Pillar Two Tax Push Down: What Is the Old and the New?

This article addresses rules in place, or being considered, for Pillar Two for the attribution or push down of taxes paid by one corporation of a group to or for the benefit of another.

This notion has long been seen in domestic tax law. See for example, US consolidation rules or Canada ´s foreign affiliate rules that treat taxes paid by a US subsidiary corporation on behalf of an LLC in the structure that is transparent for US purposes but opaque for Canadian purposes to be those of the LLC. See Part 5900 of the regulations for the Income Tax Act, Canada.

The next section will deal with Pillar Two—related rules already in place (old rules) and the final section with Pillar Two—related rules the development of which is being promoted by the US but opposed by the EU (new rules).

Pillar Two refers to a political agreement made on October 8, 2021, among 137 countries including the US and Canada (the “Inclusive Framework” (IF), led and coordinated by the OECD) to see the IF countries impose, on a coordinated basis, a minimum tax of 15% on all book profits (wherever earned) of multinational groups that have annual revenue of at least €750M.

That agreement was followed in December 2021 by the IF issuing “model” rules, intended to be legislatively adopted by each IF member, to implement the agreement. The Republicans have blocked implementation in the US, although most countries (including Canada) have, partially (or completely) implemented.

Finally, by way of overview, the IF made another political agreement, referred to as Pillar 1, on October 8, 2021—to allocate taxing rights to “market countries” over 25% of the profits exceeding 10% of gross of multinationals, that have at least €20 Billion of annual revenue. Pillar 1 has stalled and remains in negotiation among the IF countries.

Old Rules

The most interesting existing rule is section 4.3 of the December 20, 2021 Model Rules for Pillar Two.

The background is domestic tax law like the US Code CFC-Subpart F rules or the similar Canadian controlled foreign affiliate—foreign accrual property income rules. See sections 90-95 of the Income Tax Act.

Under those rules or similar ones of many other countries, the passive income of the CFC or CFA is attributed to and taxed in the hands of the shareholder in respect of which foreign corporation is a CFC or CFA, under laws of the country of that shareholder.

This means that even before the advent of Pillar Two in countries such as Canada that have adopted all or part of Pillar Two, there was current tax on undistributed passive income of foreign subsidiaries.

But notwithstanding such immediate tax, Pillar Two could also apply to potentially raise double tax in such situations.

Section 4.3 was developed to avoid such double tax (in some but not all such situations) by allowing a push down of the tax paid by the shareholder on the attributed passive to the controlled foreign subsidiary for purposes of Pillar Two tax determinations. This may best be seen by an illustration such as follows.

Assume a CFA of a Canadian parent that is in scope of Pillar Two earns $1,000 of passive income that qualifies for section 4.3 treatment. Assume CFA pays no local tax so there is no reduction of the basic tax (say 25%) paid in Canada by Canadian parent on the attributed income. But will the income inclusion rules (IIR) adopted by Canada under the Global Minimum Tax Act raise additional tax for the Canadian parent…? Absent the Canadian version of section 4.3, the answer would be affirmative because the effective tax rate of the CFA would be 0%, leading under the IIR to a 15% minimum tax liability for the Canadian parent under the GMTA.

However, section 4.3 permits the CFA to add to its tax account the basic tax of 25% paid by the parent, thus giving the CFA an effective tax rate of 25%, not 0%, and therefore eliminating the GMTA / IIR tax liability otherwise arising.

That shows appropriate benefits of tax push down rules under current Pillar Two law.

Potential New Rules and Related Controversy

This section addresses EU concerns that a Pillar Two-linked US proposal respecting tax push down is adverse to EU member interests. The US proposal is to see taxes imposed by the Code on US shareholders of CFC s in respect of the Global Intangible Low-Taxed Income (GILTI, renamed “Net CFC Tested Income” by Pub. L. No. 119-21 (July 4, 2025) (the “Act”)) of the CFC be “pushed down” under local law (particularly the Pillar Two Qualified domestic minimum top up tax rules (QDMTT)) to the CFC), that is, allowed as a reduction of local tax otherwise payable by the CFC.

QDMTT rules are a third part of the basic Pillar Two framework for the global minimum 15% tax.The first two parts essential address no or low-taxed profits of foreign subsidiaries as illustrated in the prior section.Those are the income inclusion rules and the controversial backup under taxed profit rules (UTPR). The operation of the IIR rules was seen in the prior section.

The third part, QDMTT, addresses low-taxed domestic profits of either the parent of the group or those ofa subsidiary and sees the relevant country of such entity impose a minimum tax of 15% on the relevant domestic profits.This may also be backed up by the UTPR.

Before considering the basis and essence of the EU concern, it is useful to consider the source and context of the US proposal which, as noted, is essentially to see a country (particularly a tax haven) that adopts a QDMTT have a choice in the QDMTT design of either allowing the local subsidiary to deduct foreign parent home country tax (on attributed income) and thus to reduce the local tax arising under the QDMTT or not allow such deduction and reduction.

The US proposal is not recognized at this time in the Pillar Two model rules or commentary, except in the narrow circumstance discussed in the prior section. The concern certainly is not relevant to or related to how a EU member country will calculate its QDMTT (for example how France or Germany will compute a minimum tax of 15% on the French or German profits of a French corporation or a German corporation). In those circumstances there is no reason to think that French or German QDMTT law would allow a push down of the taxes that might arise in the US on the US parent of the French or German corporation under the US GILTI.

So, the EU concerns must relate to how GILTI push down will affect the EU indirectly through QDMTT rules of non EU countries—and in particular in tax havens. That is because it is only in situations involving tax havens that there can be a concern that a purpose of Pillar Two might be defeated by GILTI push down.

Returning to the question of source of the US proposal it is not the June 28 Pillar Two agreement between the US and the G7 that (with the assistance of the G7) the Inclusive Framework will exclude US groups from the income inclusion rule and Undertaxed profits rules of IF countries in exchange for the US dropping proposed section 899 “revenge taxes” from the Act. See Department of Finance Canada, G7 Statement on Global Minimum Taxes (June 28, 2025). That makes no reference to the QDMTT / GILTI push down matter.

Instead the (informal) source is a May 16 conference where the US proposal was promoted by Rebecca Burch, Treasury Deputy Assistant Secretary for International Tax Affairs.

In the eyes of the US, it is an innocent situation where a tax haven that before the advent of Pillar Two had no taxes on profits of foreign owned local subsidiaries (so the US did not have to grant any foreign tax credits against US tax arising under GILTI on the profits of a subsidiary located in the tax haven) now has three choices:

1. It can choose to retain the status quo (so the US continues to collect full tax under GILTI).
2. It can adopt local law (such as a QDMTT) that taxes (say at 15%) those profits with no reduction of those taxes by reference to any foreign taxes paid by a foreign parent (e.g., US GILTI tax). That would be a NORMAL and rational legal format, but it would make the US unhappy as it will have to grant a US shareholder a credit (90% of the tax haven tax under the Act).
3. Or it can adopt the local tax with a reduction for the foreign (say GILTI) tax. That will make the US happy as it retains full taxing rights under GILTI.

But the EU doesn’t like the last case—pushing down GILTI. Why? What is the problem? Isn’t the fundamental purpose of Pillar Two achieved (tax all profits at a minimum rate) regardless of whether the tax on the tax haven’s profits goes to the tax haven (where there is no push down) or to the US where there is?

The problem is that the so called choice is, in the view of the EU (expressed at a July 11 conference in Munich), a mirage, a sham in that the EU is concerned that the US will coerce the tax haven into opting for GILTI push down. AND the problem with that is that it will compromise an alleged secondary purpose of Pillar Two-achieving a level playing field for all countries, in that other countries will not see a similar shift of net tax revenues. Did the draftsmen of Pillar 2 really focus on that secondary purpose?

This matter will undoubtedly attract much attention in the coming weeks as the parties try to turn the June 28 G7-US sparse agreement into a full set of arrangements. For related comments, see Somesh Jha, OECD Resolving Concerns Over G7 Minimum Tax Pact, Official Says, Daily Tax Rep. (July 21, 2025).

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Nathan Boidman, retired Canadian attorney and CPA, specialized in Canada-US taxation and is now founding a non-profit Canada-US taxation center.

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