US pillar two stance: tax competitiveness challenges for Portugal and the EU

The OECD’s pillar two initiative represents a landmark effort to establish a global minimum corporate tax rate of 15%. This framework aims to curb BEPS by multinational enterprises (MNEs).

However, an executive order issued by US President Donald Trump on January 20 2025, stating that the US will not implement pillar two rules, has raised significant concerns about the initiative’s global effectiveness and its implications for countries such as Portugal, which are committed to applying these rules.

As an EU member state, Portugal is bound to implement the pillar two rules from January 1 2024. However, the absence of US participation creates a fragmented global tax landscape, undermining the uniformity that pillar two seeks to achieve.

For Portugal, this divergence could lead to challenges in enforcing the rules effectively, particularly in cases involving US-headquartered MNEs.

The primary concern lies in the potential for tax mismatches:

• On the one hand, US-headquartered MNEs with subsidiaries in Portugal will face a dual tax environment. While the US may not impose a global minimum tax, Portugal will apply the pillar two rules to ensure that the effective tax rate on profits generated within its jurisdiction meets the 15% threshold. If a US parent company does not face a top-up tax in its home jurisdiction, Portugal may need to apply the income inclusion rule (IIR) or the undertaxed profits rule (UTPR) to ensure the minimum tax is collected. In this case, the US parent company might not receive a credit for taxes paid under Portugal’s pillar two regime, resulting in double taxation risks.

• On the other hand, Portuguese-headquartered MNEs with operations in the US will also face some relevant challenges. Under the pillar two framework, Portugal may need to apply the IIR to ensure that profits earned by US subsidiaries are taxed at the minimum rate. However, the absence of US participation complicates this process, as Portugal would need to rely on its domestic implementation of the rules to address any tax shortfalls. This could place Portuguese companies at a competitive disadvantage, with higher compliance costs and potential disputes with US tax authorities, which may resist the extraterritorial application of pillar two rules. Moreover, the lack of a level playing field may incentivise Portuguese companies to restructure their operations to mitigate tax exposure, potentially undermining Portugal’s tax base.

The US decision not to implement pillar two rules creates a significant competitive imbalance for European companies. While EU-based MNEs will be subject to the global minimum tax, their US counterparts may continue to benefit from lower effective tax rates in jurisdictions that do not adopt the rules.

For example, a US tech giant operating in Europe may face lower overall tax liabilities compared with an EU-based competitor, even if both generate similar revenues in the same markets. This could erode the competitiveness of European companies, undermining the EU’s broader objectives of fostering fair competition and preventing BEPS.

The success of the pillar two framework hinges on widespread adoption. The US, as the world’s largest economy and home to many of the biggest MNEs, plays a decisive role in determining the initiative’s global impact. Without US participation, the effectiveness of pillar two is significantly diminished, creating opportunities for tax discretion and undermining the principle of a level playing field.

The ambition of the pillar two project is too high for the OECD to abandon it. As a result, there is hope that the EU and the OECD can employ diplomatic strategies and engage in negotiations with the US president, potentially addressing concerns through measures such as increasing UTPR safe harbours.

For European companies, the lack of US participation exacerbates competitive disadvantages, potentially deterring investment and innovation. Meanwhile, for countries such as Portugal, the administrative burden of enforcing pillar two rules in a fragmented landscape could outweigh the benefits of increased tax revenues.

Ultimately, the success of pillar two depends on its universal adoption. Without the participation of major economies such as the US, the framework’s objectives are at risk, leaving the global tax system vulnerable to continued BEPS practices. Renewed diplomatic efforts are essential to bring reluctant jurisdictions on board and ensure the long-term viability of this landmark initiative.

We live in a time of critical need for global cooperation in addressing BEPS and fostering a fairer international tax system. For businesses and policymakers alike, the stakes could not be higher.