Background
Pillar Two of the Organization for Economic Co-operation and Development/G20 (OECD/G20) Inclusive Framework’s two-pillar solution imposes a 15% minimum ETR on the jurisdictional profits of multinational enterprise (MNE) groups with annual revenue of EUR 750 million or more. The GloBE Model Rules apply through an ordered set of charging provisions: a QDMTT imposed by the source jurisdiction, an IIR generally applied by the parent jurisdiction and the UTPR as a backstop. Many jurisdictions brought the rules into effect beginning in 2024, with UTPR adoption generally following in 2025.
The United States did not enact the GloBE rules. Instead, in July 2025, the One Big Beautiful Bill Act (OBBBA) restructured the existing U.S. international tax regime for tax years beginning after Dec. 31, 2025. GILTI was renamed NCTI, but the change was more than cosmetic. The qualified business asset investment (QBAI) carve-out was eliminated, the section 250 deduction for NCTI was reduced to 40%, the deemed-paid FTC haircut was reduced to 10%, and the NCTI FTC limitation was revised so that interest and research expenses are no longer allocated against the NCTI basket. NCTI remains outside the GloBE rules, but it has become the U.S. regime against which Pillar Two may be compared, setting the stage for the later SbS Safe Harbor.
After the Group of Seven’s (G7) June 2025 statement, the Inclusive Framework released the Side-by-Side (SbS) package on Jan. 5, 2026. Its centerpiece, the SbS Safe Harbor, allows an MNE group whose ultimate parent entity (UPE) is located in a jurisdiction with a Qualified SbS Regime to elect a deemed top-up tax of zero under both the IIR and the UTPR for all jurisdictions for fiscal years beginning on or after Jan. 1, 2026. QDMTTs remain in place, continue to apply to U.S.-parented groups and are computed without pushdown of taxes imposed under controlled foreign corporation (CFC) regimes such as NCTI.
NCTI and Pillar Two interactions
For U.S.-parented multinational groups, NCTI and Pillar Two are not two versions of the same minimum tax. NCTI is a U.S. CFC inclusion regime computed under domestic tax principles. Like GILTI before it, NCTI permits income and foreign taxes from multiple CFCs to be blended in determining residual U.S. tax. By contrast, the GloBE rules impose a 15% jurisdictional minimum tax using financial accounting-based income and covered taxes tested on a jurisdiction-by-jurisdiction basis.
As a practical matter, high-tax income in one country generally cannot shelter low-tax income in another for GloBE purposes. A U.S.-parented group may satisfy the U.S. NCTI regime on a blended basis and still face a QDMTT in a jurisdiction where the local GloBE ETR falls below 15%.
That outcome depends in part on whether, and how, U.S. CFC taxes are recognized in the local jurisdiction’s GloBE covered tax computation. Under the February 2023 OECD Administrative Guidance, a formulaic allocation allowed certain ‘Blended CFC Taxes’ to be pushed down from the parent jurisdiction to the constituent entities generating the underlying income, increasing local covered taxes and reducing residual top-up tax under the IIR or UTPR. However, the rule is transitional, applying only to fiscal years that begin on or before Dec. 31, 2025, and end before June 30, 2027.
Although that transitional rule provides the historical reference point for analyzing NCTI, it does not answer how the successor U.S. regime should be treated after GILTI is replaced. NCTI applies a different effective U.S. rate, eliminates QBAI and changes the FTC mechanics. Together with the expiration of the blended CFC tax allocation rule, those changes leave the interaction between NCTI and Pillar Two uncertain.
However, the expiration of the transitional allocation rule does not necessarily determine how NCTI will be treated going forward. The OECD has not yet indicated whether NCTI will be viewed as a continuation of the prior U.S. CFC regime for GloBE purposes or whether a different allocation methodology will apply.
FTC considerations for Pillar Two taxes
In 2023, the IRS issued Notice 2023-80 announcing its intent to issue proposed regulations addressing the FTC treatment of certain Pillar Two taxes. The notice treats an IIR, a UTPR and a QDMTT imposed by a foreign country as separate levies, each tested independently for creditability. Taxes imposed under an IIR are generally denied a credit under the notice’s final top-up tax concept, while QDMTTs generally may be creditable where they qualify as foreign income taxes because they do not take owner-level taxes into account.
Under Notice 2023-80, if a taxpayer elects to claim FTCs, sections 78 and 275(a)(4) generally still apply to foreign income taxes paid or accrued for the year, even if a credit is ultimately disallowed for a particular tax. If an IIR or other final top-up tax is treated as a foreign income tax, the taxpayer may still have section 78 gross-up income based on the entire foreign tax liability and may be denied a deduction under section 275(a)(4), even though the tax itself is not creditable.
The next question is not only whether the foreign tax is creditable, but whether the resulting credit has value after applying the NCTI section 904 limitation. A QDMTT may be computed first under local law, while NCTI may later apply to the same earnings with the QDMTT potentially treated as a deemed-paid foreign tax. In that case, the result depends less on whether the combined QDMTT and NCTI rates are sufficient in theory and more on whether the taxpayer has section 904 limitation capacity to use the credit. Because unused FTCs in the NCTI basket cannot be carried forward or back, expense apportionment and timing differences between the QDMTT accrual year and the related CFC tested income year may determine the actual cash tax result.
The proposed regulations described in Notice 2023-80 have not been finalized, and the treatment of the UTPR remains unaddressed.
Separate questions remain at both the OECD and U.S. tax levels. The OECD has not addressed whether, following the expiration of the transitional blended CFC tax allocation rule, NCTI taxes will receive any form of allocation for GloBE purposes. At the same time, existing U.S. guidance on the FTC treatment of Pillar Two taxes predates both the OBBBA’s NCTI modifications and the SbS package, leaving open questions regarding how those taxes will operate within the revised NCTI FTC framework.
Expected guidance on NCTI and Pillar Two
The January 2026 OECD SbS package did not extend the prior GILTI blended CFC allocation approach to NCTI, leaving the treatment of NCTI taxes in GloBE ETR computations uncertain for 2026 and later years. The significance of this issue may diminish for U.S.-parented groups that elect the SbS Safe Harbor, since the blended CFC tax allocation approach was relevant to IIR and UTPR calculations. However, the treatment of NCTI under the GloBE rules remains unresolved. Because the OECD’s February 2023 guidance described that allocation approach as temporary pending a longer-term assessment, taxpayers should not assume that the Inclusive Framework will renew it in a way that restores the prior blending benefit or that the U.S. regime will be restructured on a jurisdictional basis. Instead, the two systems appear intended to operate in parallel. Future OECD guidance may continue to address implementation and simplification issues, including transitional matters, such as 53-week fiscal year cases addressed in the OECD’s May 2026 Administrative Guidance.
That leaves the Treasury and the IRS to address the U.S. tax law results of the parallel regime. As discussed above, Notice 2023-80 announced the government’s intent to issue proposed regulations on the FTC treatment of certain Pillar Two taxes, but those regulations have not been issued, and the notice predates both the OBBBA’s NCTI changes and the SbS package. Additional guidance therefore matters not only for determining whether a QDMTT is creditable, but also for determining how that credit is applied within the NCTI basket.
Until further guidance is issued, taxpayers should document the assumptions used, the alternatives considered and the basis for treating NCTI as a parallel layer of tax coordinated with foreign minimum taxes primarily through the FTC rules.
Accounting for income taxes under ASC 740
Under U.S. generally accepted accounting principles (GAAP), Pillar Two top-up taxes are generally accounted for as a period cost in the year the GloBE liability arises. But the specific interaction of NCTI modifications with Pillar Two tax expense raises questions that have not yet been addressed in authoritative guidance. Because the creditability position rests on Notice 2023-80 reliance guidance rather than regulations, a company or group taking credit in its NCTI calculation for QDMTTs is taking a tax position that must be evaluated under the uncertain tax position (UTP) guidance in ASC 740-10 for recognition and measurement. Whether a company’s position satisfies the more-likely-than-not recognition threshold depends on a detailed facts-and-circumstances analysis.
Another difficult issue for companies to address is the measurement of the UTP. Even if the QDMTT may be fully credited in the NCTI calculation, the benefit may be limited or even zero if section 904 capacity in the NCTI basket will not absorb the QDMTT. These uncertainties should be considered when measuring the UTP, as applicable. Companies should evaluate whether current disclosures adequately describe the uncertainty associated with open regulatory questions and document the assumptions and measurement judgments supporting their conclusions regarding the amounts recognized in their financial statements.
Data and reporting alignment
One practical issue is whether the same data set can support both GloBE reporting and U.S. return positions. The starting point may be the same trial balance or local-country reporting package, but the analysis will not necessarily lead to the same result. That is where reconciliation becomes important.
A jurisdiction’s GloBE income, covered taxes and QDMTT result may not line up with the amounts used for NCTI, FTC or provision purposes. Differences can arise from timing, local law adjustments, entity classification, accounting-to-tax adjustments and expense apportionment.
This will likely require closer coordination among tax reporting, provision, controllership and local country teams. A process built only for the GIR may not provide enough support for U.S. FTC conclusions, NCTI basket limitations or ASC 740 measurement judgments. A process built only around the U.S. return may miss jurisdictional GloBE adjustments needed for local filings. Taxpayers should consider a reporting approach that starts with common source data, clearly maps the adjustments required for each regime and leaves a usable audit trail for both foreign minimum tax filings and U.S. tax positions.
