The global minimum tax (Pillar Two): what Indian multinationals should prepare for

For large multinational groups, one of the most significant international-tax developments of the decade is the arrival of a global minimum tax. Developed through the OECD/G20 Inclusive Framework as ‘Pillar Two’, the rules set a floor on the effective rate of tax that in-scope groups pay in each jurisdiction in which they operate. A growing number of countries have brought these rules into effect, and the consequences reach both Indian-headquartered groups with foreign operations and India-based subsidiaries of foreign groups.

What Pillar Two does

At its core, Pillar Two seeks to ensure that large multinational groups pay an effective tax rate of at least 15% on their profits in every jurisdiction where they operate. Where the effective rate in a jurisdiction falls below that floor, a top-up tax is charged to bring it up to 15%. The rules generally apply to groups with consolidated annual revenue at or above a high threshold — broadly, groups of substantial size rather than smaller enterprises. Purely domestic businesses and most mid-market groups are outside the scope.

The GloBE mechanics, in outline

The Global Anti-Base Erosion (GloBE) rules operate through a set of interlocking mechanisms:

• The Income Inclusion Rule (IIR) allows a parent entity's jurisdiction to charge top-up tax in respect of low-taxed profits of group entities elsewhere.
• The Undertaxed Profits Rule (UTPR) acts as a backstop, allocating top-up tax where it has not been collected under an IIR.
• The Qualified Domestic Minimum Top-up Tax (QDMTT) lets a jurisdiction collect the top-up tax on low-taxed profits arising within its own borders, rather than ceding it to another country.

For a group, the question is therefore not only ‘what is our effective rate?’ but ‘where, and under which rule, will any top-up be charged?’ A domestic minimum top-up tax in a jurisdiction generally takes precedence for profits arising there.

Why this matters for Indian groups

There are two broad situations in which Indian businesses are drawn into Pillar Two. The first is the Indian-headquartered multinational with subsidiaries abroad, which must compute its jurisdictional effective tax rates worldwide, apply the GloBE rules, and manage any top-up arising — including in jurisdictions that offer incentives or low headline rates.

The second is the India-based subsidiary of a foreign group. Even where the ultimate parent sits overseas, the Indian entity's profits and taxes feed into the group's jurisdictional computation for India, and India-specific incentives can affect whether the Indian effective rate meets the 15% floor. A particular point of attention is the interaction between Pillar Two and tax incentives — incentives that reduce the effective rate below 15% may, in effect, be ‘clawed back’ as top-up tax elsewhere.

Preparing: data before decisions

Pillar Two is, above all, a data exercise before it is a planning exercise. The computation draws on financial-accounting data, adjusted under detailed rules, on a jurisdiction-by-jurisdiction basis. Sensible preparation includes:

1. Confirm scope. Establish whether the group meets the revenue threshold, and identify all constituent entities and the jurisdictions involved.
2. Assess exposure. Compute indicative jurisdictional effective tax rates to identify where the group is close to, or below, the 15% floor.
3. Use the safe harbours. Transitional safe harbours — often built on Country-by-Country Reporting data — can simplify or defer detailed computation for lower-risk jurisdictions.
4. Ready the data. Map the accounting and tax data the rules require, and close the gaps in your reporting systems.
5. Re-examine incentives and structures. Reassess the real, after-Pillar-Two value of incentives, and review holding and financing structures in light of the rules.

A considered response

Pillar Two does not change the commercial logic of doing business across borders, but it does change the arithmetic. For in-scope groups, the effective tax rate in each jurisdiction is now a number that must be computed, documented and defended — and the value of incentives and structures must be reassessed against a 15% floor. The groups that manage this well are those that treat it as a governance and data project, started early, rather than a year-end computation.

This article is provided for general understanding only and should not be treated as professional advice. The application of Pillar Two depends on the group's facts and on the rules as adopted in each relevant jurisdiction. Please consult a qualified professional before acting.