Pillar Two: FAQs

The GloBE Rules are a series of rules to be implemented by members of the Inclusive Framework on BEPS that ensure large multinational groups are subject to a minimum 15% effective tax rate on their profits. 

Unlike the GloBE rules, the Subject to Tax Rule (STTR) is not concerned with jurisdictional ETRs, but is instead determined against a 9% nominal tax rate that applies on certain payments between connected persons. 

In essence, the STTR is effectively a treaty-override provision. It allows a source state to tax the gross amount of interest, royalties and a defined list of other payments received by a connected company, up to a globally agreed 9% minimum rate, even if a relevant tax treaty only permits the source country to impose withholding tax on the payment at a rate below 9% or allocates exclusive taxing rights over the payment to the recipient’s country of residence. 

Where a jurisdiction applies a tax rate on the receipt of relevant payments that is less than the globally agreed 9% minimum rate, the payer jurisdiction has the right to “top up” the tax payable with a withholding tax. 

For example, if a jurisdiction applied a tax rate of 5% for royalty receipts, this would mean that the payer’s jurisdiction could collect a top-up tax of 4% on the payment. 

The STTR has priority over the top-up mechanisms in the GloBE rules, and any top-up tax payable under the STTR is taken into account when determining the jurisdictional ETR under the GloBE rules. The STTR therefore applies irrespective of whether the MNE Group is subject to top-up tax under the GloBE rules.

The Pillar Two GloBE Rules apply to multinational groups that have revenue exceeding 750 million euros in a fiscal year. 

Yes, there are some exemptions, such as for international shipping companies. In addition, certain companies are treated as Excluded Entities.

Excluded entities are defined in Articles 1.5.1 and 1.5.2 of the OECD Model Rules and include:

• government entities;
• international organizations;
• non-profit organizations;
• pension funds;
• investment funds that are a UPE; and
• real estate investment vehicles that are a UPE.

Although an excluded entity is not subject to the 15% global minimum tax, it is still taken into account when determining whether the 750 million euro threshold for the group has been exceeded. 

The operation of the GloBE rules (which implements the Pillar Two global minimum tax) at a high level is relatively straightforward. The MNE group determines its effective tax rate in each jurisdiction it operates in and then compares this to the 15% global minimum rate. If the Pillar Two effective tax rate is more than 15% there is no additional tax payable. If it is less, additional tax (referred to as top-up tax) is payable. There are specific rules for calculating the Pillar Two effective tax rate and for determining who pays the top-up tax.

Covered taxes are the taxes that are taken into account for the GloBE rules. These include the following:

• taxes in the financial accounts of a constituent entity on its share of the income or profits of a constituent entity in which it has an ownership interest;
• taxes on distributed profits, deemed profit distributions and non-business expenses imposed under an eligible distribution tax system;
• taxes imposed in lieu of a generally applicable corporate income tax; and
• taxes levied by reference to retained earnings and corporate equity.

The GloBE income calculation is the first step in determining the jurisdictional ETR, which is an essential element of the Pillar Two GloBE rules. In essence, it is necessary to: 

• identify the net income for financial accounting purposes from the consolidated financial statements;
• adjust this to determine the GloBE income; and
• allocate this (where required) to any PEs or owners of flow-through entities.

A constituent entity is an entity or a permanent establishment of an in-scope MNE group that is subject to the Pillar Two GloBE Rules. The Pillar Two GloBE income and adjusted covered taxes need to be calculated and they are then used in the jurisdictional blending calculation to determine if any top-up tax is required.

Jurisdictional blending is a key aspect of the Pillar Two Rules. It requires that when calculating the Pillar Two effective tax rate, the adjusted covered taxes and GloBE income of all constituent entities in a jurisdiction are blended. This means that simply having a low-taxed entity in a jurisdiction may not give rise to top-up tax under Pillar Two if there were other high-taxed entities there. 

There are two main rules that govern who pays the top-up tax, which then impacts on where the tax is paid, the income inclusion rule and the under-taxed payments rule. 

The Income Inclusion Rule is the primary method of accounting for top-up tax under Pillar Two. The general rule is that a UPE is required to apply the Income Inclusion Rule (IIR) where it owns an ownership interest in a low-taxed constituent entity at any time during a fiscal year.

The Under-Taxed Payments Rule (UTPR) operates as a backstop to the Income Inclusion Rule (IIR) so that if not all top-up tax is allocated under an IIR (or for instance if there was no IIR in the relevant jurisdiction), the liability to account for the top-up tax is allocated to group entities based on a ratio based on the number of employees and value of tangible assets in that jurisdiction.

There are a number of elections available to MNE groups under Pillar Two, including:

• Stock-Based Compensation Election;
• GloBE Loss Election;
• Capital Gain Carryback Election;
• Consolidation Election;
• Excluded Entity Election;
• Tax Transparency Election
• Taxable Distribution Method Election;
• Election to use the Realisation Method;
• Unclaimed Accrual Election;
• Post-filing Adjustment Election;
• Election not to apply the Substance-Based Income Exclusion;
• De Minimis Exclusion Election;
• Deemed Disposal of Assets Election;
• Safe Harbour Election;
• Eligible Distribution System Election;
• Debt Release Election;
• Equity Investment Inclusion Election;
• Excess Negative Tax Carry-Forward Election;
• Portfolio Shareholding Election;
• Foreign Exchange Hedge Election.

The GloBE rules have the status of a common approach. Members of the Inclusive Framework (IF) are not required to adopt them, but, if they do, they must implement and administer the rules in a way that is consistent with the outcomes provided for under Pillar Two. In any case, members of the IF are required to accept the application of the GloBE rules applied by other members, including agreement on the rule order and the application of any agreed safe harbors.

While the IIR and UTPR can be implemented through domestic legislation, the OECD provides for the possible development of a multilateral instrument to facilitate the coordination of the GloBE rules that have been implemented by Inclusive Framework (IF) members. 

The STTR, as a treaty-based rule, can only be implemented through bilateral negotiations and amendments to individual treaties or as part of a multilateral convention. Members of the IF that apply nominal corporate income tax rates below the STTR minimum rate will implement the STTR into their bilateral treaties with developing country members of the IF when requested to do so.