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The Importance of Domestic Taxes Qualifying as a QMDTT and Why a Higher Rate May be Required If They Don't Qualify

Qualifying Domestic Minimum Top-Up Taxes (QDMTT’s) are a key part of the top-up tax calculation.

Jurisdictions are free to introduce them or not.

They are taken into account when calculating jurisdictional top-up tax, as follows:

Top-up tax %*excess profits + additional top-up tax-QDMTT

It therefore operates as a pound-for-pound reduction in any top-up tax liability charged by another
country under either the IIR or the UTPR and is the 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 only 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 the
domestic jurisdiction. In other words, businesses would in most cases pay the same level of tax on their
UK 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 so will 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.

What is a Qualifying Domestic-Minimum Top-Up Tax?

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 and would mean an increased 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.

Example
Domestic Tax Position

Let’s assume a country levies a domestic top-up tax.

Income in the jurisdiction is 1,000,000 euros.

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