This is then expressed as a percentage and rounded to the fourth decimal place.
Under Article 5.1.2 of the OECD Model Rules, the jurisdictional net Pillar Two GloBE income is the total Pillar Two GloBE income of all constituent entities in the jurisdiction, less any Pillar Two GloBE losses of constituent entities in the jurisdiction.
If there is a net Pillar Two GloBE loss, this is the end of the calculation and the Pillar Two GloBE effective tax rate (ETR) need not be calculated. In most cases this would mean no top-up tax would be due. The exception to this is where a Pillar Two domestic tax loss exceeds the Pillar Two GloBE loss. You can see more about this at Additional Tax.
If the jurisdictional ETR is below the 15% minimum rate, the jurisdiction is treated as a low-tax jurisdiction and the constituent entities are treated as low-taxed constituent entities.
The top-up tax percentage is simply the difference between the jurisdictional Pillar Two GloBE ETR and the 15% global minimum rate, as provided by Article 5.2.1 of the OECD Model Rules.
The top-up tax percentage is applied to ‘excess profit’ to determine the initial top-up tax due. The basic excess profit calculation is:
Note, when a domestic tax loss exceeds the GloBE loss, Article 2.7 of the OECD Administrative Guidance provides that an MNE can elect for the Excess Negative Tax Expense administrative procedure.
Key Aspects
Key aspects of this calculation worth noting are:
• If an MNE elected not to apply the substance-based income exclusion, excess profit would just be the net Pillar Two GloBE income for the jurisdiction. For more information on the substance-based income exclusion see, Substance-Based Income Exclusion
• The substance-based income exclusion cannot create a Pillar Two GloBE loss. If the substance-based exclusion amount exceeds Pillar Two GloBE income, the excess is simply lost.
• The jurisdictional blending approach also applies to the substance-based income exclusion. Therefore, if a constituent entity had little Pillar Two GloBE income but a large substance-based exclusion amount, this would be offset against the net Pillar Two GloBE income of the jurisdiction including other constituent entities in the jurisdiction.
See our simple Top-Up Tax Calculator for a high-level illustration of the mechanics of the top-up tax calculation.
The actual top-up tax calculation builds on all of the above, and is calculated as follows:
See Additional Top-Up Tax and Qualified Domestic Top-Up Tax for more information.
UPECo is the UPE of an MNE group located in Country A. It owns the entire share capital in two subsidiaries located in Country B, Company B and Company C. The MNE group is within the scope of the Pillar Two GloBE rules. Neither Company B nor Company C are investment entities.
Company A has:
Pillar Two GloBE income of 5,000,000 euros
Adjusted covered taxes of 1,000,000 euros
Investments in qualifying local tangible assets of 10,000,000 euros
Company B has:
Pillar Two GloBE income of 10,000,000 euros
Adjusted covered taxes of 1,000,000 euros
Investments in qualifying local tangible assets of 20,000,000 euros
The approach to calculating the amount of any top-up tax is as follows:
1. Calculate the top-up tax percentage
This is based on the jurisdictional Pillar Two GloBE income and Adjusted Covered Taxes.
The total Pillar Two GloBE income is 15,000,000 euros
The total Adjusted Covered Taxes are 2,000,000 euros
The Pillar Two GloBE ETR is therefore 13.3333% and the top-up tax percentage is 1.6667%
2. Calculate excess profit
This takes account of the substance-based income exclusion, again on a jurisdictional basis.
For the sake of simplicity lets ignore any transitional rules and have the rate for the tangible asset carve-out as 5%.
The substance-based income exclusion would therefore be 30,000,000 * 5% = 1,500,000 euros
Excess profit is therefore 15,000,000 – 1,500,000 = 13,500,000 euros.
3. Calculate top-up tax
If we assume there is no additional top-up tax or any tax payable under a qualifying domestic top-up tax (QDMTT), the top-up tax for Country B is 225,004 euros (13,500,000 * 1.6667%).
This illustrates the effect of jurisdictional blending. The income and taxes of the two companies in Country A are blended with the result that the high-tax company (Company A that had an ETR of 20% before the substance-based exclusion) offsets the low-tax company (Company B with an ETR of 10%).
On November 12, 2024, the Vietnamese Ministry of Finance issued a Draft Decree for the Implementation of the GloBE Rules. This is subject to a consultation until December 6, 2024 and it includes provisions for the detailed operation of the GloBE rules in Vietnam.
The September 17, 2024 draft law to amend the Minimum Tax Act was amended on October 3, 2024. Read our updated GloBE Guide.
On November 7, 2024, the UK issued Finance Bill 2024-2025 which includes a number of amendments to provide for the December 2023 and June 2024 OECD Administrative Guidance. Read our updated GloBE Guide.
On October 30, 2024 the Global Minimum Tax Bill and the Global Minimum Tax Administration Bill were sent to the National Assembly. Read our updated Country Guide.
On November 7, 2024, the Finance Bill 2024-2025 was introduced to Parliament. This includes provisions to enact the UTPR (and associated rules such as the Transitional UTPR Safe Harbour and Initial Phase of International Activity Exemption), and other Pillar 2 amendments.
On October 31, 2024 additional amendments were made to the 2024 draft amendment law to incorporate aspects of the OECD June 2024 Administrative Guidance.
On October 29, 2024, Hungary issued its Autumn Tax Package proposal. This included minor changes to the Pillar Two law. Most notably it expanded on the registration requirements.
We keep track of the domestic implementation of the Subject-to-Tax Rule (STTR) internationally including links to relevant effected double tax treaties.
MNE groups should pay careful attention to any group financing companies in light of the Pillar Two Rules. In this analysis we look at the impact of Pillar Two for both general GloBE and QDMTT purposes.
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