The New Zealand and EU Approaches to the Domestic Income Inclusion Rule (DIIR)

The OECD Model Rules require IF members that adopt the Pillar Two GloBE rules to include provisions to implement the Income Inclusion Rule (IIR) and the Under-taxed Profits Rule (UTPR).

Jurisdictions can also choose to introduce a Qualified Domestic Minimum Top-Up Tax (QDMTT), which would use the same tax base as the GloBE rules (subject to a number of adjustments) but take priority over the IIR and UTPR in respect of low taxed income earned in that country.

The OECD Model Rules require the application of the IIR by the Parent Entity to Low-Taxed Constituent Entities that are located outside the jurisdiction. However, Art. 2 para. 24 of the Commentary to the OECD Model Rules states that some IF members may wish to extend the application of the IIR domestically (a ‘Domestic IIR’ or ‘DIIR’).

Both NZ and the EU apply a DIIR.

New Zealand’s DIIR and the UTPR

It is worthwhile noting that if there was no DIIR or QDMTT introduced by NZ top-up tax on undertaxed New Zealand profits would ordinarily be collected under the UTPR for those MNEs.

The UTPR allocation mechanism (based on tangible assets and number of employees in each UTPR country) means that in many cases much of this tax would be allocated to New Zealand, but this would depend on the level of overseas assets and employees.

A DIIR/QDMTT would avoid them having to pay any part of the Pillar Two tax on undertaxed New Zealand income in other countries under the UTPR. This benefits New Zealand, by allowing them to retain all of the tax that their MNEs would otherwise need to pay offshore under the UTPR.

New Zealand was therefore considering a QDMTT or a DIIR. The DIIR is the approach most recently taken by New Zealand in Article 123 of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024. New Zealand applies the DIIR from January 1, 2026.