Pillar Two: FAQs

Pillar Two is the second element of the OECDs Two-Pillar Solution. It is designed to ensure that large multinational groups are subject to a minimum rate of tax on their operations. 
Pillar Two consists of two aspects, the GloBE Rules and the Subject-to Tax Rule.

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.

The basis of the calculation is Adjusted Covered Taxes/GloBE Income. Both of these take figures from the financial accounts (ie the tax expense and the financial accounting profit) which are then subject to a number GloBE specific Pillar Two adjustments. 

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.
Adjusted Covered Taxes are the numerator in the formula to calculate the Pillar Two effective tax rate. 
The starting point is the tax expense in the financial accounts (including both the current tax expense and the deferred tax expense). This is then adjusted for Pillar Two purposes. Some of the key adjustments include:
 – excluding tax that is related to income not subject to the Pillar Two GloBE Rules
 – excluding tax that is not expected to be paid within 3 years
 – adjusting for Qualified Refundable Tax Credits
 – excluding taxes due to an uncertain tax position
 – excluding deferred tax arising from tax credits
GloBE income is the denominator in the Pillar Two effective tax rate calculation. 

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.
It is based on the financial accounting income or loss subject to a number of GloBE-specific adjustments. Key adjustments include:
 -excluding certain dividends and capital gains on shareholdings
 – including revaluation gains and losses that are not included in the financial accounting profit or loss
 – adjusting for foreign currency gains and losses and policy disallowed expenses.

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. 

The substance-based income exclusion is effectively a carve-out for expenditure on tangible fixed assets and payroll costs. The amount of the exclusion feeds directly into the top-up tax calculation as it reduces excess profits which are then used to calculate the initial top-up tax.
It is initially set at 5% of the amount of tangible assets and payroll costs in a jurisdiction. For the period between 2024 and 2033, the amount excluded under the payroll carve-out will be 10%, reduced by 0.2% for the first 6 years, and 0.8% for the last 4 years. The amount excluded under the tangible asset carve-out will be 8% reduced by 0.2% for the first 6 years, and 0.4% for the last 4 years.
No. Governments can offer any tax incentives they want. However, if this results in the Pillar Two effective tax rate being less than 15%, a top-up tax would apply.  It’s worthwhile noting that as the carve-outs under the Substance-Based Income Exclusion are based on payroll costs and tangible assets, this enables governments to offer tax-reducing incentives on investments in these activities without triggering GloBE top-up tax or at least mitigating their impact on any top-up tax liability.

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.

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.