Pillar Two and the Global Minimum Tax in the Accounts

Introduction

A global minimum tax is a promise that a large multinational will pay at least 15% on its profits in every country where it operates, and that if one country taxes it less, another will collect the difference. More than 140 countries have signed up to the framework designed by the Organisation for Economic Co-operation and Development (OECD), known as Pillar Two, and since 2024 its rules have been turning that promise into tax bills. On 5 January 2026, the OECD changed how the rules apply to companies with a US parent, the largest national group among the world's biggest companies: they will no longer be taxed under the parts of the system that reach beyond the country where a profit is earned.

For financial statements, the effect so far is measured in hundreds of millions of dollars rather than billions, but it is growing. Shell reported $298 million of Pillar Two income tax in 2025, about 1% of its income before taxation, up from $251 million in 2024, the first year the rules applied, as its 2025 annual report shows. How those amounts are recorded, and what the 2026 change means for US companies, matters for every forecast of a multinational's tax rate.

The rules apply to groups with consolidated revenue of at least €750 million in two of the four preceding years. For each country where such a group operates, it calculates an effective tax rate under a common set of rules, using its financial accounting profit with defined adjustments rather than the local taxable income compared with book profit in book vs tax accounting. If that rate is below 15%, the group owes a top-up tax to bring it up to the minimum, after excluding a return on local payroll and tangible assets, the substance-based income exclusion, which leaves routine profit from real operations outside the charge.

Top-up tax

The additional tax a multinational owes under Pillar Two when its effective tax rate in a country, calculated under the OECD's common rules, falls below 15%. It equals the shortfall below 15% multiplied by the country's profit after the substance-based exclusion for payroll and tangible assets.

Three rules decide which country collects the top-up tax, in a fixed order of priority:

The domestic tax comes first, which is why many lower-tax countries, including Ireland and Switzerland, introduced one: they would rather collect a top-up tax on local profits themselves than leave it to the parent's country. The income inclusion rule comes next, and the undertaxed profits rule catches anything left over.

The United States never adopted Pillar Two. It has its own minimum tax on the foreign income of US groups' controlled foreign corporations (CFCs), renamed net CFC tested income by the 2025 tax law and taxed at an effective rate of about 12.6% before foreign tax credits from 2026, alongside the 15% corporate alternative minimum tax on book income described in bonus depreciation and R&D expensing. After the Group of Seven agreed in June 2025 that US-parented groups should be excluded from the income inclusion and undertaxed profits rules, the OECD published the side-by-side package in January 2026 to implement that agreement.

Under the package, a group whose ultimate parent is in a jurisdiction with a qualified side-by-side regime, so far only the United States, can elect to treat its top-up tax under both rules as zero for fiscal years beginning on or after 1 January 2026, covering its domestic and foreign operations. The package also introduced a separate safe harbour for ultimate parent jurisdictions and extended a transitional safe harbour by a year, as summarized in Baker McKenzie's note on the side-by-side package. For 2024 and 2025, US groups relied on transitional safe harbours to limit their exposure to the backstop rule.

What Still Applies

The exemption does not reach domestic minimum taxes. A US group's subsidiary in Ireland or Switzerland that is taxed below 15% still owes the local top-up tax. Alphabet's 2025 annual report notes that the new safe harbour does not exempt foreign subsidiaries from local minimum taxes, and that as more countries enact the rules, its effective tax rate and cash tax payments could increase. Meta gave the same warning, while reporting no material impact in 2025. For groups with a non-US parent, such as Shell, the full system still applies.

Pillar Two taxes are income taxes, but both frameworks keep them out of deferred tax accounting, so they behave differently from ordinary income tax in the accounts.

Under US GAAP

The Financial Accounting Standards Board staff concluded in 2023 that the global minimum tax is an alternative minimum tax under Accounting Standards Codification (ASC) 740. Its incremental effects are a period cost, recorded in current tax expense in the year the tax arises, and deferred tax assets and liabilities are neither recognized nor remeasured for its expected future effects; they continue to be measured at regular statutory rates, as Deloitte's Pillar Two FAQ explains. Expected top-up taxes on ordinary income are included in the estimated annual effective tax rate used for quarterly reporting. Companies choose a policy for valuation allowances: they may assess whether deferred tax assets will be realized under the regular tax system alone, or take expected top-up taxes into account, the judgment described in deferred tax assets and valuation allowances.

Under IFRS

The International Accounting Standards Board amended International Accounting Standard (IAS) 12 in May 2023 to introduce a mandatory temporary exception: companies may not recognize, or disclose information about, deferred taxes related to Pillar Two income taxes. They must state that they have applied the exception and disclose separately their current tax expense related to Pillar Two. Domestic minimum taxes that implement the rules are covered by the same exception.

Shell's tax note shows how small and how visible the charge is under IFRS. Its 2025 taxation charge of $11.6 billion splits into $11.3 billion of income tax excluding Pillar Two and $298 million related to Pillar Two, with no amount in 2023, before the rules took effect, and a statement that it has applied the IAS 12 exception. US GAAP requires no equivalent line, so US companies describe the rules in their tax notes and management's discussion, where Securities and Exchange Commission rules require disclosure of known trends and uncertainties reasonably likely to be material. The wider disclosure framework is covered in tax law changes in the financial statements.

The new US income tax disclosure standard, Accounting Standards Update (ASU) 2023-09, adds detail from 2025 annual reports: a rate reconciliation with standard categories and income taxes paid split by jurisdiction above a threshold. Together they make it easier to see where low-taxed profits sit, even before any Pillar Two amount is disclosed separately.

The minimum tax changes how analysts forecast tax rates for multinationals. A company that relied on tax holidays, incentives or low-rate jurisdictions to keep its rate in the low teens will see it move toward 15% as domestic minimum taxes spread, a structural rise rather than a one-off charge. The forecast rate builds from the jurisdictional mix and the drivers explained in effective, statutory and cash tax rates, and because both frameworks keep top-up taxes out of deferred tax balances, each year's book expense tracks the cash owed, though payment follows the year's returns.

In acquisitions, due diligence now includes the target's effective rate in each country under the Pillar Two rules, not only under local law. A target's low rate may depend on incentives that a domestic minimum tax will neutralize, and a buyer that crosses the €750 million revenue threshold through the deal can bring a target into scope for the first time. In a share deal, the calculation ignores the purchase accounting step-ups and keeps the target's historical carrying values.

For most companies, Pillar Two is now a modest line in the tax note, and for US groups the 2026 package has removed much of the uncertainty about rules beyond their borders. Its lasting effect is a floor under the tax rates of large multinationals, so forecasts that assume low rates will last need to justify that assumption country by country.