Implementation of a Global Minimum Tax Rate

An overview of OECD Pillar Two Model Rules

Author Bright Grahame Murray, Cheryl Thomas, Partner (ACA CTA )
Edited By Integra International Grant Gilmour, CPA (Canada, BC) CPA (USA, Arizona)

The Organization for Economic Co-operation and Development [OECD] Base Erosion and Profit Shifting [BEPS] programme introduced 15 actions to ensure profits are taxed where economic activities generating the profits are performed and where value is created.

Action 1 was to address the tax challenges arising from the Digitalisation of the Economy. In the middle of 2021, the international community agreed a Two-Pillar Solution to address these issues.

Currently, multinational enterprises [MNEs] can earn revenue in foreign markets without being taxed there, due to current Permanent Establishment [PE] rules and some countries only taxing domestic business income of entities, not foreign income.


The Two-Pillar Solution is comprised of:

  1. Pillar One, which deals with nexus and profit allocation. Draft rules have been published for consultation but are not expected to be implemented until 2024. These rules will only apply to MNEs with a global annual turnover above €20 billion. It is anticipated that this threshold will reduce to €10 billion in the future.
  2. Pillar Two includes the Global Minimum Tax Rules which are intended to address the incentives to shift profits to low tax jurisdictions. This Pillar is expected to have a wider impact on businesses.

The OECD Pillar Two Model Rules, also known as the Global Anti-Base Erosion (GloBE) Model rules, are designed to ensure large MNE groups pay a minimum level of tax on income arising in each jurisdiction in which they operate, by imposing a top-up tax on profits arising in a jurisdiction, where the effective tax rate is below the minimum rate of 15%.

Current position regarding GloBE rules:

  • The rules were developed by delegates from all OECD/G20 Inclusive Framework member jurisdictions.
  • The Pillar Two Model (GloBE) Rules were released on 20 December 2021 and OECD commentary on the rules was released in March 2022.
  • The rules are intended to act as a template that jurisdictions can incorporate into domestic law. They have been designed to accommodate a diverse range of tax systems, therefore many of the specific provisions of the Model Rules may not apply to all jurisdictions or individual MNEs.

    The OECD has issued guidance on Pillar Two safe harbours and penalty relief (entitled Safe Harbours and Penalty Relief). The guidance includes the agreed terms of a transitional country by country reporting safe harbour that effectively removes the obligation of calculating the GloBE effective tax rate for an MNE’s operations in certain lower-risk jurisdictions in the initial years. There is a framework for the development of permanent safe harbours, but these are not yet confirmed. There is also a common understanding as to a transitional penalty relief regime for applying penalties or sanctions where an MNE has taken reasonable measures to ensure the correct application of the GloBE rules.

    On 2 February 2023, the OECD/G20 Inclusive Framework released the Agreed Administrative Guidance for the Pillar Two GloBE Rules, which is technical guidance to assist governments with implementation of the GloBE rules from the beginning of 2024. This document includes guidance on the recognition of the United States’ minimum tax (the Global Intangible Low-Taxed Income) under the GloBE rules and on the design of Qualified Domestic Minimum Top-up Taxes. It also includes further guidance on the scope, operation and transitional elements of the GloBE rules and responds to feedback on certain technical issues. The Agreed Administrative Guidance will be incorporated into a revised version of the Commentary that will be released later this year and replace the original version of the Commentary issued in March 2022, on which this article is based. The Inclusive Framework members have noted that administrative guidance on the interpretation and operation of the rules is likely to be required on an ongoing basis, to address further issues that may arise as jurisdictions implement the rules.

At the end of 2022, the OECD sought comments on compliance and coordination aspects of the Pillar Two global minimum tax. Two documents were published for consultation.

  • GloBE information return: seeking input on the amount and type of information that MNE groups should be expected to collect, retain and/or report for the application of the GloBE rules, and possible simplifications that could be incorporated in the GloBE information return as well as the ability of the MNE group to provide alternative data points.
  • Tax certainty for the GloBE rules: seeking views on potential next steps in connection with the development of various mechanisms, including dispute prevention and resolution, for achieving tax certainty under the Globe rules.
  • The consultation process closed on 3 February 2023 and progress continues on the above matters.


Format of the Model Rules. There are 10 chapters in the Model Rules

Chapter 1 – Scope of the GloBE rules. Overview here in this article.

Chapters 2 – 5 – Key operative rules. Overview here in this article.

Chapter 6 – Mergers and Acquisitions, Disposals and Joint Ventures. Not covered in this article

Chapter 7 – Special rules for certain tax neutrality and existing distribution tax regimes. Not covered in this article

Chapter 8 – Administration, including information filing requirements Overview here in this article.

Chapter 9 – Transitional Rules Not covered in this article

Chapter 10 – Definitions. Covered in situ in this article.

The GloBE rules apply a system of top-up taxes, calculated and applied at a jurisdictional level, that brings the total amount of taxes paid on an MNE’s excess profit in a jurisdiction up to the minimum rate of 15%. The GloBE rules use an OECD standardized base and definition of covered taxes to identify those jurisdictions where an MNE is subject to an effective tax rate below 15%. They then impose a tax charge that brings the MNE’s effective tax rate on that income up to the minimum rate, after recognition of a substance-based carve out.

The mechanism by which the top up tax is charged is complex and explained in more detail below. However, generally, any top up tax will be charged in the jurisdiction of the Ultimate Parent Entity of the group, unless that jurisdiction has not implemented the rules or the parent is an exempt entity. There are also additional rules for group companies in which minority interests of more than 20% are held.


The 5 key steps that an MNE might go through to determine any tax liability under the Pillar 2 Model Rules are described in factsheets produced by the OECD and are

  1. Identify Groups within Scope and the location of each Constituent Entity (CE) within the Group
  2. Determine Income of each CE
  3. Determine taxes attributable to Income of a CE
  4. Calculate the Effective Tax Rate of all CEs located in the same jurisdiction and determine resulting Top-up Tax
  5. Impose Top-up Tax under Income Inclusion Rule [IIR] or Undertaxed payments Rule [UTPR] in accordance with agreed rule order


Step 1 – Figure out if your group is In or Out. And what members of the group are included or excluded

MNE Groups are within  the GloBE rules if their consolidated revenue in their financial statements exceeds EUR 750 m. Where jurisdictions do not report in Euros, they should rebase their non-Euro denominated thresholds using the specific methodology set out in the Agreed Administrative Guidance for the Pillar Two GloBE Rules. The CEs of an MNE Group include all the entities within the Group, other than excluded entities, with any permanent establishment of a group entity being treated as a separate CE. Certain CEs are excluded from the operation of the GloBE rules, including non-profit organisations, pension funds and some investment entities that are the Ultimate Parent Entity [UPE] of the group. Ask your Integra tax advisor for details.  A CE is usually located where it is tax resident or, in some cases, in its place of creation. This means that if a domestic law considers an entity to have  a taxable Permanent establishment [PE] in that jurisdiction then it is located there for the purpose of the GloBE rules.


Step 2

GloBE income or loss

Under Chapter 3, the amount of GloBE Income or Loss of a Constituent  Entity  is  determined  by  taking  the  Financial Accounting Net Income or Loss for the CE for the Fiscal Year as defined in the OECD rules with certain specified  adjustments to better align accounting profit to tax profit. Your Integra advisor will be able to provide more details. Where relevant, GloBE Income or Loss is then allocated between a Permanent Establishment and Main Entity or to owners of a Flow-through Entity in accordance with local tax treatment. This method potentially makes the identification of tax income for this global tax purpose different than the identification of tax income for domestic tax purposes. This mismatch is likely to create opportunities for discussion between the clients and the Integra accounting and tax advisors. There are many known differences between revenue and expense recognition for tax and accounting and now we have a third measurement system to reconcile with. The OECD GloBE measurement system.


Step 3

Identify Covered Taxes

The starting point for the computation of Covered Taxes is the current tax expense accrued for Financial Accounting Net Income or Loss. This is then adjusted for certain tax credits and timing differences, and to take prior year losses into account for GloBE purposes. There are safeguards designed to protect the integrity of the Jurisdictional Effective Tax Rate [ETR] calculation under the GloBE rules. These safeguards include limiting the recognition of the deferred tax assets and liabilities to the 15% minimum tax rate and a recapture rule to ensure that amounts claimed as Covered Taxes are actually paid within a set period of time. Certain Covered Taxes are allocated to other CEs when necessary,  including controlled foreign company (CFC) taxes, distribution taxes (withholding tax), and tax in respect of a Permanent Establishment, Tax Transparent Entity, or a Hybrid Entity. Special rules apply when there is an adjustment to a tax liability for a prior year. Ask your Integra adviser regarding this. For businesses that do not wish to apply deferred tax accounting rules in a jurisdiction, there is an election available to apply a simplified method by which GloBE losses are effectively carried forward.



Step 4

Effective tax rate [ETR] and top up tax

The Top-up Tax of each Low-Taxed CE is computed by:

First, calculating the Top-up Tax Percentage for each Low- tax Jurisdiction;

The total amount of Covered Taxes in  a jurisdiction are divided by the GloBE Income in that  jurisdiction to determine the jurisdiction’s Effective Tax Rate (ETR). This is an important concept. The Posted tax rate of a jurisdiction is not the rate that is used here. The numbers used to calculate this percentage are at the heart of the Pillar 2 rules and are calculated by applying specific adjustments to the accounting income/loss and tax charge, as explained in steps 2 and 3. This calculated rate is called the Effective Tax Rate [ETR}. Integra advisors can be valuable advisors guiding their clients through the inclusions and exclusions from this calculation.

When the ETR is below the 15% Minimum Rate, the Top-up Tax percentage for the jurisdiction must be calculated. This is computed by subtracting the ETR from the Minimum Rate (e.g., if the ETR is 10%, the Top-up Tax percentage is equal to 15% – 10% = 5%).

The Top-up Tax percentage is then multiplied by the Excess Profit in the jurisdiction to determine the amount of Top-up Tax payable. The Excess Profit is equal to the GloBE Income (from Step 2) less the Substance Based Income Exclusion. (i.e.,  a routine return on tangible assets and payroll is deducted from the GloBE income) Finally, the Top-up Tax for the jurisdiction is reduced by any applicable Qualified Domestic Minimum Top-up Tax (QDMTT).  The Jurisdictional Top-up Tax is then allocated to CEs in the Low Tax Jurisdiction that have GloBE Income for the Fiscal Year (and in proportion to such income) in order to determine which entities trigger a charge to Top-up Tax.

Jurisdictions may choose to introduce a QDMTT. This is a 15% minimum tax incorporated into domestic law of a jurisdiction which must compute profits and calculate top-up tax in accordance with the Pillar Two rules. A QDMTT effectively allows the entity’s domestic jurisdiction to charge top-up tax in priority to any other jurisdiction.

There is a De Minimis Exclusion and the rules allow for development of safe harbours in order to reduce the compliance and administration burden. Guidance has recently been issued regarding safe harbours. Ask your Integra advisor for details. The de minimis exclusion is for jurisdictions where the MNE has an Average GloBE Revenue that is less than €10 m and Average GloBE income under €1 m, computed on a three-year average basis.


Step 5

A liability to Top-up Tax is first imposed under the Income Inclusion Rule [IIR] on a parent entity with an ownership interest in the low- taxed CE. Therefore, any Top-up Tax due is generally charged in the jurisdiction of the Ultimate Parent Entity (UPE) of the MNE Group. The rules take a Top-down approach. If the UPE is not required to apply an IIR (either because the country of residence has not introduced the rules, or the UPE is exempt), the Top-up Tax is imposed on the next Intermediate Parent entity in the ownership chain that is subject to the IIR, and so on. There are additional rules that impose the IIR directly on a partially owned parent entity (i.e. a CE where more than 20% is owned by non-group members).

The rules also provide an offset mechanism to allow relief if several parent entities in a group are liable for the top up tax in respect of the same CE. If there is low-taxed income that escapes the Income Inclusion Rule then there is a Backstop mechanism (the UTPR) to ensure an entity in the MNE group pays the top-up tax. There is however a limitation on the application of the UTPR when an MNE is in the initial stages of expanding abroad. The mechanism by which top-up tax is charged under the UTPR is extremely complex and we have not gone into detail here. Ask your Integra adviser for more details on the application of both the IIR and the UTPR.


Administration – filing obligation

Each CE is obliged to file a GloBE information return with its local tax administration. This may be filed directly by each CE, or by a Designated Local Entity [DLE] for CEs in the same jurisdiction. A CE does not need to file a GloBE information return when the Ultimate Parent Entity [UPE], or a Designated Filing Entity [DFE], files a GloBE information return in its own jurisdiction and the Competent Authority of its jurisdiction has an agreement to automatically exchange the return with the Competent Authority of the CE’s jurisdiction. Each jurisdiction should publish a list of jurisdictions with which it has Qualifying Competent Authority agreements in place. All CEs must notify their local tax authority of the identity and location of the UPE or DFE that will be filing the GloBE information return, either directly or through their DLE. The GloBE Information Return will be in a standard international template. MNE groups must file notifications and GloBE information returns within 15 months of the end of the reporting fiscal year. Further guidance on the interpretation or application of the GloBE rules may be agreed and published by the Inclusive Framework.



The key take aways for Integra Advisors and their clients are

  1. Figure out if you are In or Out. The level of complexity if you are In is substantial and resources and staff will need to be budgeted and committed to the project.
  2. Understand that the tax rates used for the comparison with the global minimum rate are not necessarily the posted rates of each jurisdiction but Effective tax rates computed under these rules. Integra members can provide considerable value to their clients in determining what is included in these calculations.
  3. If the jurisdictional ETR is less than the 15% minimum rate the top up tax percentage is applied to excess profits (NB – this is the GloBE income from the original calculation, less a substance based income exclusion).
  4. The rules cover many situations where the top up tax may be allocated or moved within a group to ensure that it lands somewhere as opposed to nowhere.
  5. De Minimis rules and safe harbour rules (as and when they are developed) will be worth focusing on as they can exclude entities in certain jurisdictions from complex calculations.Pillar 2 will change the landscape of tax management for larger MNE groups. Remember that each jurisdiction has the ability in Step 4 to impose a Qualified Domestic Minimum Top-up Tax which is its own domestic equivalent of the top up tax and those calculations and implementations are starting to show up now in annual taxation changes in signatory member countries to this agreement.

The above is only a high level introduction to the rules and it will be necessary to review each country’s domestic global minimum tax rate rules in detail, if they are relevant to clients.