How to Navigate Protectionism, Incentives, Pillar Two in 2026

Executives are operating in what many describe as a BANI world—brittle, anxious, nonlinear, and incomprehensible. Policy shifts are rapid, trade relations are uncertain, and investment decisions are increasingly shaped by the convergence of sustainability, fiscal incentives, and industrial policy.

Governments are deploying grants, subsidies, and targeted credits to secure critical industries, advance decarbonization, and retain investment at home.

The International Monetary Fund’s World Economic Outlook projects global growth at 3.1% for 2026, a modest downgrade despite the recent wave of US tariffs and geopolitical tensions.

The IMF cautioned that this resilience may be temporary, as tariff rates remain high and inflationary pressures persist. Yet the broader message is clear: The world economy is adapting and changing, looking for more regional, strategically hedged networks.

Protectionism and Incentives

Across major economies, fiscal and trade policies are increasingly focusing on industrial competitiveness.

In the US, industrial and fiscal policy now move in lockstep. The Inflation Reduction Act and the massive 2025 tax-and-spending package offer production-linked credits, accelerated depreciation, and investment deductions for energy, semiconductors, and advanced manufacturing. Many credits are refundable or transferable, effectively operating as grants and improving liquidity.

These fiscal tools are supported by evolving import tariffs on steel, electric vehicles, and clean-tech components. This combination attracts global capital but adds uncertainty.

Tariff schedules and the 2025 tax-and-spending law provisions have changed several times, complicating project timelines and modeling. The US remains a major destination for industrial investment, yet multinational enterprises must factor in policy revisions and short implementation cycles.

In the EU, high energy and labor costs, plus a dense regulatory framework, continue to pressure competitiveness. One of the EU’s strategies is to turn decarbonization into an economic advantage. The Clean Industrial Deal and competitiveness compass aim to channel funding toward green manufacturing, circular-economy projects, and digitalization.

The Clean Industrial State Aid Framework, expected this year, will expand member countries’ ability to grant tax credits, accelerated depreciation, and direct funding for low-carbon projects. Additional programs such as the Innovation Fund, Important Projects of Common European Interest initiatives, and Horizon Europe complement this approach.

Meanwhile, the Carbon Border Adjustment Mechanism and EU Emissions Trading System seek to equalize carbon costs between EU producers and importers.

But simplification efforts under the omnibus legislative packages are bringing mixed results. Constant regulatory updates on key regulations such as the corporate sustainability reporting directive, corporate sustainability due diligence directive, and carbon border adjustment mechanism are creating uncertainty and this is only the beginning of a scheduled regulatory simplification wave.

Integrated data and full understanding of the supply chain is necessary to manage this complexity and access available funding streams.

Fiscal incentives, protectionist measures, and sustainability goals are now intertwined across these regions.

Pillar Two

The OECD Pillar Two framework was designed to end the global “race to the bottom” in corporate taxation by establishing a 15% minimum effective tax rate for large multinational groups. By late 2025, over 50 jurisdictions had implemented the Pillar Two rules or a domestic top-up tax of 15%.

The US didn’t implement the Pillar Two rules as it maintains that its net CFC tested income (formerly known as (GILTI), regime achieves similar goals. In the first week of January, Organization for Economic Cooperation and Development Inclusive Framework members reached agreement on a side-by-side approach, allowing the US system to operate alongside Pillar Two through dedicated safe harbors and creating the potential for other jurisdictions with eligible regimes to seek similar treatment.

Rather than delivering a fully uniform minimum tax framework, the side-by-side and ultimate parent entity safe harbors are expected to result in a more differentiated pattern of implementation over time. While many jurisdictions apply Pillar Two from fiscal year 2024, others will apply the rules from fiscal year 2025 or later, and further divergence may emerge depending on whether countries legislate for, or seek eligibility under, the new safe harbors.

Multinational groups are therefore likely to face a patchwork of outcomes that interact differently with domestic tax systems and incentive regimes.

A central question is how grants, tax credits, and other incentives are treated under this evolving framework. As part of its side-by-side package the OECD issued new administrative guidance on tax incentives, confirming that certain refundable or marketable tax credits recognized as income may retain their value under Pillar Two, subject to conditions.

The package also introduces a substance-based tax incentive safe harbor for selected expenditure-based and production-based incentives linked to real economic activity, while income-based incentives such as tax holidays or patent boxes still may depress effective tax rates and trigger top-up tax obligations.

At the same time, the guidance tightens integrity conditions by excluding incentives granted under discretionary governmental arrangements from beneficial treatment, in order to prevent incentives from being used to return tax in a way that would undermine the global minimum tax.

Further guidance is expected this year to address cases where incentives formally meet the definition of qualifying tax incentives but in practice offset the impact of Pillar Two.

Administrative guidance adopted in the first week of January further clarifies the treatment of government-granted tax benefits, including a limited grace period, generally covering fiscal years 2024 and 2025, for certain deferred tax expenses arising from arrangements in place before November 2021. The guidance also reinforces integrity safeguards to prevent the creation of new deferred tax assets designed to undermine the 15% effective tax rate.

For some time already, countries have been adjusting their tax frameworks in anticipation of these rules, converting deductions into grants, shortening refund periods, or making research and development credits refundable. For example, a renewable energy project supported through a refundable credit recognized as income is more likely to preserve its value under Pillar Two than one relying on a long tax holiday.

This allows governments to maintain competitive, investment-focused incentive regimes while operating within the constraints of the global minimum tax.

Adapting to Uncertainty

The current environment is turbulent. Existing geopolitical global dynamics complicate long-term investment planning. Incentives that appear beneficial today may lose value if their treatment evolves, and tariff changes can alter cost structures overnight. The IMF has noted that the private sector has responded with agility by front-loading imports, diversifying sourcing, and rerouting trade flows, but volatility remains a defining feature.

To navigate this environment, companies should invest in data traceability and scenario modeling. Mapping supply chains, origins, and combined nomenclature codes helps firms quantify tariff exposure, carbon costs, and compliance requirements under EU regulations.

AI-driven analytics are increasingly used to model the combined impact of tariffs, incentives, and minimum tax rules, providing corporate boards with timely insights into regulatory and fiscal risk.

Effective governance is equally important. Tax, trade and customs, treasury, sustainability, and government affairs teams should collaborate from the start of project planning to ensure that investment structures are both compliant and optimized. Waiting until projects are underway often means missed opportunities or higher exposure to policy changes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ruth Guerra is head of global ESG tax and legal, KPMG International.

Weronika Zurawska is tax consultant, EU Green Deal, ESG tax and legal, KPMG Meijburg & Co.

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