1.⁠ ⁠Introduction

In June 2025, the finance ministers of the G7 countries issued a joint communiqué announcing a new political “agreement” on international taxation, with a specific focus on the treatment to be granted to multinational groups headquartered in the United States under the OECD’s Pillar 2 framework.

The “agreement” would broadly consist of the U.S. government’s withdrawal of its proposal to introduce Section 899 — which would have established unilateral tax sanctions against countries adopting the Under-Taxed Profits Rule (UTPR) or maintaining Digital Services Taxes (DSTs) — in exchange for a commitment by the other G7 members to seek mechanisms for excluding U.S. companies from the full application of Pillar 2 rules, especially the UTPR and the Income Inclusion Rule (IIR), as well as granting more favorable treatment to tax credits under the U.S. domestic system.

The G7 communiqué explicitly acknowledges the intention to construct an alternative solution, referred to as “side-by-side,” which would, under certain conditions, allow the exclusion of U.S. corporate profits — both domestic and foreign — from the application of Pillar 2.

To understand the scope of this proposal, it is important to recall that the UTPR is one of the core provisions of Pillar 2, conceived as a secondary mechanism for income imputation in cases where the jurisdiction of a multinational group’s parent or intermediate holding company does not apply an effective tax rate of at least 15% on global profits. In such situations, jurisdictions where the group has subsidiaries may deny deductions or impose additional allocations of taxable income in order to rebalance the group’s consolidated tax burden.

Although the G7 plays a relevant role as a political coordinator, its deliberations are not legally binding on the OECD/G20 Inclusive Framework (IF), the collegial body composed of 147 jurisdictions. On this point, Manal Corwin, Director of the OECD Centre for Tax Policy and Administration, stated unequivocally that “any proposal would need to be approved by the Inclusive Framework’s 147 members.”(1)

2.⁠ ⁠The substantive content of the “agreement”: bilateral concessions and asymmetric accommodations

At the heart of the understanding reached by the G7 lies a political exchange: the United States commits to abandoning its Section 899 proposal — which would have established automatic fiscal retaliation against countries with DSTs or UTPR regimes — in return for the other G7 members’ efforts to build a regime that exempts U.S. groups from the obligations arising from Pillar 2, particularly with regard to the application of the UTPR and the IIR.

This reveals a structural asymmetry: while the U.S. commitment is immediate and falls within its domestic legislative competence, the “commitment” of the other countries depends on discussion and approval in a multilateral forum.

Part of the commitments already assumed was underway at the OECD, albeit in a non-binding form: studies had been conducted on the possibility of recognizing GILTI (Global Intangible Low-Taxed Income) as a qualified IIR, as well as on the creation of safe harbours for countries adopting regimes close to the global minimum tax.

3.⁠ ⁠The “side-by-side” solution

The term “side-by-side” refers to a regulatory architecture in which U.S. rules (GILTI) and multilateral rules (Pillar 2) would coexist, being mutually recognized as functionally equivalent.
However, two interpretations arise regarding the meaning of this solution:

The first admits the recognition of GILTI as a qualified IIR, provided that certain jurisdictional standards for profit allocation and effective tax rate (ETR) calculation — as required by Pillar 2 — are respected.
The second, supported by segments of the U.S. Treasury, consists of the creation of a full and permanent exception for U.S. groups, to be established through an interpretive note or a non-application clause, similar to what occurred with FATCA under the CRS framework. This proposal would undermine the objective of regulatory harmonization and jeopardize the integrity of Pillar 2.

4.⁠ ⁠Consequences

The systemic impact of the “agreement” will depend on the model adopted. If the technical equivalence path prevails, with GILTI adjusted to the standards of Pillar 2, it could be argued that the normative integrity of the global regime has been preserved. If, on the other hand, full exemption is adopted, an institutional precedent for disharmony will be set, posing risks to Pillar 2.

Moreover, granting favorable treatment to the U.S. is likely to intensify discontent among Global South countries, many of which have already expressed support for the United Nations Tax Convention as an alternative to the OECD regime.

The G7 agreement represents a political arrangement, whose effective implementation requires multilateral legitimation.

It remains to be seen whether the Inclusive Framework will be willing to legitimize the “agreement” — in any of its potential modalities.

What is at stake is the very future of Pillar 2.

Paulo Honório de Castro Júnior
Partner

^[1] FINANCIAL TIMES. US Treasury asks Congress to scrap foreign revenge tax in Trump bill. 14 jun. 2025. Available at:: https://www.ft.com/content/5d99c735-97e4-4574-be16-81da32ac48eb. Accessed on: June 29, 2025.

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