On June 26, 2025, U.S. Treasury Secretary Scott Bessent announced that the United States and the Group of Seven (G7 — including the United States, United Kingdom, Canada, France, Germany, Italy, and Japan) had reached a Joint Understanding on the Pillar Two rules of the Organisation for Economic Co-operation and Development (OECD), establishing what is known as a “Side-by-side System.” Under this arrangement, the OECD’s two core Pillar Two rules — the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) — will not apply to multinational groups whose parent company is based in the United States. In exchange, the United States will withdraw Section 899 of its tax reform bill, the One Big Beautiful Bill Act (“OBBBA”), which was designed to enforce remedies against unfair foreign tax practices.
This arrangement was confirmed in the G7 Joint Statement issued on June 28, 2025. At the same time, Canada’s Minister of Finance and National Revenue, François-Philippe Champagne, announced on June 29, 2025 (local time) that Canada would repeal its Digital Services Tax (DST) to facilitate the conclusion of a mutually beneficial comprehensive trade agreement with the United States. As part of this move, Canadian Prime Minister Mark Carney and U.S. President Donald Trump have agreed to resume negotiations and aim to conclude a bilateral trade deal by July 21, 2025.
Although the U.S. government plans to enact the final version of the One Big Beautiful Bill Act by Independence Day, July 4, 2025, there remains uncertainty regarding the bill’s final passage and its provisions. This article aims to help readers understand the technical rationale and implementation pathway of Pillar Two and Section 899, based on the latest information available as of June 30, 2025 . The discussion is organized around institutional structure, coordination mechanisms, and unresolved issues but does not cover every policy scenario.
Core Logic of the “Side-by-side System”
The OECD’s Pillar Two framework is built around the Global Anti-Base Erosion Rules (GLOBE), also known as the Global Minimum Tax rules, which require multinational groups to pay at least 15% income tax on profits in each jurisdiction; otherwise, they must pay a top-up tax on the shortfall. The aim is to counter profit shifting and base erosion by multinational enterprises and prevent companies from artificially allocating profits to low-tax or zero-tax jurisdictions.
At the heart of Pillar Two are two key mechanisms: the IIR and the UTPR. Simply put, the IIR requires the headquarters of a multinational to top up taxes on its subsidiaries’ income earned in low-tax jurisdictions to ensure an effective minimum tax rate of 15% on a jurisdiction-by-jurisdiction basis. If the parent country does not implement the IIR or does so inadequately, other countries may apply the UTPR to collect the underpaid tax — meaning that the subsidiary’s host country may tax the low-taxed profits. Together, these rules constitute the GLOBE framework.
Although the United States supports combating global tax avoidance, it does not fully accept the current technical design of Pillar Two. The U.S. already has its Global Intangible Low-Taxed Income (GILTI) regime, which similarly “tops up” taxes but does so using a global blending approach — combining the income of all foreign subsidiaries to calculate an average tax rate. If the average meets the minimum threshold, no further tax is due. By contrast, the OECD’s IIR requires jurisdictional blending — assessing each country separately for low taxation. The U.S. is concerned that this country-by-country approach would increase the tax burden on American multinationals, especially if other jurisdictions do not recognize GILTI’s equivalence, creating a risk of double taxation.
In short, the U.S. opposes direct adoption of Pillar Two because it already has its own minimum tax regime (GILTI), and applying Pillar Two as-is would unfairly increase U.S. companies’ tax liabilities. This is why the U.S. has long pushed for a “Side-by-side System” under which GILTI is treated as equivalent and U.S. firms are not subject to additional top-up taxes abroad.
The G7 Joint Statement clarified that the U.S. tax system — specifically its GILTI regime — will coexist with the OECD’s GLOBE rules under Pillar Two. G7 members will not apply the IIR and UTPR rules to multinational groups whose parent is a U.S. company. In other words, other G7 countries will acknowledge that the U.S. regime meets the minimum tax standard to a reasonable extent, eliminating additional Pillar Two top-up taxes on American multinationals. This structure aims to respect U.S. tax sovereignty while preventing double taxation and tax disputes, providing U.S. multinationals with greater tax certainty.
Under the announced Side-by-side System, while the IIR and UTPR will not apply to U.S. multinationals, whether subsidiaries in each country may still be subject to a Qualified Domestic Minimum Top-up Tax (QDMTT) remains uncertain. The QDMTT is an OECD-approved domestic top-up tax designed to ensure companies meet the minimum tax threshold locally, thus avoiding IIR or UTPR top-up taxes imposed by other jurisdictions. If a U.S. multinational has subsidiaries in any G7 country with an effective tax rate below 15%, it could still face local QDMTT liabilities. Thus, while U.S. multinationals enjoy partial exemption, they are not fully immune to Pillar Two top-up taxation worldwide. Whether the U.S. will accept QDMTT exposure under Pillar Two or negotiate further with the G7 on this issue remains an open question.
Significance of Withdrawing Section 899
Known as the “retaliatory tax,” Section 899 was originally designed as a U.S. countermeasure against other countries imposing DSTs, UTPRs, or other “discriminatory taxes” targeting U.S. companies. The provision would have authorized the Treasury to impose escalating punitive tax rates on designated countries and residents and tighten the threshold for the Base Erosion and Anti-Abuse Tax (BEAT). Though Section 899 never took legal effect, its mere existence sparked widespread international controversy.
On June 26, 2025, Treasury Secretary Scott Bessent stated that, having secured G7 support for the Side-by-side System, he had requested congressional leaders to remove Section 899 from the One Big Beautiful Bill Act. Senate Republicans subsequently dropped the provision from the latest version of the bill. The G7 underscored in its statement that deleting Section 899 was a key step toward reaching agreement and would help provide a more stable environment for global tax negotiations. This Side-by-side System is expected to bring “greater stability and certainty to the future of the international tax system.” As noted, this arrangement will only be finalized once the OBBBA is signed into law.
Repealing Section 899 means the overall revenue forecast for the bill will be slightly reduced. According to estimates by the Joint Committee on Taxation (JCT), the House version would have raised about $116 billion over ten years; the revised Senate version dropped this to around $52 billion. With the Joint Understanding in place and Section 899 removed, that tax revenue will be lost. However, in the long run, preventing U.S. firms from facing double taxation and uncertain compliance risks abroad should help stabilize their global operations, keep headquarters and profits in the U.S., and indirectly strengthen the U.S. tax base and investment climate.
Institutional Uncertainty and Legal Challenges
EU legal hurdles for coordination among 27 member states: A G7 agreement does not automatically ensure uniform implementation at the EU regulatory level. The EU’s Pillar Two Directive (Council Directive (EU) 2022/2523) does not currently provide a clear exemption for the GILTI regime. In particular, Article 52 only permits equivalence recognition for non-EU countries under specific conditions, whereas GILTI’s global blending approach does not fully meet the technical criteria. If EU member states wish to exempt U.S. multinationals from the UTPR, the current directive would likely need to be amended — which requires unanimous consent from all 27 EU members, posing significant technical and political challenges. Even if the OECD issues “updated commentary” confirming GILTI’s equivalence, there remains legal debate over whether EU member states would adopt it.
Global group structures require reassessment of exposure: The current Side-by-side arrangement only applies to multinational groups with a U.S. parent. It does not exempt non-U.S. groups with U.S. subsidiaries or “sandwich structures” (e.g., Cayman–U.S.–third country). This means complex multinational structures must still evaluate each entity’s tax position in different jurisdictions to assess potential IIR or UTPR triggers, which could create real compliance burdens under Pillar Two.
Unresolved issues such as the Digital Services Tax: Although the G7 statement mentions constructive dialogue on digital taxation, as of June 30, 2025, other G7 countries (such as the UK, France, and Italy) have not made clear arrangements regarding existing DSTs, aside from Canada. Whether the U.S. will still respond using other legislative tools (such as future versions of the BEAT or new outbound tax provisions) remains uncertain.
Conclusion: Institutional Reconstruction in the Global Tax Competition
This round of the Side-by-side System reflects the evolution of international tax rules entering a new phase. Between the pressure for global convergence and the need to preserve national tax sovereignty, policymakers are seeking a dynamic balance; for companies, global tax compliance has shifted from a passive obligation to a competitive race for institutional adaptability.
The compromise between the G7 and the United States is not an endpoint but a new beginning for coexistence between institutional diversity and coordination. Only by understanding the technical logic behind the rules, grasping the boundaries of institutional interaction, and building global tax strategies in a jurisdictionally neutral manner can enterprises ensure robust operations and strategic leadership in an increasingly complex international tax environment.