Qualifying Domestic Minimum Top-Up Taxes (QDMTT’s) are a key aspect of the top-up tax calculation.
They are taken into account when calculating jurisdictional top-up tax, as follows:
Top-up tax % * excess profits + additional top-up tax-QDMTT
They therefore operate as a pound-for-pound reduction in any top-up tax liability charged by another country under either the Income Inclusion Rule or the Under-Taxed Payments Rule and arethe final stage in the top-up tax calculation.
Whilst jurisdictions are not required to implement a QDMTT there is a clear incentive to do so.
This is because a QDMTT would ensure that any additional tax on economic activities in a jurisdiction and profits that results from the Pillar 2 minimum tax framework is to the benefit of the domestic jurisdiction. In other words, businesses would pay the same level of tax on their profits whether there was a QDMTT or not, but rather than allow another country to collect that tax, a QDMTT would ensure the tax is paid to the domestic government.
If there was no QDMTT, the GloBE rules would mean that low-taxed profits would be topped up in foreign jurisdictions.
There would also be a simplification benefit for MNEs headquartered in a jurisdiction who would otherwise be subject to the UTPR on their profits.
This would require MNEs to report tax liabilities to multiple jurisdictions, would inherently lead to an increased risk of disputes and could increase compliance costs through the MNE having to deal with audits from a number of different tax administrations.
A qualifying domestic top-up tax is a minimum top-up tax included in domestic law that:
– calculates the excess profits of constituent entities located in the jurisdiction in a way that is equivalent to the GloBE Rules;
– increases the domestic tax liability to the minimum rate on the domestic excess profits for a fiscal year; and
– is implemented and administered in a way that is consistent with the GloBE Rules and the Commentary.
However, of key importance is that a domestic top-up tax that doesn’t qualify as a QDMTT would simply be treated as another covered tax.
This makes the tax less attractive for Pillar Two purposes and would mean it would need to be set at a higher tax rate compared to if it was a QDMTT in order to fully eliminate any GloBE top-up tax after the substance-based income exclusion has been taken into account.
This is because the substance-based income exclusion is taken into account in the formula above when calculating excess profits.
This is easier to explain by using an example.
Domestic Tax Position
Let’s assume a country levies a domestic top-up tax.
Income in the jurisdiction is 1,000,000 euros.