Institutionalised Exceptionalism: The G7-US Agreement on Pillar Two

Executive Summary

The June 2025 G7-US agreement on implementing a global minimum tax marks a notable departure from the original OECD framework's emphasis on universal application. By exempting U.S. multinationals from certain enforcement measures, this deal prioritises practical considerations and the preservation of the existing global system over strict equality, raising important questions about the future of multilateral tax cooperation.

Background: The Global Minimum Tax Framework

The Global Anti-Base Erosion (GloBE) Model Rules set a 15% minimum tax rate for large multinational corporations, aiming to stop the competitive lowering of tax rates.

Starting in 2024, with support from the G20 and more than 140 countries via the OECD’s BEPS initiative, the framework features two main enforcement mechanisms:

Income Inclusion Rule (IIR): Allows parent jurisdictions to impose top-up taxes on low-taxed foreign subsidiaries.

Under the Taxed Payments Rule (UTPR): Allows jurisdictions to deny deductions or levy taxes if the Income Inclusion Rule (IIR) does not fully account for undertaxed profits.

These regulations apply per country, requiring multinationals to pay a minimum of 15% tax in each jurisdiction where they earn profits.

The G7-US Compromise: Anatomy of Exceptionalism

In June 2025, the G7 negotiated a comprehensive carve-out in response to US threats to exit the agreement and impose retaliatory taxes on countries targeting American multinationals.

Core Provisions

The key provisions of the agreement are as follows:

Complete UTPR Exemption: US-parented groups are exempt from the Under Taxed Payments Rule for both domestic and foreign earnings.

IIR Limitations: Restrictions on how other countries can implement the Income Inclusion Rule for US multinationals.

Conditional Structure: The arrangement relies on US legislative changes, especially the removal of Section 899 (“revenge tax”).

Operational Framework

The agreement establishes a “side-by-side” system where US companies operate under different rules, while other multinationals remain subject to the standard Pillar Two enforcement. This split approach fundamentally changes the global tax framework from a unified system to a varied regime based on corporate nationality.

Systemic Implications

Erosion of Universal Principles

The exemption of US multinationals—representing the world’s largest group of multinational enterprises—undermines the fundamental principle of equal treatment. This retreat from universality damages both the legitimacy and effectiveness of the global minimum tax, potentially encouraging other major economies to seek similar carve-outs.

OECD’s Strategic Recalibration

The OECD has effectively redefined success for the initiative, shifting from a universal approach to a pragmatic preservation strategy. This method prioritises US involvement over strict enforcement, recognising that American participation is vital for the framework’s sustainability whilst allowing significant deviations from original design principles.

The compromise provides significant competitive advantages for US multinationals. Although these companies still operate under the Global Intangible Low-Taxed Income (GILTI) rules, their effective GILTI rate often falls below 15%. It utilises global blending rather than the OECD’s country-by-country approach. This distinction may give US firms systematic benefits over competitors subject to full Pillar Two enforcement.

Relocation Incentives

By neutralising the UTPR for US domestic low-taxed profits, the arrangement potentially encourages both American and foreign multinationals to relocate operations or headquarters to the United States, thereby weakening the effectiveness of the global anti-avoidance regime.

Broader Consequences

Precedent for Major Economic Exceptionalism

The G7 deal demonstrates that major economies can effectively alter multilateral agreements to benefit their national interests, possibly eroding trust in global consensus mechanisms. This precedent could motivate other large economies to pursue similar modifications in future negotiations.

Alternative Multilateral Frameworks

The compromise has heightened calls for new strategies in global tax governance, including proposals for a UN tax convention that would empower developing countries and smaller economies currently marginalised within OECD-led initiatives.

Fragile Consensus

The future success of the global minimum tax depends on whether the broader “Inclusive Framework” of over 130 countries will accept this shift or oppose what many see as an imposition of exceptionalism by wealthier nations.

Stakeholder Perspectives

Supporters’ Arguments

Pragmatic Preservation: The deal prevents US withdrawal, maintains global anti-avoidance goals, and keeps the world’s largest economy engaged in multilateral tax cooperation.

Partial Offset: US domestic minimum tax rules provide some level of global tax fairness, although they do not fully meet the Pillar Two requirements.

System Stability: Addressing US concerns supports maintaining the broader framework rather than permitting complete fragmentation.

Critics’ Concerns

Compromised Principles: The deal compromises core principles of tax equity and universality for political convenience.

Institutional Vulnerability: The arrangement confirms fears that OECD-led negotiations are susceptible to pressure from wealthy nations.

Governance Deficit: The compromise highlights the need for more inclusive and transparent global tax governance mechanisms.

Future Implications

The G7-US deal marks a significant milestone in international tax cooperation. Countries must decide whether to maintain a strong anti-avoidance framework or accept notable exceptions. The broader 'Inclusive Framework' response will shape whether the global minimum tax evolves into a more adaptable, yet possibly divided system or fragments based on economic power and national priorities.

Key Questions for the Future:

Will other major economies pursue similar carve-outs?

How will developing nations respond to this precedent?

Can the OECD maintain its legitimacy while allowing for such substantial departures from universal principles?

The answers to these questions will shape future global tax policies and the broader trajectory of multilateral economic cooperation in an increasingly multipolar world.

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This analysis draws on reports from sources such as the Financial Times, Reuters, and The Wall Street Journal regarding the G7-US tax agreement in June 2025 and its impact on global tax governance.