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%).
Law 3/2025, of 29 April, was published in the Spanish Official State Gazette on April 30, 2025. This amends the Economic Agreement with the Basque Country and includes a new Article 20bis for the application of the Pillar 2 Global Minimum Tax.
In this article we look at some of the most significant issues to consider including the determination of when and how deals can bring groups within the scope of Pillar Two, specific considerations for private equity funds, differences in GloBE and domestic tax treatment and potential restrictions on post-acquisition transfers.
The Pillar Two GloBE treatment of corporate investments will depend to a large extent on the nature of the activities, the accounting treatment and the ownership interest.
On April 30, 2025, the Swiss Federal Council issued a proposal to amend the Minimum Tax Ordinance to provide for the OECD GIR provisions, as well as some other small amendments.
On March 31, 2025, Japan enacted Cabinet Order No. 121 of 2025 and Ministry of Finance Ordinance No. 19 of 2025 to provide further details on the application of Japan’s QDMTT from April 1, 2026.
In April 2025, the Hong Kong Government proposed a number of Committee Stage Amendments to the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024. This includes amendments for the January 2025 and June 2024 OECD Administrative Guidance.
South Korea’s amendment to the Enforcement Decree No. 35348 of February 28, 2025 and the Decree of the Ministry of Economy and Finance No. 1114 of March 21, 2025 provide for further aspects of the June 2024 OECD Administrative Guidance as well as additional top-up tax forms.
Updates to our ‘OECD Administrative Guidance: Domestic Implementation Matrix’ to reflect the latest April 2025 Pillar 2 updates for the UAE and Poland.
On April 7, 2025, the Polish Ministry of Finance released details for a draft bill to amend the Minimum Tax Act. The amendments are primarily to implement the June 2024 and January 2025 OECD Administrative Guidance.
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