Pillar Two: how tax authorities can respond to common implementation challenges

Pillar Two represents a landmark shift in international tax cooperation. Developed under the OECD/G20 Inclusive Framework, its goal is reduce profit shifting and ensure that large enterprises with consolidated revenues of at least €750 million pay at least 15 percent corporation tax irrespective of their headquarter location or the jurisdictions in which they operate. Entities not in scope of Pillar Two include government entities, non-for-profit organizations, or entities that meet the definition of a pension, investment or real estate fund.¹

Certainly, the framework is global in ambition; but its implementation has been anything but uniform. Some jurisdictions, such as Germany, the UK, and Japan, have already enacted legislation and are preparing for enforcement in 2026. Others have delayed or deprioritized adoption. Then, there have been notable non-adopters. In January 2026, the US Department of the Treasury, for example, announced that US-headquartered companies would be exempt from Pillar Two’s requirements following the Inclusive Framework agreed on January 5, 2026, as part of a new “side‑by‑side” (SbS) agreement.2

Of course, this divergence creates a fragmented compliance landscape, raising questions about how effective the framework can be without broader alignment.

For tax authorities, the challenge is twofold: enforcing a complex new standard, while navigating a global environment where not all players are moving at the same pace.

Diverging enforcement paths

In Europe, Pillar Two has gained significant traction. The EU adopted a directive requiring member states to transpose the rules into national law by the end of 2023, with application beginning in 2024. Jurisdictions like France and the Netherlands have already issued guidance and are building administrative infrastructure to support enforcement.

Emerging economies face a different set of challenges. Limited digital infrastructure, smaller, dedicated tax teams, and competing policy priorities make it harder to operationalize Pillar Two, even when legislation is in place. In some cases, authorities are still working to understand the scope of their obligations and the data they will need to collect.

Operational strain and data complexity

Even in jurisdictions that are moving ahead, Pillar Two’s implementation brings significant operational demands. Tax authorities must identify in-scope entities, compute the effective tax rate within the jurisdiction, and calculate top-up taxes, when needed. This requires access to granular financial and ownership data, often across multiple systems and formats.

For tax authorities, the result is a growing administrative burden. Staff must be trained to handle new processes, develop guidance, and prepare to review documentation that may not arrive until 2026.

The need for international coordination, technology investment, and policy alignment with existing regimes makes Pillar Two more than a compliance exercise: it is a structural transformation in tax administration. As such, without the right tools and data, enforcement risks becoming reactive and inconsistent.

In-scope multinational corporations are also struggling to prepare. Many are unsure how to segment financial data, align reporting with new requirements, or anticipate how tax authorities will interpret the rules. The interaction between Pillar Two and existing tax regimes, such as controlled foreign corporation (CFC) rules and tax incentives, adds further complexity.

Bridging Pillar Two and transfer pricing

Yet another area requiring attention is the intersection between Pillar Two and transfer pricing. While the two frameworks are distinct, they are deeply interconnected.

Transfer pricing rules, based on the arm’s length principle, remain the primary tool for allocating profits among related entities. But Pillar Two introduces a parallel mechanism: a jurisdictional top-up tax based on effective tax rates. Since any transfer pricing adjustment directly influences the jurisdiction's effective tax rate, it also determines whether a top-up tax applies. This raises important questions for tax authorities:

• How should transfer pricing adjustments be reflected in Pillar Two calculations? 
• What happens when a jurisdiction’s transfer pricing outcomes differ from those of another country applying a top-up tax? 
• How can authorities ensure consistency between transfer pricing audits and Pillar Two enforcement? 

Some jurisdictions are beginning to address these questions by embedding the OECD arm’s length principle into Pillar Two legislation. Other countries are still evaluating how to align their approaches.

For tax authorities, the key will be coordination—both internally, between transfer pricing and Pillar Two teams, and externally, through competent authority agreements and multilateral frameworks.

Strategies for tax authorities

So, where next for tax authorities getting to grips with Pillar Two? In our view, tax authorities can take several immediate steps to get ahead of Pillar Two reporting coming into effect in 2026:

• Map the base population: Identify which multinational groups are likely to fall within scope, based on revenue thresholds and jurisdictional presence. 
• Invest in data integration: Align internal systems with external data sources to create a unified view of taxpayer risk. 
• Coordinate across departments: Ensure that transfer pricing, audit, and compliance teams are aligned on how Pillar Two will be enforced. 
• Engage with peers: Participate in international forums to share best practices and align on interpretive approaches. 

 

How Moody’s can help

Moody’s supports tax authorities with tools and data to help operationalize Pillar Two more effectively.

Our comprehensive data repository can help authorities to identify in-scope entities and map corporate structures across jurisdictions. Users can effectively isolate entities with consolidated revenues exceeding the €750 million threshold and confirm their multinational status to establish a base population for analysis and policy modeling.

Once the relevant MNEs are identified, the next step is to navigate their complex global structures and assess the financial impact. Moody's delivers a significant advantage here by providing deep insights into financials and corporate ownership, allowing authorities to map out an MNE’s full international footprint and understand its presence across various jurisdictions. This is crucial for calculating ETRs and modelling potential effects on tax collection. Furthermore, we are continuously enhancing our solutions with advanced modelling and more accurate insights, designed specifically to help policymakers address the ongoing complexities and future challenges of global tax reform.

For transfer pricing, Moody’s offers a generative AI-powered benchmarking tool that automates comparability analysis across company, royalty, and loan data. This helps authorities validate arm’s-length pricing more efficiently and align transfer pricing enforcement with Pillar Two objectives.

What’s next

Pillar Two looms, but its success relies on its effective implementation. For tax authorities, that means building the capacity to enforce a complex new standard in a fragmented global environment.

It also means rethinking how data is used, how teams collaborate, and how enforcement strategies evolve. With the right tools, partnerships, and planning, tax authorities can turn Pillar Two from a compliance challenge into a catalyst for modernization.

Get in touch

Moody’s is ready to support that journey. Contact our team to learn more about our tax and transfer pricing solutions – we will be happy to help.