statement (October 2021) — The foundational political agreement on the two-pillar solution, endorsed by 136 jurisdictions initially and now 147 members.
• Pillar Two GloBE Model Rules (December 2021) — Published by the OECD, these provide the template for domestic legislation implementing the 15% minimum tax, including the Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR), and Qualified Domestic Minimum Top-up Tax (QDMTT).
• Pillar One Amount A Multilateral Convention (October 2023) — Draft text for the multilateral convention to implement Amount A, still awaiting sufficient signatories. Signing deadline extended multiple times.
• Pillar One Amount B Report (February 2024) — OECD guidance on simplified transfer pricing for baseline marketing and distribution activities.
• Side-by-Side Package (January 2026) — Agreed by 147 jurisdictions, providing safe harbours and simplified compliance for MNEs in qualifying jurisdictions.
• India: Finance Act, 2024 — Repealed the 2% Equalization Levy (effective August 1, 2024). Finance Act, 2025 repealed the 6% Equalization Levy on digital advertising (effective April 1, 2025) — both in alignment with Pillar One commitments.
• India: Companies (Accounting Standards) Amendment Rules, 2026 — Effective March 12, 2026, the Ministry of Corporate Affairs (MCA) amended AS-22 to align with OECD Pillar Two GloBE rules, specifically addressing QDMTT-related accounting treatment.

Pillar One: Reallocating Taxing Rights

Amount A — Profit Reallocation to Market Jurisdictions

Amount A applies to the largest and most profitable MNEs globally:

• Revenue threshold: Consolidated global revenue exceeding EUR 20 billion (approximately INR 1.8 lakh crore)
• Profitability threshold: Pre-tax profit margin exceeding 10% of revenue
• Excluded sectors: Extractive industries (mining, oil and gas) and regulated financial services (banking, insurance)

The mechanism takes 25% of the Adjusted Profit Before Tax in excess of the 10% profitability threshold and reallocates it to market jurisdictions in proportion to revenue derived from each jurisdiction. For a qualifying MNE with a 20% profit margin, the "excess" is 10% (above the 10% routine profit threshold), and 25% of that excess — i.e., 2.5% of revenue — is reallocated to market countries.

Amount A is expected to affect approximately 100 MNE groups globally — primarily large technology, consumer-facing, and digital services companies. The Multilateral Convention to implement Amount A remains under negotiation, with the signing deadline extended multiple times. As of March 2026, the convention has not yet been opened for signature.

Amount B — Simplified Transfer Pricing

Amount B provides a simplified and streamlined approach to the arm's length principle for in-country baseline marketing and distribution activities — specifically, buy-sell distribution and sales agency arrangements involving tangible goods. Unlike Amount A, there is no revenue threshold for Amount B.

The pricing methodology uses the Transactional Net Margin Method (TNMM) with Return on Sales (ROS) as the net profit indicator. A pricing matrix produces a benchmark range with a tolerance of +/- 0.5%. This is particularly relevant for MNEs with Indian distribution subsidiaries, as it provides greater certainty for transfer pricing of routine distribution functions.

Pillar Two: The 15% Global Minimum Tax (GloBE Rules)

Pillar Two is the more advanced of the two pillars, with over 40 jurisdictions already enacting domestic legislation. It ensures that MNEs with consolidated revenue of at least EUR 750 million (approximately INR 6,800 crore) pay a minimum effective tax rate (ETR) of 15% on income arising in each jurisdiction where they operate.

How the GloBE Rules Work

The system operates through three interlocking mechanisms, applied in a specific order of priority:

Calculating the Effective Tax Rate (ETR)

The ETR is calculated per jurisdiction, not per entity. The formula is:

ETR = Adjusted Covered Taxes / GloBE Income

GloBE Income starts with the financial accounting net income or loss of each constituent entity, adjusted for specific GloBE adjustments (e.g., excluding dividends and capital gains covered by participation exemptions, stock-based compensation adjustments, prior period errors). Covered Taxes include current tax expense, deferred tax adjustments, and qualified refundable tax credits.

If the jurisdictional ETR falls below 15%, the top-up tax is calculated as:

Top-Up Tax = (15% - ETR) x Excess Profit

Where Excess Profit = GloBE Income minus the Substance-Based Income Exclusion (SBIE).

Substance-Based Income Exclusion (SBIE)

The SBIE provides a carve-out for real economic activity. It excludes from the top-up tax calculation an amount equal to:

• 5% of the carrying value of eligible tangible assets, plus
• 5% of eligible payroll costs

These percentages are being phased in — initially set at 8% (tangible assets) and 10% (payroll) in 2024, reducing to 5% each by 2033. This exclusion is critical for India, where MNEs often have significant manufacturing assets and large workforces.

India's Implementation Status and Position

Why India May Not Urgently Need a QDMTT

India's standard corporate tax rate is 22% under Section 115BAA (effective rate approximately 25.17% with surcharge and cess), and the concessional rate for new manufacturing companies under Section 115BAB is 15% (effective rate approximately 17.16%). Since both rates exceed the 15% GloBE minimum, most MNE operations in India already clear the Pillar Two threshold. However, two scenarios create potential exposure:

• SEZ units: Companies in SEZs that claim profit-linked deductions under Section 10AA can have effective tax rates below 15% in certain years. A QDMTT would capture this shortfall.
• GIFT City IFSC units: IFSC units enjoy a 10-year tax holiday (0% tax) and concessional rates thereafter. Without a QDMTT, this top-up tax revenue would flow to the parent jurisdiction via IIR.

Implementing a QDMTT would allow India to retain the right to tax any shortfall domestically, rather than ceding it to the UPE's jurisdiction via the IIR. This is a strategic consideration — approximately 200 Indian-headquartered MNEs are estimated to be in scope of the GloBE rules, and the number of foreign MNEs with Indian operations in scope is substantially larger.

Impact on MNCs with India Operations

Interaction with India's Existing Tax Incentives

Pillar Two creates a tension with India's investment incentive regime:

• Section 115BAB (15% for new manufacturing): The effective rate of approximately 17.16% (with surcharge and cess) is above the 15% GloBE minimum, so this incentive is likely safe. However, if additional deductions (depreciation, investment allowances) push the ETR below 15% in a given year, top-up tax applies.
• Section 10AA (SEZ profits): The 100% deduction for the first 5 years and 50% for the next 5 years can reduce the ETR well below 15%. Under GloBE, the parent jurisdiction can impose a top-up tax via IIR, effectively clawing back the incentive benefit. A QDMTT would keep this revenue in India.
• PLI scheme subsidies: Qualified refundable tax credits (which PLI incentives may qualify as) are treated differently under GloBE — they are included in GloBE Income rather than as a reduction of covered taxes, potentially preserving their benefit.

Equalization Levy Withdrawal

India's withdrawal of its Equalization Levy — the 6% levy on digital advertising services (repealed April 1, 2025) and the 2% levy on e-commerce operators (repealed August 1, 2024) — was a commitment under the Pillar One framework. Countries agreed to withdraw unilateral digital services taxes in exchange for the coordinated profit reallocation under Amount A. The Equalization Levy had generated approximately INR 5,700 crore (USD 795 million) in revenue over two years. India's withdrawal ahead of Amount A implementation signals good-faith compliance but creates a revenue gap until Amount A enters into force.

How This Affects Foreign Investors in India

For foreign companies with Indian subsidiaries or considering FDI in India:

• Tax incentive analysis must now include GloBE impact: Before committing to an SEZ or GIFT City investment, MNEs must model whether the incentive benefit will be clawed back via IIR or UTPR in the parent jurisdiction
• Transfer pricing certainty improves: Amount B provides a clearer benchmark for routine distribution margins, reducing APA negotiation complexity
• Compliance burden increases: In-scope MNEs must file a GloBE Information Return (GIR) — the first filings for calendar-year taxpayers were due by June 30, 2026
• Holding structure review needed: Entities in low-tax jurisdictions (e.g., holding companies in 0% tax jurisdictions) will face top-up tax. MNEs should review whether existing structures create GloBE exposure

Common Mistakes

• Assuming Pillar Two only affects companies headquartered in implementing jurisdictions. Even if India has not enacted IIR legislation, a foreign parent in a country that has (e.g., the EU, UK, Japan, South Korea) will apply the GloBE rules to its Indian operations. The Indian subsidiary's ETR will be tested regardless of India's domestic implementation status.
• Ignoring the substance-based income exclusion. MNEs with significant payroll and tangible assets in India — common for manufacturing and IT services — benefit from the SBIE, which reduces the excess profit subject to top-up tax. Failing to compute the SBIE properly can overstate GloBE exposure.
• Confusing statutory tax rate with effective tax rate. India's statutory rate (22-25%) exceeds 15%, but the ETR for GloBE purposes is computed from financial accounting income, not taxable income. Accelerated depreciation, brought-forward losses, and timing differences can push the jurisdictional ETR below 15% in specific years.
• Treating PLI incentives and tax holidays identically. Under GloBE, qualified refundable tax credits (like PLI subsidies) are treated as income, preserving their benefit. Tax holidays and profit-linked deductions (like Section 10AA) reduce covered taxes, potentially triggering top-up tax. The distinction matters enormously for investment planning.
• Not modeling the QDMTT scenario. If India implements a QDMTT, the top-up tax will be collected in India rather than by the parent jurisdiction. MNEs should model both scenarios — with and without an Indian QDMTT — to understand cash flow implications.

Practical Example

Meridian Technologies AG, a German MNE group with consolidated revenue of EUR 3 billion and operations in 15 countries, has an Indian subsidiary — Meridian India Pvt Ltd — operating in a Special Economic Zone in Bengaluru. In FY 2025-26:

• Meridian India earns GloBE Income of INR 200 crore
• Meridian India claims a Section 10AA deduction of INR 100 crore (100% profit-linked deduction in year 3 of SEZ operations)
• Covered taxes paid: INR 11 crore (on the non-exempt portion of profits)
• Jurisdictional ETR in India: INR 11 crore / INR 200 crore = 5.5%
• Substance-Based Income Exclusion: 5% of INR 50 crore tangible assets + 5% of INR 80 crore payroll = INR 2.5 crore + INR 4 crore = INR 6.5 crore
• Excess Profit: INR 200 crore - INR 6.5 crore = INR 193.5 crore
• Top-Up Tax Rate: 15% - 5.5% = 9.5%
• Top-Up Tax: 9.5% x INR 193.5 crore = INR 18.38 crore

Without an Indian QDMTT: Germany collects the INR 18.38 crore top-up tax via the IIR. The SEZ benefit is effectively neutralized — the tax that India waived is collected by Germany instead.

With an Indian QDMTT: India collects the INR 18.38 crore top-up tax itself. Germany's IIR liability is reduced to zero (QDMTT takes priority). India retains the revenue, though the MNE's total tax cost remains the same.

For Meridian Technologies, the critical insight is that the SEZ tax holiday no longer delivers a net tax saving for the group — it merely shifts which government collects the tax. This fundamentally changes the calculus for SEZ-based incentive planning.

Key Takeaways

• Pillar One Amount A reallocates profits of the largest MNEs (revenue above EUR 20 billion, profitability above 10%) to market jurisdictions — implementation is delayed pending the multilateral convention
• Pillar Two imposes a 15% global minimum tax on MNEs with revenue above EUR 750 million through three interlocking rules: QDMTT, IIR, and UTPR
• India has not yet enacted Pillar Two legislation but has amended AS-22 accounting standards in preparation and is actively considering QDMTT implementation
• India withdrew its Equalization Levy (both 2% and 6%) in alignment with Pillar One commitments, creating a revenue gap of approximately INR 5,700 crore
• Tax incentives like SEZ deductions and GIFT City holidays may be effectively neutralized by Pillar Two — the parent jurisdiction collects what India waives, unless India implements a QDMTT
• Approximately 200 Indian-headquartered MNEs and a larger number of foreign MNEs with India operations are in scope of the GloBE rules

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