22 July 2026

To

The In charge- Transfer Pricing,

Tax Treaties and International Agreements Division

OECD Centre for Tax Policy and Administration.

Sent via email: taxpublicconsultation@oecd.org

Sub: Comments on OECD Public Consultation Document- Revisions to Chapter VII of the OECD Transfer Pricing Guidelines- Special considerations for intra- group services

VSTN appreciates the opportunity to submit comments in response to the OECD’s Draft Public Consultation Document on Revisions to Chapter VII of the OECD Transfer Pricing Guidelines- Special considerations for intra- group services.

We welcome the OECD’s continued efforts to enhance the guidance on intra- group services and to promote greater consistency with the foundational principles set out in Chapters I to III of the OECD Transfer Pricing Guidelines. The proposed revisions represent a meaningful step towards strengthening the framework for delineating intra- group services, providing additional guidance on determining arm’s length remuneration, and offering greater clarity on the selection and application of the most appropriate transfer pricing method. The inclusion of new illustrative examples is particularly valuable, as it will assist taxpayers and tax administrations in applying these principles more consistently in practice.

Given the increasing importance of services in cross- border business operations and global value chains, comprehensive and practical guidance on the transfer pricing treatment of intra- group services remains highly relevant. Accordingly, it is imperative that the final guidance reflects both the economic and commercial substance of such arrangements and the practical realities of their implementation. Guidance that is comprehensive, clear, and capable of consistent application will be instrumental in enhancing tax certainty, facilitating dispute prevention, and ensuring that transfer pricing outcomes appropriately align with value creation.

Our comments are organized into two sections: (i) specific comments on the questions raised, and (ii) general comments on other aspects of the draft.

SPECIFIC COMMENTS

BOX 1 – Feedback

1. The understanding and practical application of existing guidance in paragraph 7.10 of the OECD 2022 Transfer Pricing Guidelines.

Accurate Delineation of Intra Group Service Transactions-FAR Analysis

While para 7.7 to 7.12 of the consultation draft links Guidance in Chapter I – on accurate delineation of transactions, the Guidance under Shareholding activities can explicitly include how the functional analysis can capture the relevant risks, and how the respective entity said to have control over those risks will have to bear the costs that are incurred for undertaking activities to mitigate those risks.

In the context of intragroup services, more specifically shareholding activities, Guidance can consider including mapping the risks between group entity (service recipient) and another group entity (service provider / parent entity / ultimate parent entity). Further the Guidance can clarify / provide that the respective entity bearing the said risk & having control over the risks will have to finally bear the costs relating to activities that mitigate those risk – whether by entity itself or another group entity. That is where the risks relating to regulatory compliance is borne by the service provider (parent entity or ultimate parent entity or regional HQ), in such a case any costs incurred with regard to activities that mitigate such risk – for example filing related costs, manpower costs / consultant cost involved with regard to such filings, etc. will have to be borne by the service provider.

Inclusion of the aforesaid mapping of these risks will materially aid streamlining intragroup transactions, more particularly shareholding activities, within the six- step framework prescribed under Chapter I of the Guidance, providing much needed clarity on this subjective issue of shareholding activities.

2. Whether, based on your experience, there are other activities that would commonly meet the definition in paragraph 7.9 of the OECD 2022 Transfer Pricing Guidelines that are not reflected in paragraph 7.10 of the OECD 2022 Transfer Pricing Guidelines.

Shareholder Activity Vs Stewardship Activity / Intra Group Services

The draft Guidelines aim to provide greater clarity on what constitutes shareholder activities vis- a- vis intra group services by applying the benefit test. In current business models, MNE groups increasingly rely on centralized governance, risk, compliance, and tax control frameworks supported by digital platforms.

A classic example would be the Group’s Parent Company decision to establish TP governance framework by implementing the Operational Transfer Pricing (OTP) Tool which will help to monitor whether the Group transactions follow the agreed pricing policy. The decision to implement the tool may be regarded as activity ancillary to corporate governance if the sole purpose of implementing the tool is to facilitate the Group to ensure compliance with the TP Policy. However, if the OTP tool directly benefits the group entities in monitoring transfer pricing outcomes, computing the Transfer Price, posting journal entries etc, then the same may not be regarded as shareholder activity but as Intra Group services.

Another aspect that needs to be evaluated would be on the concept of Regional Headquarters. Certain countries like Kingdom of Saudi Arabia, lay down regulations for regional headquarters and which are often subject to 0% tax on income. The local regulations also lay down activities that need to be carried out by such RHQs to be eligible for exemption. Accordingly, RHQs typically carries on activity which may include Shareholder activity, Stewardship activity- management oversight & control and intra group services. While certain functions may be easily categorised into the above three categories, in most instances there may be genuine difficulties in bifurcating these into the above categories. For e.g., a CEO of RHQ may be engaged in providing shareholder services as well as management services that may benefit the entities in that region. Hence the taxpayers may be required to delineate the services to determine whether an activity constitutes shareholder activity or stewardship activity / service activity.

While shareholder activity is not chargeable, stewardship activities and services are chargeable if they confer direct benefit for other group entities.

In Para 7.25 the draft mentions that the shareholders’ activities need to be distinguished from the stewardship activities which are generally services in nature. However, it is suggested that the draft can clearly state the differences with examples and comment on the level of testing required to substantiate the arm’s length nature of stewardship activities.

In many instances where Indian subsidiaries are charged by overseas parent for such activities, the tax authorities would want to equate stewardship activities with the shareholding activities and rule out the payment of such charges by Indian entities. Therefore, it is important that the draft address such issues by clear guidance on stewardship activities and its arm’s length price determination.

Further the guidance may also need to consider the local country regulations impacting the recognition of certain services as shareholder activities vis- à- vis intra group services/ stewardship activities. For example, in China the TP regulations consider management charges as shareholder activities on the pretext that even though such activities confer benefits to group entities, the benefits realised by the Parent entity are much higher and therefore cannot be claimed as deduction.

Therefore guidance on what activities generally constitute Shareholder activity/ Stewardship activity/ Service activity may be very valuable. Based on our experience we have categorised as below:

Interest-Free Financing and Shareholder Support

Additional guidance would be welcome on whether, and in what circumstances, interest- free financing may be regarded as being in the nature of shareholder support, particularly in the case of wholly owned subsidiaries. Clarification of the factors that distinguish a shareholder activity from an intra- group service or financing transaction that requires compensation would promote greater consistency in application and reduce disputes. This is very relevant for Groups in the middle east where they fund their subsidiaries without any interest charge.

Recommendation

We recommend that the final guidance include additional examples on:

• the distinction between shareholder, stewardship and service activities;
• mixed- function activities undertaken by regional or head office personnel;
• the treatment of digital governance and compliance platforms;
• practical approaches for cost allocation where activities contain both shareholder and service elements; and
• the application of these principles to Regional Headquarters structures.

Such guidance would enhance consistency in application by both taxpayers and tax administrations and help reduce disputes concerning the characterization and charging of head office and RHQ costs.

3. The activities that, based on your experience, could be captured by item (e) which refers to “ancillary activities to the corporate governance of the MNE as a whole”.

Activities not ancillary to Corporate Governance

Apart from activities that can be considered as ancillary activities, certain activities may be specifically excluded such as ESG compliances. For example, the parent of the Group can spearhead ESG related compliances for the Group, but where the group entity has specific compliance to be fulfilled, for which the parent entity provides support, it might not be deemed to be shareholding activities.

Specific clarification can be provided on how efforts by the Parent / Ultimate parent, having a positive impact on the group entity’s governance indicators, and indirectly having a monetary impact.

1. Would it be useful to provide further guidance on the application of allocation keys for certain intra-group services?

2. What are the allocation keys appropriately applied in practice to specific intra-group services?

1. Further guidance on the application of allocation keys for certain intra-group services

Para 7.46 of the consultation draft states that there should not be additional administrative burden cast upon the taxpayer in connection with recording and analysis of the services. Also, the concluding lines of paragraph state that there should be consistency in the allocation method with what has been conducted between independent entities.

In this context, Guidance can also include that where services of material quantum are being rendered, independent entities would invest required efforts in ensuring that costs are accurately ascertained, as the service provider would want to ensure that indirect costs are also factored in the pricing. This is to ensure that the service provider does not excessively charge as it might appear overpriced and become uncompetitive nor it be underpriced since it would be unprofitable in the long run.

Where Guidance explicitly compares these intragroup services with independent services, these necessary additional efforts can provide significant respite during the course of audits by the tax authorities, which is in taxpayers best long- term interests.

Therefore, where Guidance includes the importance of necessary accounting systems in the MNE group, this would ensure both accurate accounting / recording of revenue as well as profitability while simultaneously ensuring that necessary inputs for robust documentation is maintained.

Guidance can consider including lists of various group of expenses incurred by the service provider and the allocation of these expenses. Further the Guidance can also provide certain allocation keys, mapped / aligned as per the generally accepted global costing standards for each of the group of expenses.

The Guidance can enunciate principles for allocation, and then provide the examples. These examples can be listed in the descending order of preference – best case, followed by next best approximation. The Guidance can consider providing a principle based approach rather than a rule based / formulaic approach.

This can include Guidance on situations where the employees exclusively provide services to an associated enterprise vis- à- vis for group entities per se. Though the most appropriate allocation key would depend on the respective facts and circumstance, this approach could provide taxpayers a base scenario, over and above which they can customize while implementing.

In Para 7.9, the requirement to evaluate the interdependencies of the activities with other activities and activities in other countries will pose a practical challenge in terms of the availability of information in either the service provider’s or the service recipient’s jurisdiction. Further some guidance can be provided on central C suite costs which occupy a part of the cost centres of most of the MNC’s.

Para 7.10- considers the group structure (centralized vs Decentralized) as one of the parameters for identifying whether an activity is a shareholder activity or not. This may create bias in the minds of the tax authorities and therefore further clarity on the same would be helpful.

2. Allocation keys appropriately applied in practice to specific intra-group services

Taxpayers often face challenges in determining the most appropriate allocation methodology for indirect charges, leading to inconsistencies in practice.

Guidance can have two faced approach – allocation keys for specific intra- group services and for allocation of certain heads of expenses that are commonly incurred. Guidance can also clarify on the basis of allocation, including its principles, for various heads of expenses. For eg; Such guidance can be on:

• a) The circumstances in which turnover is an appropriate allocation key for intra-group services.
• b) Situations where the use of multiple allocation keys for different components of the same service is appropriate and consistent with the benefit received by recipients

In addition, based on our past experience we have included certain common allocation keys which are only illustrative in nature.

Thus providing a mapping of recommended allocation keys for various heads of expense would enhance clarity, promote a more uniform approach, and help minimize anomalies in the adoption of allocation methodologies.

1. Do you encounter challenges associated with the appropriate treatment of stock or share based compensation in relation to intra-group services? If so, please describe these challenges and whether they include timing, accounting treatment and valuation of stock or share based compensation?

2. How do you address stock-based compensation as part of your transfer pricing analysis?

3. Do you think additional guidance in relation to stock or share-based compensation would be beneficial for intra-group services?

The treatment of stock- based compensation is often a subject matter of debate. The lack of specific guidance created uncertainty, particularly because different multinational groups adopted different approaches, wherein

• a) MNCs include SBC as part of cost base and charge mark-up.
• b) In case of uncharged or notional SBC, MNCs may not include these in their cost base.
• c) MNCs may recharge the SBC on cost to cost basis without mark-up.

In particular, clarification would be welcome regarding:

• a) When stock-based compensation should generally be regarded as employee compensation and included in the cost base of intra-group services;
• b) Circumstances in which exclusion from the cost base may be appropriate; and
• c) Whether the analysis differs in the context of low value-adding intra-group services.

Additional illustrative examples could further assist taxpayers and tax administrations in applying a consistent approach to stock- based compensation costs in transfer pricing analyses.

In Singapore, IRAS recently issued 9^th Edition of the Transfer Pricing Guidelines which aligned the treatment of with the OECD’s guidance in ‘The Taxation of Employee Stock Options’. Based on this IRAS has identified three distinct scenarios in relation to Share Based Compensation (SBC) and has provided explicit technical clarification on whether such costs should be added to the cost base to derive the service income under each such scenario.

and enhancing tax certainty – particularly in light of the growing prominence of SBC due to:

• Greater use of global equity incentive plans across multinational groups,
• Expansion of regional service hubs and shared service centers,
• Increased focus by tax authorities on cost plus remuneration models

Accordingly, it is recommended that the additional guidance in relation to stock or share- based compensation would be a welcome step as it would impose certainty with respect to treatment of costs and thereby reduce tax controversies.

GENERIC COMMENTS

A. BENEFIT ANALYSIS

“7.13. The accurate delineation of intra- group services includes the assessment of whether the service has been performed. This assessment is known as the “benefit test” and requires the determination of whether the activity of one group member provides another group member with economic or commercial value to enhance or maintain its business position. This is determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by another independent enterprise or would have performed the activity in- house for itself…..”

Comparing the rendition test with benefit test may give arise to a different set of consequences uncalled for. Services though rendered but since not satisfying the benefit test cannot be said that service is not rendered as this may also have impact from corporate tax perspective on the allowability of the expenses. So rendition and benefit test should not be equated.

“Para 7.16. Where the activities do not deliver the benefit as expected, an evaluation of multiple year data may be valuable in understanding whether the benefit was, in fact, reasonably expected at the time the activity was performed. In addition, such information may be valuable in determining whether the ongoing activity consistently fails to deliver a benefit as expected, and if so, to assess whether independent parties would be willing to continue to pay for such activities. Taxpayers should be prepared to provide reliable contemporaneous information to support that the benefit test has been fulfilled even if the benefit has not been realized as expected”

The guidelines provide that expectation of future benefit from intra group services as critical criteria for evaluating whether such services constitute intra group services in instances where the activities do not confer immediate benefits. The guidelines thrust the onus on the taxpayer to provide reliable contemporaneous information to support that the benefit test has been fulfilled even if the benefit has not been realized as expected.

In instances where the services does not create any value or benefit to the recipient then Tax authorities may challenge the business decisions stating that the services did not result in any quantifiable benefit to the service recipient.

A classic example would be where a market analysis is conducted by the Parent company for the group entities but the entities do not enter the market given less demand/ very high competition in that market. In this case though the services were rendered by the parent company, the activities did not result in any quantifiable benefit but it helped the group entities in taking informed decisions of whether to enter the market or not. However, Tax Authorities may challenge the said charge as it did not result in any quantifiable benefit.

In Para 7.4, the draft guidance provides that “Tax administrations should not dictate how an MNE should source services. The role of tax administrations, rather, is to determine the tax consequences of the transaction, including its evaluation under the arm’s length principle recognises that tax administrations should not dictate how an MNE should source services….”. Accordingly, it would be appropriate if the guidelines explicitly clarifies that the Taxpayer’s decision to procure services to enhance or maintain commercial expediency is a business decision and that the same cannot be questioned by the tax authorities. The transfer pricing analysis should therefore focus on whether the services were actually rendered, whether the recipient obtained or reasonably expected to obtain economic or commercial value from the services, and whether the charge is consistent with the arm’s length principle.

Taxpayers should have certainty regarding the evidence necessary to demonstrate that, at the time the services were rendered, there was a reasonable expectation of economic or commercial benefit, even where such benefits ultimately do not materialize. Therefore, where actual service rendition and a reasonable expectation of benefit are established, tax authorities should focus on the appropriateness of the charge and supporting evidence and not challenge the taxpayer’s commercial judgment solely because the anticipated benefits were not ultimately realized.

Further when assessing whether an expenditure should be recognized based on an expected benefit, the analysis should extend beyond purely monetary or economic returns and also consider broader commercial outcomes, including improvements in quality, efficiency, operational effectiveness, and strategic value. (Para 7.15/7.16)

A key point for discussion is the appropriate period over which such benefits should be evaluated. Where benefits are expected to accrue over multiple years, determining the relevant time horizon, whether three years or five years becomes critical. Therefore guidance may be provided on the ideal time frame that should be considered.

From a documentation perspective, taxpayers may be required to demonstrate and track the realization of benefits in subsequent years in relation to payments made in prior years. This creates an additional compliance burden, particularly where each annual payment is expected to generate benefits over an extended period. In such cases, isolating and attributing benefits to specific payments can be challenging, especially when benefits arising from multiple payments overlap across different years. As a result, establishing a clear linkage between individual payments and the corresponding benefits realized may become increasingly complex.

Accordingly, it would help if the draft regulations provide clearer guidance on the nature and extent of documentation required to substantiate an expected benefit. Further it is recommended that guidance provides a template for documenting the benefit analysis so that the expectation from the Taxpayers and Tax Authorities perspective is well defined thereby reducing possible controversies.

B. DOCUMENTATION (para 7.71-7.73)

The draft guidelines supplement the documentation requirements set out in Chapter V of the TPG for intra- group services and specifically require the inclusion of:

• a. Benefit Test analysis- including expected benefits and reasons for benefits not materialising as expected
• b. Decision communications (emails, minutes, approvals) relating to scope, provision and uptake of services
• c. Copies of Technical documents / Service agreements
• d. Deliverables (reports, memos, tickets)
• e. Accurate breakdown of Activities connected to intra group services
• f. Cost allocation method (allocation keys used, computation, variances, criteria for identification of costs to be allocated)
• g. Explanation and calculation of how Cost base was determined (incl. details of direct costs, indirect costs, Operating expenses and supporting documents)
• h. Details of Pass-through costs vs marked-up costs
• i. External invoices (esp. pass-through)

Documentation for Inbound Intra Group charges

The onus for maintenance of documentation substantiating the benefit received and arm’s length pricing of intra group transactions rests with the taxpayers. While in case of outbound services, the data relating to cost incurred and allocation keys used may be maintained by the taxpayer, this level of detail in case of inbound intra group charges maybe prove to be difficult as the visibility on the cost incurred at the group company level for provision of such intra group services and the allocation keys used by the group to allocate such costs may not be available at the local entity level and accordingly collating such data may put the taxpayer in undue hardship and in many instances these may not even be possible to collate for the local entity receiving such services.

Further the Documentation requirements should provide for a de minimis exemption, provided as a percentage of the turnover which will account for the size of the company, so as to reduce compliance burden on the taxpayer for insignificant intra group transactions. Such de- minimis exemption may also be based on the complexity and nature of intra group services provided / received by the taxpayer.

C. Low Value Added Intra Group Services (para 7.94)

The draft should provide more guidance to the tax administrators to adopt similar approaches across various jurisdictions in order to address the disputes arising due to non- acceptance of thresholds introduced by one jurisdiction by other jurisdiction.

For VSTN Consultancy Private Limited

Nithya Srinivasan CEO

The VSTN expert team welcomes the opportunity to discuss these comments in more detail. For any questions regarding this submission or for additional information, please contact

Ms. Nithya Srinivasan- CEO and Founder- snithya@vstnconsultancy.com, Ms. Srilakshmi Hariharan- Principal- srilakshmih@vstnconsultancy.com

UAE- Public Clarification- Downward Adjustment

Summary

UAE Federal Tax Authority (“FTA”) has recently issued a public clarification focusing on downward adjustment made by a Taxable Person to meet the arm’s length standard and the corresponding disclosure requirement in the Corporate Tax Return. The alert covers the key aspects of the clarification issued and the documentation requirements to be considered by Taxable Person to ensure sufficient defense during tax audit.

Background

Article 34(1) of the Federal Decree-Law No. 47 of 2022 requires that all transactions and arrangements between Related Parties must meet the arm’s length standard. In the instances where the transactions / arrangements with related parties are not concluded at arm’s length and the Taxable person has reasons to believe so, based on an appropriate arm’s length analysis, then one must make appropriate transfer pricing adjustments to comply with the arm’s length principle. Adjustments can be carried out in any of the below ways:

1. Adjustment in the books of accounts, prior to finalisation of the Financial statements; or
2. Adjustment in the Tax Return

Such adjustment may either increase the Taxable Income (upward adjustment) or decrease the Taxable Income (downward adjustment).

In case of related party transactions exceeding the materiality threshold, necessary disclosures were required to be made in the disclosure form alongside the corporate tax return.

As per the Corporate Tax Guide (CTGTXR1) dated November 2024, downward adjustment will be allowed only in the Tax return upon a successful application to the FTA (i.e., prior approval). Accordingly, prior to the release of this clarification, if the downward adjustment is not approved by the FTA, the Taxable Persons were asked to enter the amount as ‘NIL’ in their tax returns.

Clarification

The Corporate Tax system of UAE operates on a self-assessment basis. On the contrary, in instances where a downward adjustment is made, there was no automatic route prevalent to disclose the said adjustment in the corporate tax return of the taxable person which caused hardship to the tax payers.

In this public clarification issued by FTA, it is now clarified that no approval is required from FTA in order to disclose downward adjustment in the tax return.

Having said that, it is specifically mentioned in the clarification that any transfer pricing adjustment made by a Taxable Person in the Tax Return may be subject to a Tax Audit.

Further FTA has imposed certain key mandates to the Taxable Persons in this regard, which requires strict adherence.

Key considerations:

• No threshold – Disclosure of downward adjustment in tax return irrespective of value / nature;
• Maintaining Robust documentation – covering rationale for making downward adjustment, benchmarking analysis;
• Supporting workings – Reconciliation of values as per financials and as per tax return;
• Corresponding adjustments – Taxable person to ensure that symmetrical corresponding adjustments are made by the Related Parties to the transactions

This Public Clarification applies solely to adjustments required under Article 34(1) of the Corporate Tax Law and does not extend to the following:

• a. Corresponding adjustments made by the FTA to the taxable income of related party(ies) [as per Article 34(10)]; and
• b. Taxable person making an application to FTA to make corresponding adjustment pursuant to an adjustment made by foreign competent authority to the transaction. [Article 34(11)]

Key Takeaways

While prima facie this clarification brings in operational convenience to the Taxable Persons, it is indeed an indication of a strong review mechanism being built underneath by the FTA to closely monitor and scrutinize the downward adjustments irrespective of the volume.

Considering that FTA has lifted the approval mandate for disclosure of downward adjustment, the burden of proof entirely rests on the taxable person and hence it is imperative to build a comprehensive defense mechanism well in advance.

The specific mandate on maintenance of a proper benchmarking analysis and the requirement to ensure symmetrical corresponding adjustments signify that the taxable persons cannot merely plug-in an adhoc number in their tax return, whereas it should be supported by a robust defense documentation prior to the filing of tax returns and to ensure that the Related parties also treat the adjustment consistently.

Understanding Pillar Two: Implementation and Implications – Impact on Indian HQ Groups

Jun 30, 2026

Nithya Srinivasan Founder, VSTN

Triveni Palla Director, VSTN

The OECD/G20 Pillar Two framework introduces a 15% global minimum effective tax rate for large multinational enterprise groups and is reshaping international taxation even in countries that have not fully implemented the rules domestically. Where profits in a jurisdiction are taxed below 15%, a top-up tax may be imposed through a hierarchy of rules: the source jurisdiction may collect it through a Qualified Domestic Minimum Top-up Tax (QDMTT), the parent jurisdiction may apply the Income Inclusion Rule (IIR), and, failing both, other jurisdictions may impose it under the Undertaxed Profits Rule (UTPR). As implementation expands globally, Indian businesses are increasingly exposed because taxing rights can be triggered by the location of parent entities, subsidiaries, and other group companies.

This article aims to provide an overview of the implementation of Pillar Two and its implications worldwide, along with a focused analysis of its impact in India.

Pillar Two Rule Hierarchy

Once a multinational group’s income and effective tax rate have been calculated, and after reducing income through the substance-based carve-out, any top-up tax required to reach the 15% minimum rate is allocated through a strict hierarchy of rules. This ensures that low-taxed income is taxed somewhere while still giving priority to the jurisdiction where the income arises.

Substance-Based Carve-Out and Its Interaction with Top-Up Tax: Under Pillar Two, the substance-based carve-out, or Substance-Based Income Exclusion (SBIE), reduces exposure to top-up tax by excluding a portion of income linked to genuine economic activity. It is calculated using eligible payroll costs and the carrying value of tangible assets, while intangible assets such as intellectual property are excluded. The objective is to ensure that the global minimum tax targets excess or mobile profits rather than routine returns arising from real operations.

The carve-out is determined by applying prescribed percentages to payroll and tangible assets and deducting that amount from GloBE income before the top-up tax is computed. During the transition period, these percentages gradually reduce over ten years, with payroll decreasing from 10% to 5% and tangible assets from 8% to 5%. As a result, only the residual income is tested against the 15% minimum tax, lowering the tax burden for businesses with meaningful employees and physical assets.

The carve-out is intended to encourage real investment and distinguish routine business profits from profits that may reflect profit shifting. It supports activities such as hiring, manufacturing, and maintaining local operations, but its protection is limited because it applies only to tangible substance, declines over time, and does not remove Pillar Two exposure entirely. The greater the real economic substance in a jurisdiction, the greater the carve-out and the lower the potential top-up tax.

Qualified Domestic Minimum Top-up Tax (QDMTT): The first rule applied is the QDMTT. This allows the source (local) country to collect the top-up tax itself. If a jurisdiction applies QDMTT, it effectively “uses up” the top-up tax, preventing other countries from taxing the same income again. This rule gives countries the primary right to tax income generated within their borders.

Income Inclusion Rule (IIR): If no QDMTT is applied, the IIR comes next. Under IIR, the parent company’s jurisdiction collects the top-up tax on low-taxed income of its subsidiaries. This ensures that, even if the source country does not act, the group’s headquarters country steps in to enforce the minimum tax.

Undertaxed Payments Rule (UTPR): Finally, if neither QDMTT nor IIR applies—such as when the parent jurisdiction has not implemented the rules—the UTPR acts as a backstop. In this case, other countries where the group operates allocate and collect the remaining top-up tax, typically by denying deductions or making adjustments.

Overall, the system ensures that after accounting for real economic substance, any remaining low-taxed profits are taxed to at least 15%, with taxing rights flowing from the local jurisdiction (QDMTT) to the parent jurisdiction (IIR) and, if needed, to other jurisdictions (UTPR).

Global Implementation Landscape

Although more than 140 jurisdictions have agreed to the framework in principle, implementation remains uneven. A large number of countries have already legislated or are actively implementing the rules, but differences in adoption speed, economic priorities, and administrative capacity have created a fragmented global landscape. The status of implementation of Pillar 2 in various jurisdictions is summarised below:

India and China: As of mid-2026, both India and China have not yet implemented OECD Pillar 2 rules (i.e., no enacted IIR, UTPR, or domestic minimum top-up tax), despite being Inclusive Framework members; India is taking a measured, preparatory path, evidenced by accounting standard amendments and ongoing policy evaluation before legislation, while China remains more non-committal, with no formal legislative roadmap or public implementation timeline announced.

European Union (EU): The European Union is the global leader in Pillar Two implementation, with the Directive requiring transposition by the end of 2023, the IIR generally effective from 2024, and the UTPR from 2025. Member States such as Germany, France, the Netherlands, Spain, and Italy have moved forward under a mandatory regional framework, and many have also adopted QDMTTs to retain top-up tax revenue domestically.

United Kingdom: The United Kingdom has fully implemented Pillar Two rules, with the IIR and QDMTT effective from 2024.

Brazil: Brazil has already enacted its own Qualified Domestic Minimum Top-up Tax (QDMTT) and actively pursuing to be recognized as an eligible “Side-by-Side” jurisdiction.

Japan and South Korea: In Asia-Pacific, Japan and South Korea are among the earlier adopters of Pillar Two, with Japan moving toward UTPR implementation from 2026.

Australia: Australia has fully enacted Pillar Two legislation, with IIR and QDMTT effective from 2024 and the UTPR from 2025.

Southeast Asia: Countries such as Indonesia and Thailand are actively implementing Pillar Two, with Indonesia issuing detailed regulations in 2026.

Canada: Canada continues to make legislative progress on Pillar Two, with the UTPR still under consideration in 2026.

United States: The United States has not fully adopted Pillar Two as of 2026. In Jan 2026, OECD countries agreed on a “side-by-side” framework for the U.S. and continues to rely largely on its existing GILTI regime.

Latin America: In parts of Latin America, including Brazil, Pillar Two remains largely at the consultation stage.

Middle East and Low-Tax Jurisdictions: Jurisdictions such as the UAE, Bahrain, Kuwait, and Qatar are moving toward gradual adoption, often emphasising QDMTTs to protect their domestic revenue base.

Africa and Developing Countries: Across many African and other developing jurisdictions, adoption remains mixed, with a number of countries still evaluating or delaying implementation.

Cross-Jurisdictional Challenges

Across jurisdictions, the main challenges arising from Pillar Two can be summarised as follows:

For administrators

• Harmonising Pillar Two with different domestic tax systems and legal frameworks.
• Fragmented implementation timelines and uneven adoption of QDMTT, IIR, and UTPR.
• Heavy data, systems, and reporting requirements, including the GloBE Information Return.
• Limited administrative capacity, training, and digital infrastructure, especially in developing economies.
• Difficulty aligning existing tax incentives and domestic regimes with the minimum tax framework.
• Frequent rule changes and evolving guidance, creating uncertainty for businesses and tax authorities.
• Political, legal, and geopolitical tensions, including treaty constraints and concerns around extraterritorial rules such as the UTPR.
• Reduced effectiveness of tax competition, leading to greater reliance on subsidies and other non-tax incentives.
• Concerns that top-up tax revenue may be collected by other jurisdictions, affecting competitiveness and investment models.

For multinational enterprises

• Capturing and reconciling jurisdiction-level financial and tax data across multiple systems and reporting standards.
• Managing complex calculations, including effective tax rates, GloBE adjustments, top-up tax, and applicable exceptions.
• Meeting extensive filing and reporting obligations across multiple jurisdictions.
• Responding to uneven implementation, evolving OECD guidance, and interpretational uncertainty.
• Reassessing tax incentives, investment structures, and governance frameworks.
• Managing financial reporting impacts, including tax expense, deferred tax, earnings volatility, and ETR forecasting.
• Addressing double taxation risk, taxing-right disputes, and limited dispute resolution mechanisms.
• Coping with transition pressure, including compressed timelines, system upgrades, and reliance on interim solutions.

Despite these challenges, Pillar Two marks a fundamental shift away from tax competition, signaling a new era in international taxation- albeit one still under construction.

Implications for Indian Businesses

Indian-headquartered multinational groups (with ≥ €750 million revenue) need to prepare for compliance even though India hasn’t enacted Pillar 2 yet by:

• (i) assessing their jurisdiction-wise effective tax rates (ETR) to identify exposure below 15%
• (ii) building systems to monitor the compliance (Registration, Notifications, return filings etc.) compute GloBE income and top-up tax,
• (iii) tracking where foreign jurisdictions apply IIR/UTPR, and
• (iv) enhancing financial disclosures and data readiness in line with India’s updated accounting standards.

In practice, this means upgrading tax reporting, modelling potential top-up taxes abroad, reviewing structures involving low-tax jurisdictions, and preparing for eventual Indian legislation so they do not lose tax credits or face unexpected global minimum tax liabilities.

For these groups, Pillar Two reduces the value of low-tax structures and can increase global tax costs. Offshore arrangements in jurisdictions such as the UAE, Singapore, or Mauritius become less effective because any tax rate below 15% may be neutralized through top-up taxation elsewhere. The rules also increase compliance complexity through jurisdiction-by-jurisdiction effective tax rate calculations, GloBE income adjustments, and the need to align financial and tax data across multiple systems. In practice, groups may face earnings volatility, restructuring of supply chains and holding structures, and a higher risk of double taxation or disputes where domestic tax rules do not align neatly with GloBE rules.

For Indian subsidiaries of foreign multinational groups, low Indian tax outcomes arising from SEZ benefits, tax holidays, or deductions may no longer provide a meaningful group-level advantage because the parent jurisdiction may collect the shortfall. This weakens the value of India’s traditional tax incentives for large MNEs and may influence investment and transfer pricing decisions by shifting the focus from tax efficiency to business substance, including employees, assets, and operational presence. Strategically, Indian-headed groups must strengthen tax governance and data systems, foreign groups may reassess how they structure Indian operations, and India itself faces the policy question of whether to adopt measures such as a QDMTT to retain taxing rights and revenue.

Sector-Specific Implications in India

Manufacturing

The implementation of Pillar Two reduces the importance of low-tax jurisdictions in business decisionmaking. For the manufacturing industry, this creates a more level playing field by limiting tax-driven competition and encouraging companies to compete based on operational strengths such as efficiency, innovation, and supply chain capability rather than tax advantages.

With tax considerations becoming less dominant, manufacturers can make more strategic location decisions based on business fundamentals like access to markets, infrastructure, skilled labor, and energy resources. This shift supports stronger and more resilient supply chains, enabling companies to optimize operations for long-term sustainability rather than short-term tax benefits.

Pillar Two also rewards companies with substantial economic presence through mechanisms such as the substance-based income exclusion, which considers tangible assets and workforce. As manufacturing is inherently asset- and labor-intensive, firms can benefit by maintaining real production activities, reducing exposure to additional taxes while reinforcing their operational footprint.

In addition, the reduced effectiveness of aggressive tax planning allows companies to simplify their structures and shift focus toward core business operations. Under Pillar 2, sustainable incentives such as qualified tax credits, subsidies, grants, and expenditure-based incentives are preferred because they do not significantly reduce the effective tax rate (ETR) below 15%. Instead of lowering taxes, they are often treated as income or receive favorable treatment in ETR calculations. The Indian HQ multinational enterprises can renegotiate with the Government to provide such incentives that will allow benefits while ensuring the ETR remains at or above 15%, thereby avoiding top-up tax.

Overall, despite added compliance requirements, Pillar Two provides greater tax predictability and encourages long-term investment in productive capacity, automation, and sustainability.

Global Capability Centres

Pillar Two’s global minimum tax of 15% reduces the benefits of low-tax jurisdictions, making tax less important in GCC location decisions. For GCCs, this means that traditional tax incentives such as SEZ benefits, expense-based incentives or operating in low-tax countries become less valuable. As a result, companies are shifting focus toward talent, scale, and operational efficiency.

This change is transforming GCCs from cost-driven service centers into strategic hubs that deliver higher value work like R&D, innovation, and product development, while low-value activities decline.

Pillar Two also has implications for transfer pricing and operating models. Traditional cost-plus arrangements used by many GCCs are being reassessed to ensure alignment with actual functions, risks, and assets. This may lead to recalibration of margins and greater scrutiny of whether GCCs truly reflect their assigned economic roles. In parallel, the new regime introduces significant compliance requirements, including detailed jurisdiction-wise tax reporting and effective tax rate calculations, increasing operational complexity for multinational groups.

Overall, GCC competitiveness is now driven more by capabilities and value creation than by tax advantages.

Distributors

OECD Pillar Two affects even routine entities like distributors. Although limited-risk distributors typically earn low, stable margins under transfer pricing, they may still face top-up tax if their effective tax rate falls below 15%.

The substance-based income exclusion (SBIE) offers limited relief since distributors usually have modest payroll and tangible assets. Traditional models where distributors earn low margins and profits are shifted to low-tax principal entities are becoming less efficient under Pillar Two.

As a result, companies are revisiting transfer pricing policies, often increasing distributor margins and reallocating profits toward market jurisdictions to maintain acceptable ETRs. Low-profit models like commissionaire structures are especially exposed and may be replaced with more efficient setups.

Overall, Pillar Two is pushing businesses to align transfer pricing with global tax outcomes, reducing the benefits of low-tax structures and requiring closer coordination between tax, finance, and operations.

Conclusion

If India does not implement Pillar Two in the near term, Indian-headquartered groups should act now to map jurisdiction-wise effective tax rate exposure, identify where foreign IIR or UTPR rules could apply, and quantify potential top-up tax leakage outside India as from 2025 lot of key jurisdictions have implemented Pillar 2 rules. They should also strengthen data, systems, and governance to support GloBE calculations, registrations, notifications, and return filings across relevant jurisdictions. Existing structures involving low-tax jurisdictions, tax holidays, or incentive regimes should be reassessed to determine whether they still deliver value once foreign top-up taxes are considered. At the same time, groups should align finance, tax, and business teams on Pillar Two readiness, including financial statement disclosures and scenario modelling. Most importantly, they should prepare for eventual Indian adoption so that implementation, when it comes, does not create disruption, missed credits, or unexpected global tax costs.