Global Minimum Tax Endures Despite US Exemption Deal
Rumours regarding the demise of Pillar 2, the Organisation for Economic Co-operation and Development's ambitious global minimum tax framework, have proven to be greatly exaggerated. However, the international rules-based order that underpins such multilateral agreements appears to be discovering its practical limitations in an increasingly fractious geopolitical landscape.
A Fragile Consensus Holds Together
Businesses worldwide entered 2026 with significant news from the OECD. The long-awaited update to the 15 per cent global minimum tax, known as Pillar 2, was finally published alongside a new 'side by side' system that formally exempts the United States from these rules. This development is crucial because it will fundamentally shape how multinational corporations are taxed on their global profits for the foreseeable future, while simultaneously defining the boundaries of acceptable cross-border tax competition.
For months, the international community has been teetering on a precipice between global consensus and potential chaos while awaiting clarity on the future of these tax arrangements. Remarkably, the consensus has held together, albeit just barely. The world of international taxation has become another front in the broader struggle over the so-called International Rules Based Order, which now faces mounting pressure from great power politics and shifting national priorities.
The International Rules Based Order Under Strain
What exactly constitutes this International Rules Based Order? Essentially, it encompasses those global institutions and standards that countries have collaboratively built over decades to support and regulate international trade. For the most part, these frameworks have been respected and adhered to by participating nations. When examining the extensive list of multilateral treaties and institutions, their indispensable nature becomes apparent: from the law of the sea and Geneva conventions to World Trade Organisation rules, climate change accords, and various trade bans.
The OECD stands as one of those multilateral institutions that epitomises this rules-based approach, particularly in shaping economic relations between developed countries and their tax regulations. Pillar 2 represents arguably the organisation's most ambitious tax project to date. Previously, the OECD had never ventured into setting actual tax rates or drafting detailed rules that resemble domestic tax legislation, yet this is precisely what Pillar 2 has accomplished alongside numerous administrative processes.
The US Opposition and Subsequent Compromise
A notable shift occurred in recent years when the United States, previously one of the strongest backers of the Pillar 2 project, declared its opposition. Congress advanced draft retaliatory measures targeting countries that implemented the Undertaxed Profits Rule component of Pillar 2. Faced with this resistance, the G7 negotiated a deal last June that would exclude US-parented corporations from the framework's requirements.
This compromise was subsequently taken back to the inclusive framework for agreement and codification, resulting in a new set of rules published on 5 January 2026. Following announcement of this 'side-by-side' arrangement for the US, the international community endured six months of uncertainty. Several countries voiced objections, with the German chancellor at one point declaring the entire project dead. Expectations grew that significant changes would emerge, particularly around tax credits, while questions lingered about China's next moves.
Four Potential Collapse Scenarios That Didn't Materialise
In theory, several scenarios could have fatally undermined Pillar 2. First, the framework might have collapsed entirely if major backers had abandoned their support. Second, erosion could have occurred from the top down, with large economies demanding their own US-style carve-outs. Third, undermining could have happened from below, with low-tax jurisdictions rolling back their domestic minimum taxes specifically for US multinationals. Finally, the rules could have been reduced to something in name only, with changes to qualifying tax incentives fatally undermining the 15 per cent rate as a genuine minimum.
Remarkably, none of these scenarios have fully materialised, at least not yet. The defences appear to have been shored up through diligent negotiation and compromise. The consensus held together despite predictions of failure, demonstrating the OECD's established ability to achieve agreement where others anticipate collapse. The 'side-by-side' rules as drafted leave minimal space for countries without their own US-style minimum tax rules to negotiate similar carve-outs, preventing widespread erosion.
Meanwhile, domestic top-up taxes only qualify if they're non-discriminatory, meaning tax havens cannot offer lower rates exclusively to US-parented groups, though some jurisdictions could still abandon top-up taxes entirely if most of their investment originates from America. While certain provisions do dilute the margins of the 15 per cent rate, they don't go as far as some nations, including China, had hoped, leaving the framework substantially stronger than the pre-Pillar 2 landscape.
Bureaucratic Challenges and Future Uncertainties
Regardless of the substantive outcomes, significant bureaucratic challenges remain inherent to the implementation of these complex international tax rules. Reports of the global minimum tax's demise, along with the OECD's diminishing influence, have proven somewhat premature. The organisation has successfully kept the show on the road despite considerable geopolitical headwinds, though this certainly doesn't represent the end of the story. The coming years will reveal whether this fragile consensus can withstand ongoing pressures.
This project likely marks the high-water mark of the OECD's international tax ambition, as well as that of the G7 and G20 nations. The International Rules Based Order is now beginning to discover its practical limits in an era of renewed great power competition and shifting national priorities. The preservation of Pillar 2 represents a significant achievement, but one that highlights the growing challenges facing multilateral cooperation in an increasingly divided world.
