OECD Model Rules for the Global Minimum Tax

The modern global economy has presented challenges to international tax systems, allowing multinational enterprises to generate revenue in countries without being subject to significant taxation, a practice known as base erosion and profit shifting (BEPS). To address this, the Organisation for Economic Co-operation and Development (OECD) led a collaborative effort resulting in a “Two-Pillar Solution” to reform the international tax landscape.

This framework aims to ensure large multinational businesses pay a fair share of tax where they operate. Pillar One reallocates a portion of profits from the largest multinationals to the market jurisdictions where their customers are located. Pillar Two introduces a global minimum corporate tax rate, establishing a floor for tax competition among countries.

Scope of the Pillar Two GloBE Rules

The Pillar Two Global Anti-Base Erosion (GloBE) rules apply to large business structures operating across international borders. The rules target Multinational Enterprise (MNE) Groups with annual consolidated revenues of €750 million or more in at least two of the four fiscal years preceding the tested year. This threshold focuses the compliance burden on the largest global players.

An MNE Group is any group with at least one entity or permanent establishment in a different country than its Ultimate Parent Entity (UPE). The UPE is the entity at the top of the corporate structure that prepares consolidated financial statements. Every entity within such a group is a “Constituent Entity” and is potentially subject to the GloBE rules.

The OECD framework provides for several “Excluded Entities” that are carved out from the scope of the rules. These entities are not subject to the GloBE rules and include:

• Government bodies
• International organizations
• Non-profit organizations
• Pension funds
• Investment funds that are the UPE of an MNE Group
• Real estate investment vehicles that are the UPE

Calculating the Global Minimum Tax

The calculation of the top-up tax under the GloBE rules is a multi-step process performed on a jurisdictional basis. An MNE Group must aggregate the financial results of all its constituent entities within a single country to determine if additional tax is owed for that jurisdiction. The process begins with establishing a tax base known as GloBE Income or Loss.

The starting point for GloBE Income is the net income or loss for each entity as calculated under the financial accounting standard used for its consolidated financial statements. This figure undergoes prescribed adjustments to align it with the policy goals of the GloBE rules. For example, certain tax expenses recorded in the financial accounts are added back to arrive at a pre-tax income figure.

Once the GloBE Income for all entities in a jurisdiction is aggregated, the next step is to calculate the “Adjusted Covered Taxes.” Covered Taxes include taxes recorded on an entity’s income or profits at national and sub-national levels. This amount is also adjusted, such as by removing taxes related to income that is excluded from the GloBE Income calculation.

With GloBE Income and Adjusted Covered Taxes established, the MNE can calculate the jurisdiction’s Effective Tax Rate (ETR). The sum of the Adjusted Covered Taxes is divided by the net GloBE Income of that jurisdiction. This ETR is then compared against the global minimum rate of 15%.

If the ETR for a jurisdiction is below the 15% minimum, a top-up tax is triggered. The “Top-Up Tax Percentage” is the difference between the 15% minimum rate and the jurisdiction’s ETR. This percentage is then multiplied by the jurisdiction’s GloBE Income, after reducing it by a substance-based income exclusion, to determine the final Jurisdictional Top-Up Tax.

Key Enforcement Mechanisms

The GloBE framework is built upon interlocking rules to ensure the calculated top-up tax is collected. The primary enforcement tool is the Income Inclusion Rule (IIR), which operates from the top down. The IIR places the obligation to pay the top-up tax on the Ultimate Parent Entity (UPE) of the MNE group, making it responsible for the tax related to the low-taxed income of its foreign subsidiaries.

The IIR requires the parent entity to include its share of a subsidiary’s top-up tax in its own domestic tax liability. If the UPE is in a jurisdiction that has not implemented an IIR, the obligation can shift down to the next intermediate parent entity in the ownership chain that is subject to an IIR.

When the IIR cannot be applied, a secondary mechanism known as the Undertaxed Payments Rule (UTPR) comes into play. The UTPR is designed to operate when the UPE is in a jurisdiction without a qualified IIR, or when the low-taxed entity is the UPE itself. This prevents groups from avoiding the tax by being headquartered in a non-adopting country.

The UTPR works by allocating any remaining top-up tax among the jurisdictions where the MNE group has operations and that have implemented the rule. This allocation is based on the group’s employees and tangible assets in those jurisdictions. The jurisdiction then collects its share of the tax by either denying a deduction for payments or requiring an equivalent adjustment to taxable income.

A related component is the Subject to Tax Rule (STTR), a treaty-based rule that functions independently. It allows source jurisdictions to impose a limited withholding tax on certain related-party payments, like interest and royalties, when that income is subject to a nominal tax rate below 9% in the recipient’s jurisdiction. Any tax paid under the STTR is treated as a covered tax for GloBE purposes.

Safe Harbours and Substance-Based Exclusions

To ease the compliance burden, the rules include several safe harbour provisions. A temporary measure is the Transitional CbCR Safe Harbour, which applies to fiscal years beginning on or before December 31, 2026, but not including a fiscal year that ends after June 30, 2028. This allows an MNE to deem the top-up tax for a jurisdiction to be zero if it meets one of three tests based on its Country-by-Country Report (CbCR).

The tests are a de minimis test, a simplified ETR test, and a routine profits test. The simplified ETR test is met if the jurisdiction’s simplified ETR is above a phased threshold of 15% for fiscal years beginning in 2023 and 2024, 16% for 2025, and 17% for 2026. Meeting any of these tests allows a company to avoid the full GloBE calculations for that jurisdiction during the transitional period.

A feature of the Pillar Two rules that reduces the tax base is the Substance-Based Income Exclusion (SBIE). This is a carve-out that directly reduces the amount of profit subject to the top-up tax. The SBIE shields a portion of income that represents a routine return on substantive economic activities within a jurisdiction.

The SBIE is calculated as a percentage of the carrying value of eligible tangible assets, such as property and equipment, and a percentage of eligible payroll costs. During a transition period, the exclusion starts at 8% for tangible assets and 10% for payroll. These rates gradually decrease over ten years to a permanent rate of 5% for both.

Compliance and Reporting Obligations

Adherence to the Pillar Two rules requires a standardized reporting effort for all in-scope MNE Groups through the GloBE Information Return (GIR). The GIR is a comprehensive document designed to provide tax administrations with the information needed to assess an MNE’s top-up tax liability for each jurisdiction in which it operates.

The GIR must contain information about the MNE Group, including its ownership structure and constituent entities. The core of the return involves the detailed jurisdictional calculations, such as the computation of GloBE Income, Adjusted Covered Taxes, the ETR, and any top-up tax due.

To avoid duplicative filings, the rules allow the MNE Group to designate a single entity to file the GIR on its behalf in one jurisdiction. This centralized filing is contingent on an automatic exchange of information agreement between the filing jurisdiction and the other jurisdictions where the group operates. The first GIRs are due 18 months after the end of the first fiscal year in which the group is subject to the rules.