Switch-Over Rule

The operation of the Pillar Two GloBE rules to PE’s means that they are treated as separate constituent entities from the main entity.

As such Pillar Two GloBE income and covered taxes are allocated to the PE, which then includes these in the jurisdictional blending calculation for the relevant jurisdiction.

However, the IIR applies to allocate the income of the PE to a parent entity. If the tax treaty gave taxing rights over the income of the PE to the source jurisdiction, this would prevent the operation of the IIR.

As such, the OECD proposes a treaty-based switch-over rule that would limit the PE exemption where the profits of the PE are subject to the Pillar Two GloBE rules and where the PE is subject to an IIR.

A switch-over rule should also include income from immovable property where a tax treaty gives taxing rights to the source state where the income is attributable to a PE.