Pakistan has joined the OECD’s global framework on corporate tax. The part that matters most to businesses is Pillar Two, which sets a floor of 15% on the effective tax rate of large multinational groups. It is not a new tax. It is a rule that limits how much large groups can reduce their tax burden by shifting profits to lower-tax jurisdictions.
This guide explains what Pillar Two is, which Pakistani companies fall in scope, how the 15% rate is worked out, what the income inclusion rules do, and what a company should be doing right now.
What is the OECD Pillar Two global minimum tax?
Pillar Two is the second pillar of the OECD/G20 framework to tackle base erosion and profit shifting. Where Pillar One focused on shifting where profits are taxed, Pillar Two changes how much tax large groups pay in the jurisdictions where they operate.
The core mechanism is simple. If a multinational group reports a low effective tax rate on the profits it earns in a country, and that rate is below 15%, then the difference is topped up. The top-up is allocated back to the home jurisdiction through a second, domestic top-up tax. The idea is that a large group should pay at least 15% somewhere, rather than paying almost nothing in some countries and slightly more in others.
It is worth being precise about what Pillar Two is not. It does not create a new form of corporate tax for ordinary businesses. It does not apply to small companies. And it does not change your FBR income tax return. It applies on top of corporate tax that already exists, and only to groups above a very high size threshold.
The EUR 750 million turnover threshold
Pillar Two only applies to multinational groups with a consolidated group revenue of EUR 750 million or more (roughly USD 800 million) in at least two of the previous four financial years. Below that, a company is out of scope regardless of how it is structured.
The threshold is a group-level figure, which is where many Pakistani companies get caught out. A Pakistani subsidiary does not need to turn over EUR 750 million itself. If it belongs to a multinational group that meets the threshold worldwide, its results can still be in scope. That means a large multinational’s Pakistan entity may have Pillar Two reporting obligations even though the local revenue looks modest on its own.
There is a second threshold that catches many more groups. If a group has revenue above EUR 750 million in only one of the previous four years, it can still be in scope if it meets a lower fixed threshold of EUR 200 million in at least two of those years. This is designed to stop groups from fluctuating in and out of scope around the main threshold.
How the 15% effective tax rate is calculated
The effective tax rate (ETR) is the simplest way to think about Pillar Two: the total tax a group pays, divided by the accounting profit it reports. The GloBE rules define exactly which taxes count in the numerator and which profits count in the denominator, and the formula is deliberately standardised so that the same group computes a similar ETR everywhere.
In broad terms, the numerator includes corporate income tax paid, plus several withholding taxes, plus a share of deferred tax. The denominator is financial accounting net income, adjusted for a set of exclusions. So the ETR is not simply your tax expense divided by your pre-tax profit in a local financial statement. It is a separately defined measure, and groups often need to build a parallel calculation to their normal tax reporting.
Pakistan has chosen the straightforward route of implementing the Income Inclusion Rule (IIR) as well as the Undertaxed Profits Rule (UPR). This matters more than it might sound, and it is explained in the next section.
Why Pakistan adopting the Income Inclusion Rule matters
Countries that implement only the Undertaxed Profits Rule apply a top-up tax where the subsidiary sits. Countries that also implement the Income Inclusion Rule apply an additional top-up in their own jurisdiction, regardless of where the low-taxed profit was earned.
This has a practical consequence. A Pakistani company that is part of a multinational group may now face a top-up tax calculated on the difference between the 15% floor and the rate the group actually paid on a low-taxed foreign subsidiary. The tax is collected in Pakistan, on profits earned elsewhere. For groups operating in the Middle East, Singapore, or other low-tax jurisdictions, this is the rule to focus on.
The rule is normally only relevant if the foreign jurisdiction has an effective tax rate below 15%. If the group pays 15% or more in that jurisdiction, no top-up arises and the point is moot. So the first question for any group is not "do we have a Pillar Two problem" but "which of our entities are taxed below 15%".
Filing and administrative obligations
An in-scope Pakistani group must register with the FBR for Pillar Two purposes, obtain a Pillar Two identification number, and file a GloBE Information Return. The return covers all the group entities in all jurisdictions, along with the ETR computed for each one and the top-up owed.
The GloBE Information Return is due within 18 months of the end of the fiscal year, with an earlier transitional deadline for the first reporting year. A Qualified Country-by-Country Reporting Safe Harbour can be used to stand in for the detailed country-by-country return for a transitional period, which simplifies the first years.
Penalties apply for late or missing filings, and for inconsistencies between the GloBE return and other tax information. The local top-up is a real liability, so the calculations behind it need to be supportable rather than estimated.
Administrative relief and safe harbours
The framework includes several pieces of administrative relief that are genuinely useful. De minimis revenue exclusions exempt entities and groups with revenue below EUR 10 million. The simplified ETR approach allows a group to use its financial accounting tax rate as a proxy for the GloBE ETR, which is a substantial simplification for groups in jurisdictions that have not yet adopted the detailed rules.
There are also several model provisions that a jurisdiction may allow: a payroll-based method for employees, a de minimis profits-based exclusion for small entities, and an investment profits safe harbour. Whether these apply depends on how Pakistan has implemented each one.
What affected companies should do now
- The practical steps, in order:
- Establish whether the group is in scope. Check consolidated group revenue against EUR 750 million for the last four years, and check whether the EUR 200 million fixed threshold is triggered instead.
- Map every entity the group controls, including low-interest entities that may be excluded, and note the fiscal year each one reports on. Mismatched year-ends are a common source of error.
- Compute the GloBE ETR for each entity using the defined numerator and denominator, and identify which jurisdictions fall below 15%. The simplified ETR approach is a reasonable starting point if it is available to you.
- Test whether the administrative relief provisions reduce the scope of what needs reporting. De minimis exclusions alone can remove a lot of the group.
- Register with the FBR and calendar the GloBE Information Return deadline, including the transitional deadlines for the first years.
- Reconcile the local top-up calculation with the Q1 ITR figures so that the numbers in the return agree with what was filed.
What this does not change
It is worth saying plainly what has not changed. Ordinary corporate tax rates have not moved. The FBR return for a normal trading company is unaffected. Personal income tax is unaffected. A small business with turnover under EUR 200 million that is not part of a large multinational group will not come near any of this.
The people who need to act on this are corporate tax managers in multinational groups and the advisers who support them. If that describes you, the work is primarily about data: collecting reliable ETR data across every jurisdiction in the group, and building a calculation that will withstand review.
Conclusion
The OECD Pillar Two global minimum tax introduces a 15% floor for large multinational groups, and Pakistan applies both the Undertaxed Profits Rule and the Income Inclusion Rule. For most Pakistani businesses this is simply not relevant. For the small number of groups in scope, it is a data and reporting exercise that needs to start well before the first filing deadline.
Written by
ETTC Team
Expert instructor at ETTC – Elite Tax Training Centre, helping professionals master practical taxation for global careers.
