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ETR Calculation and Top Up Tax

ETR and Top-Up Tax - General

The Pillar Two GloBE effective tax rate (ETR) is an essential aspect of the top-up tax calculation. Once the ETR is determined Article 5.2 of the OECD Model Rules requires that this is then compared to the 15% global minimum rate to determine if any top up tax is due.

The ETR calculation is, in general, calculated on a jurisdictional basis. This means that the adjusted covered taxes and Pillar Two GloBE income for each constituent entity in the jurisdiction are added together in what the OECD call ‘jurisdictional blending’.

Jurisdictional blending was chosen over global blending as global blending would allow MNE’s to offset low taxed profits against high tax profits not just within the same jurisdiction (which is what jurisdictional blending does) but also across different jurisdictions.

This jurisdictional blending is why, for instance, transactions between constituent entities in the same jurisdiction aren’t required to be on an arms-length basis.

Whilst jurisdictional blending applies in most cases, there are some exceptions. For instance, if an MNE has a minority-owned subgroup this is treated as a standalone entity for the purpose of calculating the Pillar Two GloBE ETR. Similarly, investment entities are treated as separate from other constituent entities.

Therefore, in certain cases more than one Pillar Two GloBE ETR may need to be calculated for a jurisdiction.

See our Simple Top-Up Tax Calculator to see how the top-up tax calculation applies. 

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