"What Now?": The Potential Impact Of The G7 Agreement For EU And Swiss Taxpayers

I. Introduction

On June 28, 2025, the G7 issued a joint statement that marked a shift in the global tax landscape. The agreement, reached just days earlier between the U.S. Treasury and its G7 counterparts, confirmed that U.S.-parented multinational enterprises will be fully excluded from the Organisation for Economic Co-operation and Development's (OECD's) Pillar 2 Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR). Instead, the G7 endorsed a "SbS system" (SbS) under which the U.S. international tax regime, particularly the global intangible low taxed income (GILTI) rules (now net CFC tested income (NCTI)), will operate in parallel with Pillar 2. While the OECD Inclusive Framework (IF) had previ ously granted temporary relief to U.S. multinational enterprises (MNEs), the new G7 agreement signals a more permanent accommodation. In response, the U.S. Senate has withdrawn the proposed Section 899, a retaliatory measure targeting jurisdictions that applied Pillar 2 rules to U.S. groups. For European Union (EU) and Swiss taxpayers, the potential implications are complex.

he agreement raises fundamental questions about legal consistency and the future of coordinated implementation. It also introduces new uncertainties, par ticularly for jurisdictions that have already enacted Pillar 2 legislation, such as Switzerland and EU Member States. This article explores the potential legal, policy, and practical consequences of the G7 agreement for EU and Swiss MNEs. It also examines the remaining uncertainties as the global tax order enters a new phase.

II. Background

Pillar 2 is a project by the OECD and G-20 (IF) introducing top-up tax rules to ensure a minimum effective taxation of 15% in each jurisdiction where MNEs with a global turnover of at least EUR750 million op erate. Pillar 2 consists of interwoven measures, including an IIR, a UTPR and an optional qualified domestic min imum top-up tax (QDMTT). Pillar 2 is considered one of the most ambitious international tax policy initiatives to date, and as global implementation has advanced, tensions have emerged between the U.S. and other IF members. These tensions partially stemmed from U.S. dissatisfaction with Pillar 2, with House Republicans f lagging concerns over Pillar 2's extraterritorial aspects for over two years. The tension came to a head in May 2025, when the House fiscal 2026 budget reconciliation bill proposed a new Section 899. Section 899 would have introduced retaliatory measures such as increased with holding taxes against entities from jurisdictions deemed to impose unfair foreign taxes (the UTPR and digital services taxes).¹ While this provision remained in the Senate version released on June 17, Treasury Secretary Scott Bessent announced on June 26 that an agreement was reached with the G7 to remove Section 899 in ex change for limiting the application of Pillar 2 measures to U.S. MNEs, by granting a full exclusion from the IIR and UTPR to U.S.-parented MNEs.²

Despite its initial momentum, Section 899 was put on hold in favor of the SbS system. According to the G7 statement, the SbS system would comprise the following elements. Foremost, U.S.-parented MNE groups would be fully exempt from the application of both the IIR and the UTPR, with respect to profits earned domestically and abroad. Additionally, the SbS system would be de veloped in parallel with efforts to simplify the adminis trative and compliance burdens associated with Pillar 2. Similarly, the agreement also included a commitment to reassess the treatment of substance-based, non-refund able tax credits under Pillar 2.

In late August 2025, a discussion paper from the OECD proposing options on the SbS system was leaked.³ The discussion paper, dated August 13, 2025, proposes that the IIR and UTPR would not apply to the low-taxed profits of in-scope MNE groups headquar tered in a jurisdiction with an "eligible SbS regime." Additionally, the discussion paper states that such a re gime should not interfere with local QDMTTs. In this regard, the discussion paper proposed an initial sugges tion on the criteria to be applied to determine whether a jurisdiction has an eligible SbS regime. The proposal included the following criteria for a jurisdiction to sat isfy. First, it must impose tax on the income of con stituent entities at a rate above the agreed minimum, regardless of whether that income is earned domesti cally or abroad. Second, if the ultimate parent entity (UPE) of an in-scope MNE Group is located in such jurisdiction, the UPE must be taxed at the agreed rate on its share of income from controlled foreign corpora tions (CFCs), including income that has not been dis tributed. Third, such jurisdiction must offer a foreign tax credit or a similar form of relief for any QDMTT paid, subject to the same limitations that apply to other foreign tax credits under domestic law. The discussion paper was shared with delegates of Working Party No. 11, with a deadline to provide written comments by September 5, 2025. To date, no further information on the discussion paper or the outcome of the discussions has been shared publicly.

III. Implications for Multinational Enterprises with EU Nexus

Intensified negotiations within the EU resulted in the EU Minimum Taxation Directive (2022/2523) of December 14, 2022 (the Directive), which provided for the introduction of Pillar 2 in the EU. Direct taxation is essentially the last tax policy area within the EU where the approval of new legislation still requires unanimous voting. Navigating this political landscape made the adoption of the Directive challenging. Nevertheless, all EU Member States required to transpose the Directive into their domestic laws have done so as of today.

A. Competitive Distortions

At the end of 2022, there was widespread European anticipation that Pillar 2 would be adopted globally. However, that expectation has somewhat dissipated by now. The SbS system is supposed to remove the U.S. in ternational tax system from Pillar 2, with U.S.-parented MNEs effectively only facing QDMTTs in jurisdictions that have implemented the Pillar 2 rules. Meanwhile, other jurisdictions are seeking similar agreements, as can be derived from their responses to the G7 Agreement.⁴ T his raises the question of why EU-headquartered companies should remain committed to a system that imposes significant global compliance costs and poten tially higher effective tax rates (ETRs) than their compet itors based outside the EU, particularly those benefiting from a global exemption under frameworks such as the SbS system. Although OECD delegates remain opti mistic that an agreement on the implementation of the G7 Agreement can be reached soon,⁵ thereby indicating a future for Pillar 2, the fact that German voices pub licly called for suspending the implementation of Pillar 2 may be the first sign of cracks emerging within the EU's commitment to the initiative.⁶ While German busi ness leaders urged German Chancellor Friedrich Merz to withdraw from Pillar 2, the German Ministry of Finance responded by affirming its commitment to Pillar 2, albeit calling for some simplification.⁷

B. Compliance Considerations

Pillar 2 by no means simplifies global compliance. Rather, it effectively creates a third set of books, aside from tax and accounting. U.S.-parented MNEs with operations within the EU must still contend with this complexity, as the SbS system is not expected to ex empt them from the QDMTT imposed by EU Member States. However, the application of QDMTT safe har bors provides for some relief. Importantly, even if U.S. parented MNEs are ultimately excluded from the IIR and UTPR under the SbS classification, their compli ance obligations under Pillar 2 are unlikely to disappear entirely. Jurisdictions may still require U.S. MNEs to f ile a GloBE Information Return (GIR) to demonstrate eligibility for the SbS exclusion. This could involve pro viding detailed information on the group's structure, the jurisdiction of the UPE, and ETRs, even if no top-up tax is ultimately due.

EU-parented MNEs with operations in the United States face significantly greater compliance obligations under the full implementation of Pillar 2. According to a 2022 study examining the compliance costs asso ciated with Pillar 2 in Germany, authors predicted that German MNEs would pay around EUR319 million (about EUR703,000 per firm on average) for imple mentation and EUR100 million (about EUR214,000 per firm) annually for ongoing compliance, with higher costs for larger firms.⁸ These are burdens that German groups had not previously encountered. Given the in herent complexity of both the U.S. international tax system and the Pillar 2 system, it is difficult to determine whether EU-headquartered MNEs face a clear compli ance cost disadvantage compared to their U.S.-parented counterparts.

Furthermore, clarity will be needed on eligibility for the SbS system and the associated reporting obligations for EU parent companies that hold subsidiaries in low-tax jurisdictions through intermediary U.S. holding compa nies (same considerations apply for reporting obligations for Swiss parent companies, see section IV.B below). At present, it is unclear whether the IIR will apply to low taxed foreign subsidiaries held through an intermediary entity located in a jurisdiction operating an eligible SbS regime. If the eligibility of an SbS regime is assessed solely based on its application at the level of the UPE, then MNE Groups headquartered outside such jurisdictions would remain subject to the IIR on all of their profits, including those earned by constituent entities located in jurisdictions with an eligible SbS regime. In any case, a careful balance must be struck to avoid creating addi tional disparities by allowing U.S. MNEs to bypass all administrative obligations under the exemption.

C. Outlook

To date, the EU has not issued a formal public re sponse to the SbS exclusion, which might partly reflect the discontent among certain EU Member States, who expressed concerns over the G7 Agreement being negoti ated without their involvement.⁹ Setting aside the previ ously discussed considerations on competitive distortions and compliance burdens, the OECD's idea would be to accommodate the objectives of the SbS solution through one or more safe harbors. Within the EU, Article 32 of the Directive includes a provision allowing for the imple mentation of safe harbors. However, interpreting Article 32 of the Directive as a gateway for jurisdiction-wide carve-outs risks undermining the legal integrity of the EU framework. Originally designed to facilitate admin istrative simplification through safe harbors, Article 32 was never intended to justify broad exemptions based on political agreements. Warnings have been issued in liter ature that such reinterpretation could transform the pro vision into a "constitutional Trojan horse," eroding both the Directive's coherence and the EU's commitment to a level playing field.¹⁰

An alternative approach would involve amending the Directive itself, thereby abandoning the dynamic in terpretation of OECD Guidance and formally embed ding the SbS exclusion as a component of the EU legal framework. However, given the considerable political challenges that accompanied the Directive's initial adop tion, and considering explicit statements from certain EU Member States suggesting that the Directive does not serve their national interests,¹¹ this legislative route appears suboptimal from an EU perspective. It risks reopening complex negotiations and further fragmenting consensus at a time when cohesion is critical to main taining the credibility of the EU's commitment to Pillar 2. Against that background, it is unsurprising that EU legislators would favor a safe harbor mechanism over a formal amendment of the Directive.

IV. Implications for Multinational Enterprises with Swiss Nexus

Following the approved public vote on June 18, 2023, the required Swiss constitutional basis was created for implementing Pillar 2. The Swiss Federal Council, in exercising its authority, introduced the regulations on the Swiss QDMTT by means of a temporary ordinance on January 1, 2024 (Swiss Ordinance).¹² On November 20, 2024, the Swiss Ordinance was amended to include the Swiss IIR as of January 1, 2025. In an explanatory note, the Swiss Federal Council explained that it refrained from implementing the UTPR for the time being, citing heated debates on the compatibility of the UTPR with international law as well as rising political opposition to the UTPR, particularly in the United States.¹³

A. Competitive Distortions

Approximately 500 Swiss companies operate in the United States, while more than 1,200 American com panies are active in Switzerland.¹⁴ Under the current form of the SbS system, U.S.-parented groups are ex empt from both the IIR and the UTPR with respect to their domestic and foreign profits.¹⁵ As a result, Swiss entities belonging to U.S.-parented groups are placed in a more favorable position regarding the IIR. This may incentivize global restructuring among non-U.S.-par ented groups to relocate their headquarters to the United States. However, the SbS system is currently not expected to interfere with local QDMTTs.¹⁶ In other words, Swiss entities of U.S.-parented groups located in cantons with an ETR below 15% would generally remain subject to the Swiss QDMTT. In turn, this may encourage U.S. parented groups to migrate their Swiss subsidiaries to low-tax jurisdictions that do not operate a QDMTT regime. Nevertheless, such migration would typically trigger exit taxation in Switzerland,¹⁷ and depending on the timing of the migration, the Swiss entity may remain subject to the Swiss QDMTT until the beginning of the next fiscal year.¹⁸ Additionally, it is anticipated that the IF will consider introducing integrity rules to address QDMTT arbitrage.¹⁹

T he current version of the Swiss Ordinance excludes the application of Article 4.3.2 (c) of the GloBE Model Rules (MR) under the Swiss QDMTT.²⁰ The rule in Article 4.3.2 (c) MR stipulates that when a constituent entity is taxed under a CFC Tax Regime by its direct or indirect owners, the portion of covered taxes recorded in the owner's financial accounts on their share of the CFC's income is reallocated to the CFC itself. By ex cluding the application of Article 4.3.2 (c) MR, the taxes paid by the constituent entity-owner subject to a CFC Tax Regime on the Swiss entity's income are not real located to the Swiss entity. Consequently, this can re sult in a lower ETR for the Swiss entity under the Swiss QDMTT, potentially triggering top-up tax. However, even if the U.S. parent is exempt from applying the IIR and other jurisdictions cannot apply the UTPR due to the SbS system, the Swiss entity itself remains subject to the Swiss QDMTT if its ETR falls below the min imum rate. The QDMTT is calculated based on the ju risdictional ETR and operates as a standalone top-up tax mechanism. In other words, while the SbS system pro posed by the U.S. exempts U.S.-parented groups from the IIR and UTPR, it should not override the applica tion of the Swiss QDMTT. In effect, if the SbS system is implemented as proposed, the lack of reallocation would not be remedied for U.S.-parent groups, since the Swiss QDMTT would still apply. Therefore, the SbS system would not provide a particular advantage regarding the exclusion of Article 4.3.2 (c) MR vis-à-vis parent com panies located in other CFC regimes. Additionally, the explicit exclusion of Article 4.3.2 (c) MR in the current Swiss Ordinance is expected to be removed in the revised Swiss Ordinance (see below for details on the revised Swiss Ordinance).

B. Compliance Considerations

T he operation of the SbS system also raises compliance questions for Swiss entities of U.S.-parented groups. On behalf of all 26 cantons, the Swiss Tax Conference has introduced OmTax, a centralized information system for the Swiss domestic QDMTT and IIR. OmTax serves as a platform for identifying the tax liability of taxable constituent entities and for declaring the Swiss do mestic QDMTT and IIR. In other words, it facilitates the preparation and submission of the Swiss domestic QDMTT and IIR tax returns and has been available since January 1, 2025. Invoicing, collection, and settle ment of the Swiss domestic QDMTT and IIR are not handled through OmTax but remain the responsibility of the cantons via their existing systems. U.S.-parented MNEs with subsidiaries in Switzerland are expected to remain subject to the Swiss QDMTT and will presum ably file "regular" Swiss QDMTT returns via OmTax. In general, if a Swiss filing entity is not subject to the IIR, it must still submit a nil return through OmTax. Accordingly, the current structure of OmTax does not appear to create a significant disparity in administrative burden. However, it remains unclear whether compli ance simplifications will be granted to U.S.-parented Swiss entities or whether specific reporting requirements will be imposed.

Regarding the GIR, consideration will need to be given to the reporting requirements expected from U.S. parented MNEs (i.e., relevant group structure and iden tification of the UPE). The first international exchange of Swiss GIRs for the 2024 tax period is scheduled to take place by December 31, 2026. Group parent com panies based in Switzerland must submit a GIR to the Swiss Federal Tax Administration by June 30, 2026. By that time, the applicable reporting requirements must be clearly defined. This need for clarification extends be yond Switzerland and will also be anticipated across EU Member States (see above section III.B).

C. Outlook

To date, the Swiss government has not issued a formal public response to the SbS system. Switzerland is ex pected to take a cautious, "wait-and-see" approach be fore making any amendments to the Swiss Ordinance. When Switzerland voted in favor of the constitutional amendment to implement Pillar 2 via ordinance in June 2023, the expectation was that Pillar 2 would operate as an international system.²¹ However, with the introduc tion of the SbS regime and the continued non-partici pation of major jurisdictions such as China and India, questions may emerge on whether Pillar 2 can still be regarded as a truly international framework, as origi nally envisioned.

It is important to note that the Swiss Ordinance is an independent ordinance based on the Swiss federal con stitution.²² As such, it must generally adhere to funda mental constitutional principles, including the principle of legality and the prohibition of retroactivity. References to non-governmental rules within an independent ordi nance can be static, meaning linked to a specific set of rules at a fixed point in time; or dynamic, allowing the underlying materials to evolve without altering the or dinance itself. The Swiss Ordinance adopts a static ref erence to the MR, as the Swiss government recognised that a dynamic reference would raise constitutional concerns.²³ Consequently, any revision to the MR would necessitate a corresponding revision of the Swiss Ordinance.²⁴ Additionally, the Swiss Ordinance permits the use of the Commentary²⁵ as an interpretative aid for the MR, constituting an indirect dynamic reference. However, this raises constitutional questions when new guidance is released, particularly regarding whether such interpretation alters the substance of the MR. If it does, the Swiss Ordinance may require revision, which in turn may prompt questions on its compliance with constitu tional principles. Therefore, the introduction of a SbS system, and Switzerland's response to it, may also give rise to constitutional considerations.

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Footnotes

1. One Big Beautiful Bill Act (P.L. 119-21) (H.R. 1).

2. Sen. Mike Crapo, R-Idaho, post on X of Treasury Secretary Scott Bessent's announcement on removal of section 899 (June 26, 2025).

3. Stephanie Soong, Confidential OECD Documents Outline Potential Pillar 2 Changes, Tax Notes (2025), www.taxnotes. com/featured-news/confidential-oecd-doc uments-outline-potential-pillar-2-chang es/2025/08/29/7syzc (last visited October 9, 2025).

4. Lee Sheppard, Not GILTI and Pillar 2, Part 2, Tax Notes (2025), www.taxnotes.com/ tax-notes-international/base-erosion-and profit-shifting-beps/not-gilti-and-pillar-2 part-2/2025/10/27/7t6kl?highlight=g7%20 sheppard (last visited October 24, 2025).

5. Stephanie Soong, Top U.K. Delegate Hopeful for SbS Pillar 2 Tax Deal, Tax Notes (2025), www.taxnotes.com/tax-notes-international/ oecd-pillar-2-global-minimum-tax/top-u.k delegate-hopeful-side-side-pillar-2-tax deal/2025/10/13/7t2tb (last visited October 24, 2025).

6. Stephanie Soong, Three German States Call for Suspending Minimum Tax Talks, Tax Notes (2025), www.taxnotes.com/tax-notes-today-interna tional/oecd-pillar-2-global-minimum-tax/ three-german-states-call-suspending-min imum-tax-rules/2025/10/03/7t29p?high light=merz%20pillar%20two, (last visited October 24, 2025).

7. Alexander Peter, States' Proposal to Suspend German Global Minimum Tax Voted Down, Tax Notes (2025), www.taxnotes.com/ tax-notes-international/oecd-pillar-2-glob al-minimum-tax/states-proposal-sus pend-german-global-minimum-tax-vot ed-down/2025/10/13/7t2xr (last visited October 25, 2025).

8. Sean Bray and William McBride, Does the G7 Global Minimum Tax "SbS" Solution Give US Multinationals an Advantage?, taxfoundation.org/blog/g7-global-mini mum-tax-side-by-side-solution-us-multina tionals/ (last visited October 25, 2025).

9. Sheppard, supra note 4.

10. Dennis Weber, A full carve-out for U.S. groups for Pillar 2: an EU Constitutional Trojan Horse?, Kluwer International Tax Blog (2025), legalblogs.wolterskluwer.com/ international-tax-law-blog/a-full-carve-out for-us-groups-for-pillar-2-an-eu-constitu tional-trojan-horse/ (last visited October 26, 2025).

11. Elodie Lamer, Sunk Costs Don't Justify Continued Push for Pillar 2, Estonia Warns, Tax Notes (2025), www.taxnotes.com/tax-notes-today-international/oecd pillar-2-global-minimum-tax/ sunk-costs-dont-justify-continued-push-pil lar-2-estonia-warns/2025/09/19/7t11x (last vis ited October 26, 2025).

12. Ordinance on the Minimum Taxation of Large Corporate Groups (Verordnung über die Mindestbesteuerung grosser Unternehmensgr uppen, Mindestbesteuerungsverordnung; SR 642.161).

13. Federal Department of Finance, Explanatory notes on the amendment to the Ordinance on Minimum Taxation of Large Corporate Groups, Bern (November 20, 2024).

14. Swiss-U.S. Economic Relations, Federal Department of Foreign Affairs (2025), www.eda. admin.ch/countries/usa/en/home/represen tations/embassy-washington/embassy-tasks/ economic-and-financial-affairs/swiss-u-s- economic-relations-.html (last visited October 1, 2025).

15. G7 statement on global minimum taxes, Government of Canada (2025), www.canada. ca/en/department-finance/news/2025/06/ g7-statement-on-global-minimum-taxes.html (last visited October 1, 2025).

16. Soong, supra note 3.

17. Article 61b of the Direct Federal Tax Act (Bundesgesetz über die direkte Bundessteuer; SR 642.11); Article 24d of the Federal Act on the Harmonization of Taxes (Bundesgesetz über die Harmonisierung der direkten Steuern der Kantone und Gemeinden; 642.14).

18. Article 10.3.6 of the Model Rules; OECD (2021), Tax Challenges Arising from Digitalisation of the Economy—Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, doi.org/10.1787/782bac33-en.

19. Soong, supra note 3.

20. Article 2 para. 2 (b) of the Swiss Ordinance (Mindestbesteuerungsverordnung).

21. Federal Council Dispatch dated June 22, 2022, on the Federal Resolution on Taxation of Large Corporate Groups (Implementation of the OECD/G20 Project); BBI 2022 1700 Nr. 1.1.1.

22. Federal Constitution of the Swiss Confederation (Bundesverfassung der Schweizerischen Eidgenossenschaft; SR 101).

23. Federal Department of Finance, supra note 13 at 13.

24. Id.

25. OECD (2022), Tax Challenges Arising from the Digitalisation of the Economy—Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two), First Edition: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, doi. org/10.1787/1e0e9cd8-en.