The Looming Impact of the OECD’s Pillar Two (Global Minimum Tax) on Uganda’s Fiscal Landscape.

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A. Background

As the forerunner of the OECD’s BEPS 2.0 project, The Global Minimum Tax (Pillar Two) represents an important shift in the international taxation landscape, leading the OECD’s broader effort to modernize a century-old tax framework. Designed for an era of physical trade, the traditional rules have become increasingly obsolete in a borderless digital economy.

The OECD’s 15-point Base Erosion and Profit Shifting (BEPS) project, finalized in 2015, represented a landmark effort to plug systemic tax avoidance gaps. Since its implementation, it has fundamentally reshaped how cross-border transactions are taxed globally.

However, the initial BEPS package left a critical systemic gap unaddressed i.e. the disconnect between value creation and physical presence. In the modern digital economy, large multinationals can generate substantial revenue in a jurisdiction without a taxable physical footprint, allowing significant profits to remain untaxed in the market where the economic value is actually created.

More particular, the rise of digital platforms and the mobility of intellectual property have enabled MNEs to shift profits to low tax jurisdictions with greater ease. This practice has fueled intense tax competition, undermining the tax bases of higher taxed economies.

This necessitated continued work beyond the 2015 BEPS Actions culminating into a Two-Pillar Solution comprising of Pillar One and Pillar Two with Pillar One aimed at ensuring a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, while Pillar Two puts a floor on tax competition on corporate income tax through the introduction of a global minimum corporate tax at a rate of 15% that countries can use to protect their tax bases.

Despite the lack of consensus surrounding Pillar One, Pillar Two or the Global Minimum Tax has seen rapid global adoption and is now active in several major jurisdictions.

B. What is the Global Minimum Tax and how does it work?

At its core, the Global Minimum Tax is a worldwide agreement that large multinational enterprises (MNEs) must pay a minimum tax rate of 15% on the profits they earn in every country where they operate.

Before this, a company could be headquartered in a high-tax country but shift its profits to a low or no tax country where the tax rate was 0% or as low as 5% (tax haven).

  • The Top-Up Mechanism

The framework does not compel low or no-tax jurisdictions to change their tax laws but instead, it grants other countries the right to top up the tax whenever a multinational’s effective tax rate falls below 15% in a low tax jurisdiction where it has operations.

  • Example

Consider a Ugandan-based multinational with a subsidiary in a low-tax jurisdiction (Country H) where the tax rate is only 5%. If that subsidiary generates UGX 100 million in profit, it currently pays only UGX 5 million in local tax in that jurisdiction. Under traditional, siloed tax rules, this profit remains largely untaxed at the group level, creating a significant tax advantage.

Under Pillar 2, in this scenario, Uganda as the headquarters jurisdiction would identify the 10% gap between the subsidiary’s local rate and the 15% global minimum tax rate (floor). Consequently, Uganda would levy a UGX 10 million Top-Up Tax, ensuring the group’s total effective tax rate on those profits meets the global standard.

This mechanism ensures a global tax floor of 15%, rendering profit-shifting to low-tax jurisdictions redundant. Since the top-up tax will be captured regardless of the profit’s location, the competitive advantage of tax havens is fundamentally dismantled.

C. Who Does it Affect?

The Pillar 2 framework isn’t aimed at small local businesses or mid-sized startups. It specifically targets the big multinationals (MNEs). To fall under these rules, a company must have global annual revenues of at least €750 million (roughly $800 million) (i.e. what is referred to as ‘in scope entity’).

By focusing only on the largest companies, the rules capture the vast majority culprits of profit-shifting activity without burying small businesses in paperwork.

D. The technical design of the Global Minimum Tax

Designed to eliminate tax-driven profit shifting, the Global Minimum Tax (Pillar Two) introduces a sophisticated interlocking calculation process that enforces the 15% global tax floor.

  1. Scoping and Constituent Mapping

The process begins by identifying the Constituent Entities of an In-Scope MNE Group (those with consolidated annual revenues exceeding €750 million). This step maps every entity’s role within the group and determines its tax jurisdiction to ensure no pocket of global profit remains invisible to the framework.

  1. Determining Qualifying Income or Loss

The Qualifying Income for each entity is calculated using the financial accounting net income or loss used in the group’s consolidated financial statements. This figure is then refined through Pillar Two specific adjustments to align accounting profits with tax principles, such as adjusting for certain dividends, equity gains, and foreign currency exchanges.

  • Calculating Adjusted Covered Taxes and the ETR

Next, the Covered Taxes are determined for each entity. The Effective Tax Rate (ETR) is then calculated on a jurisdictional basis. This is done by dividing the aggregate adjusted covered taxes of all entities in a country by their aggregate qualifying income.

  1. The 15% Comparison and Top-Up Tax Calculation

If a jurisdiction’s ETR is below 15%, a Top-Up Tax percentage is calculated to close the gap. Before applying this percentage, the framework allows for a Substance-Based Income Exclusion (SBIE). This carve-out reduces the amount of low-taxed income subject to the top-up tax based on a percentage of the tangible assets and payroll costs in that country, recognizing genuine economic activity.

E. The Enforcement Mechanisms aka the Interlocking Rules

To ensure this tax is actually collected, the Model Rules utilize three primary charging mechanisms:

  1. Income Inclusion Rule (IIR)

This is the primary top-down rule. The IIR allows the jurisdiction of the Ultimate Parent Entity (UPE) to slap a top-up tax on the parent company in respect of any low-taxed income of its foreign subsidiaries.

  1. Undertaxed Profits Rule (UTPR):

This serves as a backstop, the UTPR applies if the low-taxed income is not fully captured by an IIR (for example, if the parent company is in a country that hasn’t adopted Pillar Two). It allows other jurisdictions where the MNE operates to deny tax deductions or make equivalent adjustments to collect the remaining top-up tax.

  1. Subject to Tax Rule (STTR):

A treaty-based rule that allows source countries to impose a limited top-up tax on certain related-party payments (like interest or royalties) that are taxed at a nominal rate below 9% in the recipient’s country. It acts as the first line of defense for developing nations.

  1. Where is Uganda affected

Uganda has a high statutory corporate tax rate (30%) which would ordinarily result in an effective tax rate of above 15%, but it offers generous tax holidays to exporters and strategic investors.

Under Pillar Two, if a large multinational (MNE) with over €750M in revenue enjoys a 0% tax holiday in Uganda, its Effective Tax Rate (ETR) in Uganda will fall below the 15% global minimum.

Another country (likely where the company is headquartered) will have the right to collect a Top-Up Tax to bring that rate to 15% using the Income Inclusion Rule. In effect, any tax revenue Uganda foregoes through tax holidays is simply ceded to a foreign treasury via the Top-up Tax. This renders the Ugandan incentive redundant for the investor and results in a direct transfer of fiscal resources from Uganda to another jurisdiction often times more advanced economies.

To prevent this tax ‘donation’ within the Pillar 2 framework, Uganda may implement a Qualified Domestic Minimum Top-up Tax (QDMTT) (must meet specific criteria to be qualified).

A Qualified Domestic Minimum Top-up Tax (QDMTT) means a minimum tax that is included in the domestic law of a jurisdiction and that:

  1. Determines the Excess Profits of the Constituent Entities located in the jurisdiction (domestic Excess Profits) in a manner that is equivalent to the GloBE Rules;
  2. Operates to increase domestic tax liability with respect to domestic Excess Profits to the Minimum Rate for the jurisdiction and Constituent Entities for a Fiscal Year; and
  • Is implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Rules and the Commentary, provided that such jurisdiction does not provide any benefits that are related to such rules.

A QDMTT ensures that any additional tax on economic activities in a jurisdiction that results from the Pillar Two minimum tax framework is to the benefit of the domestic jurisdiction.

  1. How the future will look like under pillar 2 for Uganda

Uganda has for instance used the 10-year tax holiday to attract large-scale investments in manufacturing, infrastructure, and Free Zones. In the future, these holidays will become ‘top-up targets’. If a multinational group (MNE) with global turnover above €750M operates in a Ugandan tax-free zone, their home country will simply collect the 15% that Uganda waived under a tax holiday.

To avoid donating tax revenue to foreign treasuries, Uganda will have to introduce a Qualified Domestic Minimum Top-up Tax (QDMTT).

This law will ensure that if a multinational’s effective tax rate in Uganda falls below 15%, the Uganda Revenue Authority (URA) gets the first right to ‘top up’ that tax to 15% locally.

Uganda will most likely have to reconsider its statutory tax holidays and bilateral investment agreements to ensure that local incentives are not neutralized by the global minimum tax framework.

Under the Pillar Two framework, tax disputes will transcend the traditional bilateral relationship between a taxpayer and the URA, evolving into complex cross-border reconciliations. For instance, if the URA calculates an effective tax rate of 12% while a parent jurisdiction asserts it is 16%, a jurisdictional conflict arises over the right to levy a top-up tax or if one is even due. This shift will inevitably drive a surge in Mutual Agreement Procedures (MAP) as the primary mechanism for resolving these international deadlocks.

  1. Kenya’s implementation of Global Minimum Tax, catch up moment for Uganda.

The Minimum Top-up Tax (must meet specific criteria to be qualified) was introduced in Kenya via the Tax Laws (Amendment) Act, 2024. According to the November 2025 regulations, this law applies to years of income beginning on or after 1 January 2025. Since the tax must be paid by the end of the fourth month following the financial year, in-scope MNEs must make their first payments by 30 April 2026.

As discussed above this will help Kenya stops other jurisdictions from collecting top-up taxes arising in Kenya through the application of IIR and UTPR.

With Kenya’s implementation of a Minimum Top-up tax, this shouldn’t be a case of let’s ‘wait and see’. It is a clear affirmation of the urgency to incorporate a Domestic Minimum Top up Tax in our domestic tax legislation.

 

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